The Winter 2011 issue of New Appleman on Insurance: Current Critical Issus in Insurance Law features three timely articles of significant importance:
• The Supreme Court's 2011 Class Action Decisions: Their Impact on Insurance Class Actions
• The Rise of U.S. Onshore Captive Domiciles: Is There Really Any Evil Lurking in an Emerging Shadow Industry?
• Health Insurance at The Intersection of State and Federal Regulation: Confused Regulation of ERISA Fully Insured MEWAs
The Supreme Court's 2011 Class Action Decisions: Their Impact on Insurance Class Actions by Wystan Ackerman analyzes the three decisions issued by the U.S. Supreme Court on class actions in 2011, with a focus on their impact on the insurance industry. In Wal-Mart Stores, Inc. v. Dukes, the Court reinvigorated and redefined the commonality requirement, and addressed consideration of the merits on class certification, scrutiny of expert testimony, whether statistical sampling may be used to prove classwide damages, and under what circumstances monetary relief can be obtained under Rule 23(b)(2). In AT&T Mobility, LLC v. Concepcion, the Court upheld the use of arbitration provisions in consumer contracts that bar class action arbitrations, holding that state law rendering such provisions unconscionable was preempted by the Federal Arbitration Act. In Smith v. Bayer Corp., the Court held that, under the federal Anti-Injunction Act, a federal court, after denying class certification, could not enjoin a state court from adjudicating a putative class action on the very same issue.
The article concludes that Wal-Mart will be of substantial benefit to insurers in defending class actions in federal court in a number of ways, and it is likely to shift the battleground to state courts to some degree. Concepcion poses an interesting opportunity for insurers that wish to reduce their class action exposure by expanding the use of arbitration. Such a change, however, would fundamentally alter the way individual insurance disputes have been resolved for decades, would come with significant risk, and would need to overcome regulatory hurdles. Finally, Smith failed to solve the problem of relitigation of class certification. Solving that problem likely will require action by Congress or the Rules Committee, or a strong opinion by the Court imposing due process boundaries on state court class actions.
The Rise of U.S. Onshore Captive Domiciles: Is There Really Any Evil Lurking in an Emerging Shadow Industry? by Karen C. Yotis first notes that as Vermont, and a surprising number of other states (including Utah, Hawaii, Montana, Tennessee and most recently New Jersey) continue to aggressively market themselves as captive domiciles, the New York Times reported in a May 9, 2011 article entitled "Seeking Business, States Loosen Insurance Rules," that a shadow insurance industry may be emerging that is reminiscent of the shadow banking system that contributed to the current global financial crisis. In 1997 there were seven states with captive laws, in 2001, there were 19. With New Jersey entering the captive market in 2011, the number of U.S. on-shore captive jurisdictions skyrocketed to upwards of 30.
The author of the commentary in our quarterly reports that the captive market helps states promote business travel, create jobs and earn taxes on premium dollars. The business sector utilizes captives to implement risk management and risk financing strategies, reduce or stabilize insurance costs, increase its capacity to create tailored coverage for a specific risk, control insurable risks, establish a better-than-average claim experience, capture investment income, accelerate/manage cash flow and utilize potential tax advantages. Captives enable insurers to create investment structures that make millions available for dividends, acquisitions and other projects. Even consumers may benefit as the industry explores ways to use captives as a method for holding down the cost of health insurance.
The author points out that one of the chief functions of a captive is to facilitate the efficient financing of risk within an organization. In addition, captives form part of the overall financial planning structure for a corporation; act as a shield against upswings and downturns in the commercial market; serve as a direct insurance company that issues policies to subsidiaries in a group or can serve as a reinsurance company that assumes risks behind commercial insurers.
Attorneys that represent clients within the insurance industry must remain abreast of the issues and concerns relating to the captive market so they will stand ready to counsel companies that have incorporated captives into their risk management strategy and be prepared to assist companies interested in exploring the benefits of forming a captive within an onshore U.S. domicile.
This commentary discusses the historical and financial underpinnings of the U.S. onshore captive market, reviews the captive insurance laws and regulations in the 10 largest U.S. captive domiciles (Vermont, Utah, Hawaii, South Carolina, District of Columbia, Kentucky, Nevada, Arizona, Delaware and Montana) and in two other significant jurisdictions (Tennessee and New Jersey) and, based upon the results of that analysis, speaks out in support of the captive industry's sharp response to the New York Times article.
Health Insurance at The Intersection of State and Federal Regulation: Confused Regulation of ERISA Fully Insured MEWAs by R. Dean Conlin observes that a key provision of the Affordable Care Act is the requirement that individuals either purchase minimum essential health insurance or pay a penalty ("individual mandate"). This watershed requirement has been challenged as a violation of the federal Commerce Clause. Whether or not the ACA's individual mandate survives this challenge, large employers will likely continue to provide health insurance to their employees through self-funded plans that rely on the preemption of state insurance regulation by the Employee Retirement Income Security Act of 1974 ("ERISA"). This article first describes ERISA's preemption of state insurance regulation that would otherwise prevent large employers from being authorized to provide their employees with uniform plans of tailored health coverage.
The article next explains that small employers have long struggled to provide similar self-funded health plans. For the past decade, Congress has considered, but not passed, association health plan legislation that would permit small employers to group together through trade and professional associations, either to purchase health insurance from commercial insurers or to provide their own coverage through self-funding. At the present time, however, without any further Congressional action, a form of association or multiple employer health plan could be provided nationwide pursuant to ERISA.
This article carefully examines the fully insured, multiple employer welfare arrangement ("fully insured MEWA") authorized by ERISA. While exploring the intersection of state and federal insurance regulation, the article dissects confusing opinions issued by the Department of Labor that effectively prevent small employers from utilizing a fully insured MEWA.
For further information on this quarterly publication, including how to order a subscription to it, click here: New Appleman on Insurance: Current Critical Issues in Insurance Law.
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