Topic:
INSURANCE (GENERAL); EMPLOYMENT (GENERAL);
Location:
INSURANCE;

OLR Research Report


March 1, 2004

 

2004-R-0258

CAPTIVES AND SELF-INSURED TRUSTS

By: Janet Brierton, Associate Legislative Attorney

You asked for background information on captive insurers and self-insured trusts, including any regulations on each.

SUMMARY

A captive insurer is an insurance company set up by a company or organization to insure that one company or organization exclusively. Connecticut does not regulate captive insurers.

A self-insured trust is a fund set up by an employer or group of employers to pay for employee welfare benefits (e.g., hospital, sickness, accident, disability). Such plans are subject to the provisions of the federal Employee Retirement Income Security Act of 1974, as amended from time to time (ERISA). Due to ERISA preemption, self-insured plans generally do not have to comply with state insurance laws. However, if the self-insured trust is under a multiple employer welfare arrangement, the plan is subject to all state insurance laws and regulations.

CAPTIVE INSURERS

Although Connecticut defines a “captive insurer” in the insurance statutes, the statutes do not establish any requirements for them. “Captive insurer" means an insurance company owned by another organization whose exclusive purpose is to insure risks of the parent organization and affiliated companies or, in the case of groups and associations, an insurance organization owned by the insureds whose exclusive purpose is to insure risks of member organizations and group members and their affiliates. The terms "licensed insurer" or "insurer" does not include any captive insurer. "Licensed insurer" or "insurer" means any person, firm, association or corporation licensed under CGS § 38a-41 to transact a property casualty insurance business in this state (CGS § 38a-91(2), (6)). The insurance department has not issued any regulations concerning captives.

SELF-INSURED TRUSTS

ERISA

The Employee Retirement Income Security Act of 1974, as amended from time to time, (ERISA) is a federal law that regulates all aspects of most employee welfare benefit plans. The law was a product of years of study and compromise between labor, business, and government. The creation of an overall federal regulatory scheme made it possible for certain benefit plans to escape requirements of state law.

To prevent conflict between federal ERISA and state laws, Congress pre-empted state laws that affected employee benefit plans. Congress also realized that the states had traditionally regulated insurance, so it exempted from the broad ERISA pre-emption these types of state laws.

Congress further provided that while state insurance laws are not pre-empted, employee benefit plans and trusts established under such plans are deemed not to be an insurance company or to be engaged in the business of insurance for the purpose of state regulation.

In 1985, the U.S. Supreme Court attempted to sort out the ERISA pre-emption provisions. At issue was a Massachusetts statute that mandated certain minimum mental health care benefits for state residents participating in an employee benefit plan and insured under a group health policy. The state's attorney general brought suit requesting a state court to compel the insurance company to comply with the state statute. The insurance company declined to do so claiming that the state statute was pre-empted by ERISA.

The U.S. Supreme Court ruled that the Massachusetts statute was a law that regulated the "business of insurance" and cannot be pre-empted by ERISA as it applies to insurance contracts purchased for plans subject to ERISA. However, since the plan itself could not be deemed to be an insurance plan, state regulation could not apply to the plan (Metropolitan Life Insurance Co. v. Massachusetts, 471 U.S. 741 (1985)). By limiting the law's effect to only the insurance contracts and not to the plan, the Court, by implication, permitted a plan to fund its health benefits by means other than insurance contracts (such as through a self-funded trust) and escape the requirements of state law. This was permitted despite the fact that services and benefits may be supplied to the employee in almost an identical manner. The U.S. Supreme Court recognized this distinction by stating: “We are aware that our decision results in a distinction between insured and uninsured plans, leaving the former open to indirect regulation while the latter are not. By doing so, we merely give life to a distinction created by Congress in the 'deemer clause,' a distinction Congress is aware of and one it has chosen not to alter.”

This distinction means that if an employer purchases an insurance policy to provide benefits to its employees, then the policy will be subject to the requirements of state insurance law. If, on the other hand, the plan benefits are funded directly by the employer, the plan does not have to comply with state insurance law.

The U.S. Supreme Court has also extended the reach of the ERISA pre-emption to affect an employee's rights under insured plans as well as self-insured plans in certain circumstances relating to unfair claims practices. Section 502(a) of ERISA provides an exclusive remedy for employee benefit plan participants in benefit claims cases. The Supreme Court has held that ERISA pre-empts state common law claims in unfair benefit claims cases (Pilot Life Insurance Co. v. DeDeaux, 481 U.S. 41 (1987)). ERISA remains the exclusive avenue for such claims as they may relate to all types of plans. Subsequent Circuit Court decisions have extended this rationale to pre-empt state statutory remedies as well.

State regulation, state remedies, and state control over employee benefit plans are losing ground to federal standards of enforcement. This point was underscored when the Supreme Court stated: "The pre-emption clause (of ERISA) is conspicuous for its breadth. It establishes as an area of exclusive federal concern, the subject of every state law that relate(s) to an employee benefit plan governed by ERISA" (FMC v. Holliday, 111 S.Ct. 403 (1990)). The result is that more and more companies are seeking the self-insured route.

Multiple Employer Welfare Arrangements

While a single employer plan that elects to self-insure a health benefit plan for its employees is generally not subject to state insurance laws because of ERISA pre-emption, multiple employer plans may not have the same result.

The term “multiple employer welfare arrangement” (MEWA) is defined in ERISA as an employee welfare benefit plan, or any other arrangement that is established or maintained for the purpose of offering or providing benefits to the employees of two or more employers (including one or more self-employed individuals), or to their beneficiaries, except that it does not include a plan or arrangement established or maintained by a collective bargaining agreement, rural electrical cooperative, or rural telephone cooperative association (29 U.S.C. § 1002(40)).

Congress amended ERISA in 1983 to provide an exception to ERISA's preemption provisions for the regulation of MEWAs under state insurance laws (P.L. 97-473). As a result, if an ERISA-covered employee welfare benefit plan is a MEWA, states may apply and enforce state insurance laws with respect to it.

Fully Insured MEWA

The extent to which state insurance laws apply to a MEWA depends on whether the plan is fully insured. In the case of a fully insured MEWA plan, or any trust established under such a plan, the state's regulatory powers are limited to mandating and enforcing reserve requirements, which are designed to ensure that the MEWA will be able to meet its benefit obligations (29 U.S.C. § 1144(b)(6)(A)(i)). The U.S. Department of Labor interprets this section of ERISA as also permitting states to subject MEWAs to licensing, registration, certification, financial reporting, examination, and any other requirement of state insurance law necessary to ensure compliance with the state insurance reserve requirements. A MEWA plan is fully insured if the benefits provided are guaranteed under a contract or policy of insurance issued by an insurance company qualified under state law to conduct insurance business in the state.

Self-insured MEWA

If the MEWA plan is not fully insured (i.e., is self-funded or self-insured), than any state insurance law may apply to the plan so long as it is not inconsistent with ERISA (29 U.S.C. 1144(b)(6)(A)(ii)). According to the U.S. Department of Labor, a state insurance law, in general, will not be inconsistent with ERISA if it requires the plan to meet more stringent standards of conduct or provide greater protection to plan participants and beneficiaries than required by ERISA.

Atlantic Healthcare Benefits Trust v. Googins

Connecticut's ability to regulate MEWAs was decided in Atlantic Healthcare Benefit Trust v. Googins, 2F3d1 (1993). In that case, plaintiffs were groups of individuals and entities that arranged with employers to provide employee health care benefits. Atlantic Healthcare Benefits Trust was a self-funded trust organized under Virginia law. United Healthcare Association of America was a Virginia corporation that offered health and welfare benefits through the trust to participating employers and their covered employees and dependents.

When the insurance commissioner took steps to regulate such arrangements as insurance companies, the plaintiffs sued. They sought (1) a declaration that the health care benefits they supply are furnished through a MEWA that is subject to regulation under ERISA and that ERISA's preemption provisions preclude Connecticut from regulating a MEWA as an insurance company; and (2) an injunction barring the insurance commissioner from requiring them to register as an insurance company. The U. S. District Court, relying on a 1983 amendment to the ERISA preemption provision that permits state insurance departments to regulate MEWAs, granted defendant's motion for summary judgment (hence, dismissing the case).

The plaintiffs appealed, asserting (1) that self-funded health benefit plans are exempt from state regulation; (2) that Connecticut's regulatory scheme for granting certificates of authority to insurance companies is inconsistent with ERISA, and (3) that the amendment to ERISA authorizing state regulation of MEWAs merely permits states to adopt legislation that regulates MEWAs as MEWAs, but does not permit states to regulate MEWAs as if they were insurance companies. The Court of Appeals for the 2nd Circuit affirmed the district court's dismissal.

The reasoning of the Appeals Court is as follows:

1. In a 1983 amendment to ERISA, Congress separately and directly prescribed the authority of states to regulate MEWAs: in the case of any employee welfare benefit plan which is a MEWA, any law of any state which regulates insurance may apply to the extent it is not inconsistent with ERISA.

2. The 1983 amendment to ERISA is an exception to ERISA's deemer clause, and it authorizes states to regulate MEWAs as insurance companies.

3. As to the permissible scope of state insurance regulation, the MEWA clause in ERISA distinguishes between a MEWA that is fully insured and one that is not. In the case of a fully insured MEWA, a state's regulatory power is limited to mandating and enforcing reserve requirements. Broader state regulation of other MEWAs is permissible so long as the regulation is not inconsistent with ERISA.

In Atlantic, it was undisputed that the MEWA was not fully insured. It funds benefits by contributions and assessments paid by member employers to the trust. Thus, the court determined that Connecticut could regulate Atlantic so long as the regulation was not inconsistent with ERISA.

Connecticut Regulations

Most states, including Connecticut, consider a self-insured MEWA to be an unauthorized insurer. State laws and regulations are applicable to the plans. Further, Connecticut prohibits unauthorized insurance transactions under the Unauthorized Insurers Act, CGS § 38a-271 – § 38a-282, inclusive. Any unauthorized insurer who does any act of insurance business will be fined up to $10,000 plus $500 for the first offense and an additional $500 for each month that the violation continues.

Through regulations, Connecticut requires licensed agents, brokers, and insurers to report information to the insurance department before assisting in any manner the transaction of insurance by MEWAs. If a MEWA fails to pay a claim or loss in Connecticut, any person who assisted or aided the plan directly or indirectly in procuring an insurance contract is liable to the insured for the amount of the claim (Conn. Regs. § 38a-272-1 - § 38a-272-10).

JB:ro