Substituted Opinion in American National Ins. Co. v .Texas Dept. of Ins., 2010 Tex App. LEXIS 3005 (April 22, 2010).

Comment:  This is the very latest iteration from the Texas Court of Appeals in Austin on the question of whether medical stop loss insurance sold to self-funded plans is fish or foul.  You may recall a similar opinion in late December 2009 from this same Court on this subject, which I chose not to write-up at the time, knowing that a rehearing was a possibility. On April 22, 2010, that Court withdrew its earlier opinion and issued the current one in lieu.  While the April 22 post-rehearing “final” opinion differs from the December 2009 version, the substantive changes are few. 

Like most legal problems generally, issues of legal taxonomy have real world significance.  The taxonomy question at issue in this case was whether medical stop loss insurance was fish (direct insurance) or foul (reinsurance).  If foul, the stop loss carriers escaped regulation by the TX DOI because it had no authority regulate reinsurance at the time. Additionally, more fees had to be paid on sales of fish than foul, and fishmongers had to obtain approval of the policy contracts while the birders did not.

The birders mounted a legal challenge to the DOI’s classification of their stop loss policies as fish, crying “foul” at the administrative level. Having no luck within the DOI and having exhausted their administrative remedies, the birders filed suit against the DOI in Texas District Court in Travis County, and both sides asked the Court to decide the case based on stipulated facts.  The trial court ruled again for the fishmongers.  The birders perfected an appeal to the Court of Appeals covering Travis County.^[i]

The Court analyzed the taxonomy issue by reasoning that a true “reinsurer”—a term not defined in the Texas insurance code—must do business with an “insurer,” thereby “re-insuring” some or all of that insurer’s risk.  So, the Court next considered whether self-funded plans were “insurers” or not under Texas law. If they were insurers, then stop loss carriers were reinsurers; if they weren’t true insurers, stop loss carriers were the insurers, not the reinsurers.

The Court next looked at a length Texas statute defining the various activities that constitute “the business of insurance,” and concluded that self-funded plans engaged in most all of them, and were therefore “insurers.”

Finally, the Court dealt with a couple of Texas statutes referring to stop loss insurance  in varying contexts and concluded that none were controlling.  Instead, the Court look to the functional aspects of stop loss insurance (insuring plan sponsors, not plan participants), and concluded that it should be treated as reinsurance, not direct insurance, under Texas law.

Compare: BCBSM, Inc. v. Minnesota Comprehensive Health Ass’n (classifying stop loss as health insurance for revenue purposes); Apalachee Center for Human Services, Inc. v. Spivey (classifying stop loss as reinsurance for purposes of Florida attorneys’ fees statute).

The classification of stop loss insurance as "reinsurance" or something else may have significant consequences in stop loss claims litigation as well.  Specifically, many states exempt "reinsurance" from consumer-protective statutes designed to allow for an award of attorneys' fees and/or prejudgment interest to a successful plaintiff.  See Apalachee Center, linked above.  The "law of unintended consequences" lurks in the margins, however, as not all principles of reinsurance law apply to stop loss.  Use the "reinsurance" label with caution.