STOP LOSS INSURANCE

Consider the following dialogue.  It is more or less based upon variations of recent Opinions set forth by the Supreme Court of Texas.

The people having this discussion are Quink and Malvinio.  Noticing the tilting, even, retilting, and even wobbling playing field.

Q.  There is a lot about insurance I think I know.  To be sure
that is open to dispute.  However, something came up recently that I knew immediately I did not know or even understand.

M.  Astounding.  What is it?  As ignorant as I am, maybe I can help.

Q.  It pertains to “Stop Loss Insurance.”  I can guess what it might mean.  I have been tempted to conjecture that the phrase is just another name for insurance. Insurance pays for losses, and policy limits put a stop to the insurer’s losses.  Still, I know that I cannot be right.  Hence, that can’t be right.  My intuitions shout it out at me.

M. So you want me to explain it?

Q. Yes, if you know about it, give it a whack.

M. Ok, let’s give it a “good college try.”  Let’s adopt a lawyerly convention.  This is the first thing we’ll do.  As you know–you especially, since you follow the over-abbreviation-group-habit most of the time–I’m surprised that your wife can even understand you. 

Q.  Stop it.  You know that I am not married anymore.  One of the guys in your office did the work.  I would have handed it to you if you had not been making yourself out to be a legend of the insurance law.

M.  True.  But you’ve had at least one girlfriend for a long time.  I assure you that neither of these “problems” has anything to do with SLAs.

Q. True.  But please get back to work.

M.  The first thing to remember is that SLA is a special category of insurance, and it has its origins in certain arrangements which can be made in the financial world.

Q. Good Lord!

M.  In lots of non-insurance deals, stop-loss agreements involve shifting losses from one person to another.

Q. But isn’t that insurance writ large?  Doesn’t that make it just like all other types of insurance?

M. Stay with me about the financial world.  A stop-loss agreement is a device, shifts financial losses from one person to another.
Co-signing is like that.  Some types of lending are like that.  Some types of securities speculation involve this.

Q.  Isn’t that pretty much like a hedge fund?

M.  Under most circumstances, yes.

Q. Are ‘t we back to SLA really being insurance?  Go back to the financial stop-loss arrangement suppose “Tiger Lilly, owns $1000 of stock in ABC Corporation, and she wants to avoid the situation of losing everything, so she has an automatic number where if the value drops below that–say $754–the stock is sold at the price, or as close as possible.  Isn’t that a stop-loss arrangement?

M.  Funny, under the stances that you would pick that name.  Never mind. Consider a somewhat related case.  Consider an insurance company, Reciprocal Red Inc., that had insured the law firm of Alan, Wetford & Valentine for legal malpractice, fiduciary duty violations, and so forth; then further suppose that both the policy limits were $28.4M, and that policy limits were not reduced by defense costs. 

Q.  Well, forgive me for interrupting. Valentine surely has some sort of stop-loss agreement.

M. It looks like it, but not all of its losses are covered.  The insurer will not cover absolutely anything forever.  The pay-on-behalf-of limits plus defense costs, stop the insurer’s losses, but not Valentine’s.

Q. Why do you always insist on the phrase pay-on-behalf-of when everybody else calls it “indemnify”?

M.  Because the term “indemnity” has several meanings.  A century ago, or so, the word “indemnity” meant that the insured would pay for his own losses and then the insurer would reimburse the insured. That was the meaning of “indemnity” in the insurance trade.  There are a few parts of a few policies that work that way, but almost all do not.  For this reason, the word “indemnity” should be driven from the trade.

Q. Bullshit, Malvinio.  But I have led you into a digression.

M. Do we now see that the insurer is the one in need of a stop-loss agreement, and that agreement is built into some sort of contract with another insurer?

Q.  Granted.  But in the words of Professor Higgins, “this hardly ever happens.” Ever! This point entails that SLI would be very rare. So what’s to talk about?

M. Well, “rarity” does not mean “never,” and we both know that very odd and unusual things get insured–sometimes for a lot of money.  Various body parts of champion dogs, crucial professional athletes, and various features of the bodies of various Hollywood stars are insured.

Q.  First party or a third party?  By the way, what is second party insurance?

M. I’ve wondered about that.  It seems to me that some life insurance should bear that name.  So should the continued existence of some marriages.  Suppose the husband is a real tiger and the wife is a sweet, loving cat.

Q. Enough!  Back to the topic. So, what if we were not concerned about the Valentine Firm, but about “Red Ink.”  Everyone knows that it hates losses and tries to avoid paying anything on all of them.

M. You’re wrong about Red Ink.  It’s actually pretty good.  AIG used to have this reputation.  It doesn’t much anymore I think.  Even if its Head Knocker once remarked that so far as he was concerned the real value in business life was to have a deal pending in which he has an unfair advantage.  Another insurer that had this problem was “Stonewall Insurance.”  Or, what about this one, “Dead Body Insurance Company”?  It offered coverage to funeral companies when they fouled up.

Q. But the dead guy can’t sue.  He’s not going to be an injured party.  Who would be the plaintiff?  Aha.  I see.  It would the family.

M. Among others.  But let’s go back.  I have only the rest of the day.  Besides, you took most of this from me in law school.

Q.  True.  But I was stoned or drunk or both most of the time. You don’t remember, do you?

M.  Sort of, but keep in mind I am your sponsor in both AA & NA.

Q.  Aren’t you also one of my “retired” sponsors in SA?

M.  Of course not, that’s my twin brother Mark Angelo.

Q.  Back to the discussion.  Doesn’t a stop-loss agreement become a kind of reinsurance?  Insurance on insurance?  Or, insurance, upon insurance, upon insurance?

M.  Yes, sort of, I think.  But I have one backup point to make.   A while back, I said some point came first.  Now for the second.  SLI
might not cover just one loss.  It might cover a whole array of losses all at the same time. 

Q. Sure.  But doesn’t that keep it as a kind of reinsurance?

M. Again, yes, sort of.

Q.  So, what’s the difference.

M.  Well, for one thing, most SLI is tied to health insurance, especially large policies.  They may cover hundreds or thousands of people.

Q. All I can think of that would do that would be United or Blue Cross.

M. Or companies like that.  Still, I know what you’re going to say next.  You’re going to say, “Isn’t really just a type of  reinsurance?”

Q. True.  So I’ll skip that question and ask this one:  Why is that so?

M. Now things get interesting.  The answer is “Yes. Sort of.”

Q. Why “Sort of”?

M. I don’t know.  I suspect it’s simply a fact of business history.  As you know, in the law, and anything related to the law, we are often blocked into “vocabulary history.”

Q. I remember, just barely, back in the “Stoned Ages,” you’re losing–no using–that phrase.   I have used it too.  I remember using it in an argument before the Supreme Court.  I got a very peculiar reaction.  One judge said.  “Ah yes.  One of Melvinio’s phrases.  Watch out for him. He’s a loose cannon.”  All the while, he was smiling.  I checked upon him.  I think he was in your insurance class a while back.

M.  Yes.  The same one you were in.  Now back to business.  Health insurance comes in two forms:  individual and group.  SLIs come most often–almost always in group policies.

Q. Why?

M. Because that’s where the great huge losses can occur.  Think what would happen if some sort of plague hit a city. . ., even just one.  Smallpox may be in the old days.  Newly discovered, easily transmittable HIV; no physical contact necessary.  Or lethal bird droppings which carried a deadly virus.

Q.  I’m still just hearing about reinsurance.  So, what’s interesting about this?

M.  Here it is.  Suppose we were not talking about United or the like.  Suppose we’re talking about gigantic employers who provide health insurance to thousands of employees.

Q. Don’t they usually have other companies administering them?

M.  Yes. But the policies are theirs, and they will owe the money to pay the benefits.  The losses can become astronomical, very quickly.

Q. So what?  Other carriers can get SLIs, so why couldn’t the employer which is doing the heavy lifting?

M.  What about the fact that the premiums are actually deductions from wages?

Q.  You’re asking the questions now?  Who do you think you are?  Does a law professor reincarnate?  Do you see yourself as a salvationist figure of some sort?

M.  This was where the fun was supposed to begin.  Fat chance.  Of course, premiums can, and usually do come from wages.  There is at least one exception.

Q. And that would be when some employees can buy a higher level of coverage and pay for it themselves.

M. And when they can buy coverages the employer will not provide.  Until recently, maybe, that might include preventative care, care for children with preexisting conditions, and for “children” up to the age of 25.

Q.  Out of college, unemployed, and living at home?

M. I don’t know.  I wonder what the politics of that would look like.  I wonder if the public policy would like that?

Q. Me too.  Can groups of employers all buy the same insurance policy?

M.  In theory I suppose so, but some obscure statute I haven’t read, much less studied, may have something to say about that.

Q. ERISA?

M. Yes. I should think so.

Q. If that statute is to be the model for “O’bomb-a Care.”  No wonder people hate that statute.   So how are employers handled?   How does SLI work for them?

M. Best question yet.  The standard view just now is that it does not.

Q. Why not?

M. Two reasons, I think.  First, employers who are covering their employees are not in the business of insurance–that is the business of selling insurance, and insurance can only be sold by an entity that is in the business of insurance.  Second, many of the places SLI is needed are in the level of self-insured retentions.  The idea is that reinsurance coverage doesn’t make any sense in that context since SLIs are for dangerous losses, not just losses within self-insured retention.

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Q.  Does this really make sense?  Take the second point first.  If the ABC company has an employee health plan and has an insurer over a certain level, say $5M, might it not want coverage for some of the first $5M, say, the amount between $4M and $5M?

M.  Sure. but why does it not just buy primary coverage?  Why SLI?  Surely it’s more sensible simply to call it what it is: limitation on self-insured retention?  The loss is already stopped by the presence of the insurance over $5M.  Besides, isn’t SLI more extensive than primary, self-insured retention?

Q.  There are several reasons.  First, self-insured retention is not insurance, it is more like a savings account.  Second, if the “over $5M” policy is as low as that insurer will go, ABC can just buy regular old insurance under it and call the other insurer and excess insurer.  That insurance could even be for the $$4-5M gap with a deductible of $4M.  Third, to the extent that the self-insured retention is what it appears to be, then how can there be reinsurance.

M.  You miss my point.  Isn’t self-insured retention really self-insurance.

Q.  But there is no such thing as self-insurance.  Insurance, by definition, requires the transfer of risk.

M. So what.  There are stop-loss agreements in the financial world.  Why couldn’t an SLI be thought of that way?  Surely it can be.

Q. Of course, it can be, but that does not make it insurance because of the definition of the term insurance.

M. Okay, let’s look at the second point.  I’m beginning to think you know more about this than I thought–more than you thought, too.
 
Q. Let’s go on.  Grant me–please, just for the sake of argument–
that the SLI is not for the self-insured retention, but for the up-top, after all the retention is exceeded, the outside insurance has been exceeded, and ABC is paying its own tab.  Is that SLI given how the idea works in the financial world?
 
M. I understand. Go on.

Q. Isn’t ABC insuring itself where ever the SLI applies?

M. Can’t be because of the definition.

Q. What if ABC is a wholly-owned subsidiary of XYZ?

M. Don’t know.  Probably depend on the relationship between the two.  The same would be true if a real person owned ABC.

Q. Forget that then.  What if both of them–the insurer and ABC called it SLI and thought about it that way?

M.  The altered vocabularies of miscreants, the ignorant, the mad,  and even sane, informed and honorable individuals or organizations do not change reality.
 
Q. But why shouldn’t a reality here reflect semantics, rather than the other way around?  These are social relationships we are talking about–even if they are business relationships–not physics.
M.  Semantic changes do not change relativity.  They only change how we talk about it.

Q. And to some degree how we think about it.

M. Let’s look at the other point.

Q. I can’t remember what it was.  Please remind me.

M.  Maybe we’ve already discussed it.  The point was that since ABC is not in the business of insurance, it cannot provide insurance.

Q. Haven’t we exhausted that one?  We’ve been discussing if not arguing about language and semantics versus reality and perceived reality for some time now.

M. Surely, Quink,  it would be significant to you, devious, though playful fox that you have proved yourself to be, if a major court reasoned, as I have, and to the conclusion I have. 

Q. Malvinio, you are such a hedgehog.  You won’t even admit the power of language overthinking or the power of conceptual analyses over mere habits of thought.

M. Maybe, but what do you say about the authority of courts?  Surely they too have tremendous influence over how social relationships–including business relationships–should be or must be conceived.

Q. Granted, I guess, though it should not be worshiped.  I remember what you taught about the fundamentals of common law jurisprudence: “the historical lock up,”  “precedent, precedent, overall.” “formalism,” and (what you taught) “pragmatic realistic realism.”  I remember your saying, “Inflexible, pointless social habits are distilled dangers impeding real progress.”  I remember that you further said that “The flow of jurisprudence is a social habit.”

M. I said that? Remarkable fellow was I.

Q. Certainly.  No question about it.  I’ve got to go for right now, but I’ll be back in a couple of days.

M. Welcome back. Good to see you.  Now, let’s look a little–talk a bit–at the case which I am trying to get you to focus on.

Q. Certainly.  Please proceed.  I may even let you finish a thought.

M. Consider a business, say a large one, and it had set a self-insured system with stop-loss insurance.  Now, stop-loss insurance
. . . .

Q. Let me, interrupt, I know we haven’t talked in a couple of days, but haven’t we talked about this stuff before?

M. To be sure, but I am about to come to the point.  Suppose that stop-loss insurance is sold to the business and it has been called “reinsurance” every time for a long time.  Suppose it is called that in virtually all contexts. The insured does it. Intermediaries do it.   Even state insurance auditors did do it when they buy the insurer for an audit.
Q. So what?  We’ve already established that ordinary usage does not establish truth just by itself.

M. Just as you say. Well, now suppose that the governing government realized that there is not a formal definition in any statute or any case.  And it also realizes that it has the authority to tax and otherwise obtain revenue from insurers but not reinsurers. 

Q.  This makes absolutely no sense.  How could that happen?  Reinsurance is a form of insurance.  But the state’s desire for money determines “truth” even less than established usage.

M.  Here’s the state’s response.  There is nothing about this arrangement that requires us to “lie down” with ordinary usage.  The health insurance trust fund of the insured is not an insurer and it is not itself really insurance.  Consequently, the stop-loss insurer is not really reinsurance.  There has to antecedently be insurance inexistent for the entity calling itself a stop-loss insurer, of any kind, to really be an actual insurer.  Trust funds, or the like, to pay future medicals are not insurance, and ordinary usage does not entail that they are, no matter how the relevant language in other contexts works.

Q.  Jesu-Marie.  Now you can figure out why I never took any courses from you after elementary insurance.  In any case, do we have anything here more than–and more interesting and enlightening than a linguistic stand-off?  And if that’s true, should the state always win simply because it wants tax revenues?  What kinds of tax revenues are we talking about, anyway?  Surely there are isn’t that much stop-loss insurance on the market.

M. You are not right about that.  In this light, you might want to know that the state has the authority to tax insurers but not reinsurers.

Q. One whole “level” of the insurer and not another?  What about taxing primary insurers but not excess insurers?  Umbrella carriers but not purely excess carriers?  One whole type of insurance but not another? Wedding insurance but not burial insurance?  Livestock health insurance but not canine life insurance?  Aren’t we still just talking about nickels and dimes?

M. Skipping your diatribe, of course, money is a good thing, as can be seen by the amount the “reinsurers” are spending nationwide to ensure that stop-loss insurance policies are called “reinsurance,” until the fires of hell drop to beach temperatures.  We’re not talking about nickels and dimes.  Using your image we are talking about dollar bills, for sure.  Lots of these companies will owe fines for having refused to pay the state after having been “asked” to pay up.  And they may owe money reaching further back.  After all, these companies have been selling insurance here for many years.

Q.  Still, this becomes a fight over money, and not much more.  Does the state have any other real reasons?

M. Just this one. The department of insurance regulation and administration has written its insurance regulations for a half-century classifying by, in effect, defining “insurance” so that it would include the insurers selling the stop-loss product.  No one has even challenged its view, either in the legislature, before the department, in mags or journals. The state argues that administrative regulations in the absence of statutes are a primary course of authority, so far as the law is concerned.

Q,  But isn’t the 50-year argument undercuts itself?  First, the fact that no one has bitched about the regs all these years and the fact that it has just “sat” there suggests that it was for a bygone season.
Surely it’s easier to apply pragmatic and moderate legal realism to evaluating this situation? 

M.  No question about it.  They have less authority than statutes.  But flexible they are not.  They are far more detailed than most statutes really are, and groups of very competent people have spent at least months devising them

Q. They are much more competent at this sort of thing than elected legislators. Much more deeply knowledge about insurance law.

M. I certainly didn’t say that.

Q.  Might, that have anything to do with the fact that you are now a state senator?

M. [Smiling] Get out. 

This dialogue is based on variations taken from Texas Department of Insurance v. American National Insurance Company, ___  S.W.3d ___  (Tex. 2012)