As implementation of the Patient Protection and Affordable Care Act (the "ACA") continues, questions remain as to whether the ACA is applicable to the surplus lines (excess lines in New York) markets. Historically, surplus lines coverage has generally been exempt from many of the laws that govern the admitted market, e.g., those that regulate rates and forms. As a result, many in the market assumed that the ACA, while interesting to the extent it could create opportunity for surplus lines writers, would not directly apply to surplus lines. Upon examination however, it appears that any such conclusion may have been hasty.

Arguments For Inapplicability

The ACA enacted comprehensive reform of the private health insurance marketplace, including the regulation of minimum essential benefits and medical loss ratios. Health insurance is typically not exportable to the surplus lines market. Therefore, conceptually the ACA's market reforms should be irrelevant to products written on a surplus lines basis. In addition, some have argued that people buying health products issued by a surplus lines insurer would not need the protections of the ACA since the products should not, if they are surplus lines products, be major medical coverage. Finally, certain provisions of the ACA are either clearly applicable only to licensed carriers (e.g., only licensed carriers may write insurance on the exchanges), or relate to processes from which surplus lines insurers are typically exempt (e.g., rate filings). These arguments have been advanced to support the proposition that the ACA is limited to reforming only the admitted market. Notwithstanding the appeal of these arguments, the applicable statutory and regulatory terms do not limit the applicability of the ACA in the same way that state health insurance and rate and form laws are typically limited to admitted business.

Statutory Bases For Potential Applicability

The ACA applies to both a "group health plan" and a "health insurance issuer" offering group or individual health insurance coverage. A group health plan, generally, means an employer sponsored health plan as defined by the Employee Retirement Income Security Act of 1974, and surplus lines insurers would not, therefore, fall within this definition. A "health insurance issuer", on the other hand, is "an insurance company, insurance service, or insurance organization ... licensed to engage in the business of insurance in a State and which is subject to State law which regulates insurance...." Many surplus lines insurers have based their eligible surplus lines status on the fact that the carrier is admitted in one U.S. jurisdiction (i.e., "a State"). These carriers would therefore fall within the definition of a "health insurance issuer." Indeed, the fact that the "health insurance issuer" definition tracks this requirement for surplus lines eligibility -- licensed in a state and subject to state surplus lines laws -- could indicate a deliberate attempt to bring such insurers into the scope of the ACA.

Interestingly, certain ACA regulations related to the group and individual markets (although not to the rate and form provisions) define a "health insurance issuer" slightly differently. This regulatory definition states: "Health insurance issuer or issuer means an insurance company ... that is required to be licensed to engage in the business of insurance in a State and that is subject to State law that regulates insurance...." Thus it could be argued that CMS interprets the statutory phrase "licensed in a State" to mean, at least in some circumstances, "required to be licensed to engage in the business of insurance in a State."

Under this regulatory definition, it could be argued that surplus lines insurers are not required to be licensed in a State, and therefore surplus lines insurers do not fall within the definition of a health insurance issuer. Nonetheless, most domestic surplus lines insurers are required to be licensed in one state to maintain their status as a surplus lines insurer (with exceptions for the few states that allow domestic surplus line insurers), such that this definition would still apply to such insurers. Moreover, it is unlikely that, if pressed, the regulators would agree that their definition requires domestic surplus line insurers to comply with the ACA when writing health coverage, but exempts alien surplus line insurers and others who do not happen to be licensed in at least one state but who write the same coverage. As such, to the limited extent surplus line insurers write health insurance coverage, they should be careful to either write health insurance that is exempted from the ACA (e.g., accident-only coverage), or be prepared to satisfy all of the market reforms embodied in the ACA.

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