The NAIC's Identity Crisis

So just who is the National Association of Insurance Commissioners (NAIC)? Apparently the answer depends on particular circumstances. This has actually been the case for some time,
but more people seem to be paying attention now because of the organization’s “mission creep” at both the state and federal level.

Case in point is a February 28, 2012 letter from Rep. Ed Royce (R-CA) to NAIC president Kevin McCarty and CEO Therese Vaughan requesting clarification of exactly how this collection of insurance regulators is defining themselves.

Rep. Royce’s interest was sparked by recent press reports that the NAIC is re-branding itself
as a “standard –setting” organization rather than a private non-profit organization, as it has previously cited its 501 ( c) (3) status to distance itself from exercising any regulatory authority, thereby enabling the NAIC to sidestep open meeting and Sunshine law requirements.

While there have been grumblings about NAIC’s organizational structure and status for some time, it is now getting more attention largely because of the establishment of the Federal Insurance Office and health care reform implementation requirements, which have more
clearly exposed the NAIC’s activist nature.

So let’s explore the NAIC’s identify crisis a bit.

It is on record stating that “when individual insurance commissioners gather as members
gather as members of the NAIC, they are not considered a governmental or public body, but rather are a private group. As an organization, the NAIC does not have any regulatory
authority.”

Well, I guess the validity of this statement depends on how you define the term authority.
While technically true that the NAIC cannot mandate state compliance with any
“standards” it develops, such authority is effectively exercised indirectly through the organization’s accreditation program.

Another interesting observation is that 501 ( c ) (3) organizations are generally restricted
from engaging in political or lobbying activities. But apparently the NAIC does not feel
confined by the U.S. tax code as it regularly dispatches lobbyists to the U.S. Capitol to influence members of Congress on insurance-related legislation.

They certainly have been engaged in an ongoing effort to kill or neuter legislation designed
to modernize the Liability Risk Retention Act. Their most recent objections include
giving the Federal Insurance Office any oversight responsibility with regard to RRG regulation and the establishment of federal corporate governance standard for RRGs.

In related news, the NAIC represented itself as a “standard setter” on insurance issues in a
recent friend of the course brief to the Maine Supreme Court involving premiums charged for health insurance. As part of its brief, the NAIC said it had the right to participate because ‘through the NAIC, state insurance regulators establish standards and best practices, conduct peer review and coordinate their regulatory oversight.”

Rep. Royce concludes his letter by asking NAIC officials to respond to three specific questions:

1. What is NAIC’s status? Is it a trade association? Is it a formal part of “the national system
of state-based insurance regulation in the U.S..”? If so, why did it (a) testify to Congress,
when asked specifically about its status, that it does not “hold ourselves out as some kind of …national regulatory system”; and (b) insist to NCOIL that is not considered a public body” and “does not have any regulatory authority”?

2. Does NAIC agree that as a self-described “private group,” it may not “regulate in the field
of interstate commerce”?

3. As a 501( c ) ( 3) non-profit corporation, does the NAIC not file a Form 990, a routine financial statement for non-profits, with the Internal Revenue Service (IRS)? If the NAIC has been formally exempted by the IRS from filing this information, please provide written documentation of this exemption, and explain why the NAIC feels it necessary to keep this disclosure from public scrutiny.

We look forward to seeing the NAIC’s response and will report on it accordingly. In the
meantime, this blog can report that there is no record of the NAIC filing 990 reports.

It's National Consumer Protection Week - March 4-10

Have you ever had your insurance claim denied or maybe you filed a claim and received less than you thought you deserved. Ever have trouble reading an insurance policy? If you're reading this now, you know about the Office of the Insurance Commissioner and the services we provide. But you probably know a handful of people who've never heard of us.

This week (March 4-10) is National Consumer Protection Week. Tell a friend about our consumer services and follow us on Facebook.

More than 500 people a month file complaints with us. Last year alone, we recovered more than $8.5 million for Washington state insurance consumers who had their claims denied or delayed.

Just in last few months we helped:

• A Redmond consumer get a $29,000 health insurance claim paid


• A Lake Stevens consumer collect an additional $2,553 on an auto claim


• A Rochester consumer get a $7,574 refund on their auto warranty


• A Sammamish consumer get their homeowners policy reinstated

Maybe we can help you! If you or someone you know has an insurance question or complaint, visit http://www.insurance.wa.gov/. We take complaints online and you can track our progress 24 hours a day, seven days a week. Or call our Insurance Consumer Hotline at 1-800-562-6900, Monday-Friday, 8 a.m. -5 p.m.

Kathleen's Pregnant Pause

“I’m not sure that is going to work,” commented House Energy and Commerce Committee Chairman Fred Upton.

Fellow committee member Rep. Phil Gingrey chuckled later as he asked out loud “So, what is she talking about? Here’s the bill, pay it – that’s what they do.”

These pointed comments were prompted in response to testimony delivered by HHS Secretary Kathleen Sebelius during a March 1 committee hearing on the Administration’s evolving policy on health plan contraceptive coverage requirements for religious institutions.

Ms. Sebelius began her testimony by explaining that organizations affiliated with religious institutions would not have to cover contraceptives if they objected on grounds of conscience.
Instead, insurers would be required to offer birth control free of charge to the employees of those organizations.

So what about self-insured religious organizations (of which there are many)?

After pausing to consider the question, Secretary Sebelius replied that the organizations’ third party administrators might be enlisted to provide contraceptive coverage.

Of course, TPAs are not insurance entities and therefore by definition cannot provide “coverage” for anything. Same issue for ASO providers event though they are connected to insurance entities. These are inconvenient facts to be sure.

But not to worry, as Secretary Sebelius reassured everyone that the department would reach out and “have dialogue with folks”before proposing a rule in the near future.

Perhaps there should have been some “folks” in the room when this health care reform plan was hatched in the first place.

Fourth Circuit Rules that FLSA Claims Constitute “Wrongful Act” Under CGL Policy

Post by Logan Wells

In a decision published February 24, 2012, the United States Court of Appeals for the Fourth Circuit held that an insured’s violation of the Fair Labor Standards Act (“FLSA”) constituted a “wrongful act” under the terms of the defendant school board’s commercial general liability (“CGL”) policy, thereby reversing a decision by the United States District Court for the Western District of Virginia.


In Republic Franklin Insurance Company v. Albemarle County School Board, employees of the Albemarle County School Board (“Board”) filed an action against the Board alleging the Board had violated the FLSA by failing to pay them the overtime rate when they worked in excess of forty (40) hours a week. The Board tendered the defense of the underlying suit to its insurer, Republic Franklin Insurance Company (“Republic”).


Under the terms of the CGL policy issued by Republic to the Board, Republic agreed to "pay for all ‘loss’ resulting from a ‘claim’ for a ‘wrongful act’ to which this insurance applies." The policy defined "loss" as "any amount which an insured is legally obligated to pay as damages," and the term included coverage for punitive damages "where insurable by law." "Loss," however, did not include "fines or penalties imposed by law" or "operating costs of [the insured’s] institution such as would be included in [the insured’s] ‘educational institution’s’ budget. "The policy defined "wrongful act" as "any breach of duty, neglect, error, omission, misstatement, or misleading statement in the discharge of ‘educational institution’ duties."


Republic agreed to defend the underlying action with a reservation of rights to challenge coverage, and filed a declaratory judgment against the Board seeking a declaration that Republic owed no duty to defend the Board in the underlying action, and owed no duty to indemnify the Board for any judgment that might be entered in the underlying action. Specifically, Republic asserted that (1) FLSA violations were not “wrongful acts” as covered by the CGL policy Republic issued to the Board; and (2) that any judgment that might be entered against the board would no impose “losses” on the Board, as “loss” was defined in the policy. The Board counterclaimed for a declaratory judgment that Republic had a duty to defend the underlying action and a duty to indemnify the Board for the amount of any judgment that might be entered.


The parties filed cross-motions for summary judgment. The district court denied the Board’s motion and granted Republic’s motion, declaring that Republic owed no duty to defend or indemnify the Board, and finding that, inter alia, the FLSA complaint did not allege a “wrongful act.” The district court also found that because the claim for back wages was not a claim for “damages,” as required by the definition of loss, but rather an existing operating cost, the claim liquidated damages and attorneys’ fees was also not a loss “because that claim did not exist independently of the claim for back wages.”


The Board subsequently appealed the ruling of the district court, leaving the Fourth Circuit to decide two issues: (1) whether the underlying FLSA complaint alleged a claim for a wrongful act; and (2) whether liquidated damages and attorneys’ fees claimed because of the FLSA violations were losses covered by the policy.

Wrongful Act

With regard to the “wrongful act” issue, Republic argued the Board’s failure to comply with the FLSA could not be a wrongful act because the Board had a preexisting duty to comply with the FLSA, and contended that the Board’s obligation to pay wages arose as soon as the work at issue was performed and therefore could not constitute a later wrongful action covered by the policy.


Rejecting Republic’s argument, the Fourth Circuit found that, “while a preexisting duty might be relevant to whether an insured suffers an insurable loss, it cannot be relevant to whether the insured is the subject of a claim for a wrongful act.” The court further explained:

Every duty breached or violated is necessarily a preexisting duty, and it is the breach or violation of that duty which constitutes a wrongful act. And, this is precisely how the insurance policy in this case defines a wrongful act: "‘Wrongful act’ means any breach of duty, neglect, error, [or] omission.” In the underlying FLSA complaint, the employees allege that the School Board failed to pay them wages for all work done and for overtime work, in violation of the duties imposed by the FLSA. The School Board’s alleged failures are thus breaches of the duty imposed by the FLSA and therefore wrongful acts. By its plain language, the policy covers claims for the wrongful acts alleged in the underlying complaint.

(Emphasis in the original).

The court further noted that Republic’s argument “conflate[d] the concepts of ‘wrongful act’ and ‘loss’”:

Confusingly, [Republic] conflates the concepts of "wrongful act" and "loss," failing to recognize that a breach of a preexisting duty to pay is a wrongful act but that the resulting obligation to pay back wages may not be a loss resulting from that wrongful act. Such loss could only arise if the failure to fulfill the preexisting duty to pay wages caused "damages" apart from the back wages not paid. See Pacific Ins. Co. v. Eaton Vance Mgmt., 369 F.3d 584, 590-91 (1st Cir. 2004).

See also Macy Dep’t Stores v. Fed. Ins. Co., 305 F.3d 597 (7th Cir. 2002); Oktibbeha Cnty. Sch. Dist. v. Coregis Ins. Co., 173 F. Supp. 2d 541 (N.D. Miss. 2001). The court explained:

[A] judgment ordering an insured to pay money that the insured was already obligated to pay, either by contract or by statute, is not a "loss" covered under an insurance policy that requires that the loss be caused by a "wrongful act." The alleged "loss" in such cases arises from the contract or the statute itself, not from the failure to abide by it....[However, the rule is not] that the failure to comply with a preexisting duty cannot be a “wrongful act.” Such a rule would not only be incompatible with the definition of "wrongful act" in such policies—defined broadly to include "any breach of duty"— but also is counterintuitive because no violation of the law could ever be a "wrongful act" as there would always be preexisting duty to follow the law.

Accordingly, the court found that the underlying complaint alleged “wrongful acts” on the part of the Board within the meaning of the policy issued by Republic.

Losses

With regard to whether liquidated damages and attorneys’ fees claimed because of the FLSA violations were losses covered by the policy, Republic argued that the liquidated damages and fees were not covered losses because (1) they are inextricably connected with the claims for back wages and overtime pay, which are not losses; (2) they are "fines or penalties imposed by law" and therefore excluded under the policy; and (3) they are restitutionary in nature and therefore not "damages," as required by the policy’s definition of "loss." The Board disagreed and argued that unlike back wages, the liquidated damages and attorney’s fees were damages resulting from its alleged wrongful acts.

The Fourth Circuit rejected Republic’s argument and held that “because the underlying FLSA complaint .... demand[ed] not only back wages, but also liquidated damages and attorneys’ fees resulting from the School Board’s wrongful acts....any judgment against the School Board, to the extent it would include liquidated damages and attorneys’ fees, would amount to a ‘loss’...resulting from a claim for a ‘wrongful act.’” In so finding, the court relied on controlling Supreme Court precedent “holding that liquidated damages as authorized by the FLSA are not penalties, but rather, compensatory damages ‘for the retention of a workman’s pay which might result in damages too obscure and difficult of proof for estimate other than by liquidated damages.’”  (Quoting Brooklyn Sav. Bank v. O’Neil, 324 U.S. 697, 707 (1944)). Thus, the Fourth Circuit found that Republic’s policy provided coverage for the liquidated damages and attorneys’ fees as a loss, as defined by the terms of the policy.