In re Local Gov't Ctr., Inc., 2012–729
| Decision Date | 10 January 2014 |
| Docket Number | No. 2012–729,2012–729 |
| Parties | APPEAL OF THE LOCAL GOVERNMENT CENTER, INC. & a. |
| Court | New Hampshire Supreme Court |
165 N.H. 790
85 A.3d 388
APPEAL OF THE LOCAL GOVERNMENT CENTER, INC. & a.
No. 2012–729
Supreme Court of New Hampshire.
Argued: November 14, 2013
Opinion Issued: January 10, 2014
Ann M. Rice, deputy attorney general (Suzanne M. Gorman, senior assistant attorney general, on the brief), and Bernstein, Shur, Sawyer, & Nelson, P.A., of Manchester (Andru H. Volinsky, Roy W. Tilsley, Jr., and Christopher G. Aslin on the brief, and Mr. Volinsky orally), for the petitioner.
Preti Flaherty, PLLP, of Concord (William C. Saturley and Brian M. Quirk on the brief, and Mr. Saturley orally), David I. Frydman, of Concord, on the brief, and Ramsdell Law Firm, PLLC, of Concord (Michael D. Ramsdell on the brief), for the respondents.
Howard & Ruoff, P.L.L.C., of Manchester (Mark E. Howard on the brief), for Harold J. Pumford, as amicus curiae.
LYNN, J.
The respondents, The Local Government Center, Inc. (LGC), Local Government Center Real Estate, Inc., Local Government Center Health Trust, LLC, Local Government Center Property–Liability Trust, LLC, Health Trust, Inc., New Hampshire Municipal Association Property–Liability Trust, Inc., LGC–HT, LLC,
and Local Government Center
Workers' Compensation Trust, LLC,1 appeal a final order of a presiding officer of the petitioner, the New Hampshire Bureau of Securities Regulation (Bureau), finding that they violated RSA 5–B:5, I(c) (2013) and requiring, among other things, HealthTrust to return $33.2 million to its members, P–L Trust to return $3.1 million to its members, and P–L Trust to transfer $17.1 million to HealthTrust.2 We affirm in part, vacate in part, and remand.
I. Background
A. LGC and Related Entities
The following facts are derived from the presiding officer's report or the certified record, or they are undisputed. LGC is the successor to the New Hampshire Municipal Association, Inc. (NHMA), which was a non-profit New Hampshire corporation that provided lobbying, legal counsel and training for its members (comprised of various municipalities) and administrative support to certain affiliated associations. HealthTrust is the successor to NHMA Health Insurance Trust, which NHMA created in 1985, and P–L Trust is the successor to NHMA Property Liability Trust, which NHMA created in 1986. Workers' Compensation Trust is the successor to a similar program created by NHMA. When it was first established, it was "housed" in NHMA Property Liability Trust. It became a separate trust in 2000.
HealthTrust, P–L Trust, and Workers' Compensation Trust are pooled risk management programs. See RSA ch. 5–B (2013). HealthTrust is the largest pooled risk management program operated by LGC. As of December 31, 2010, HealthTrust had revenues of $392,244,000, P–L Trust had revenues of $10,254,000, and Workers' Compensation Trust had revenues of $6,517,000. According to the respondents, HealthTrust provides health insurance benefits to "more than 70,000 individual public employees, their dependents, and retirees, with 36 medical plans and 25 prescription drug plans. HealthTrust handles approximately $360 million in claims each year." According to the respondents, P–L Trust provides property liability insurance that "covers over 4,000 buildings and their contents with a value
of nearly four billion dollars in its Property–Liability risk pool, and also covers 26,000 public employees in its Workers' Compensation risk pool."
Pooled risk management programs are alternatives to traditional, single employer insurance programs. A pooled risk management program allows political subdivisions such as cities, counties, and school districts, to combine or "pool" so that they are considered as one customer for purposes of insurance coverage and risk management. As the presiding officer found, "The steps involved in the acquisition of insurance coverage by a political subdivision from, for instance, ... [H]ealth [T]rust[,] would appear quite basic." Political subdivisions apply to be members of a pooled risk management program. Information about the group of individuals to be insured is then submitted for evaluation and rating. Upon approval of the requested
insurance coverage for the coverage year, the political subdivision is assigned a premium rate and assigned to either a January or a July pool of program members, depending upon the political subdivision's fiscal year or requested coverage year. LGC then collects the premiums, and a third party administrator, such as Anthem Blue Cross/Blue Shield, handles any claims.
Generally, HealthTrust, P–L Trust, and Workers' Compensation Trust operate similarly to a mutual insurance company with the net assets of each program considered the property of its respective members. Earnings and surplus of each trust are determined annually at the end of the coverage year by subtracting certain expenditures from the program's total revenue (consisting of income from investments and combined premiums paid by the program's members). The year-end statements for years 2008 through 2010 report that HealthTrust had net assets of $92,687,000 in 2008, $79,481,000 in 2009, and $86,782,000 in 2010. P–L Trust had net assets of $10,093,000 in 2008, $10,838,000 in 2009, and $10,225,000 in 2010. The Workers' Compensation Trust had net assets of $829,000 in 2008, a negative net asset level expressed as ($992,000) in 2009, and net assets of $177,000 in 2010.
Until 2003, HealthTrust, P–L Trust, and Workers' Compensation Trust operated as organizations separate from each other and from LGC. Each organization—HealthTrust, P–L Trust, Workers' Compensation Trust, and LGC—had its own corporate by-laws and its own board of directors. In addition, the members of each organization were not identical; thus, for example, a political subdivision that was a member of HealthTrust was not necessarily also a member of P–L Trust.3 In 2003, LGC took control of the assets of HealthTrust, P–L Trust, and Workers' Compensation Trust.
Sometime thereafter, LGC eliminated the separate boards that previously had governed those entities. After 2003, a single board of directors governed LGC, HealthTrust, P–L Trust, and Workers' Compensation Trust. See Prof'l Firefighters of N.H. v. Local Gov't Ctr., 159 N.H. 699, 701, 992 A.2d 582 (2010). In effect, after the 2003 reorganization, LGC became the "parent" to its "subsidiaries," HealthTrust, P–L Trust, and Workers' Compensation Trust. See id. In 2007, LGC merged Workers' Compensation Trust with P–L Trust.
Historically, Workers' Compensation Trust has collected insufficient insurance premiums to cover its costs. To remedy this problem, beginning with the 2003 reorganization, LGC transferred funds from HealthTrust and P–L Trust to Workers' Compensation Trust. Between 2003 and 2010, LGC transferred approximately $18.3 million from HealthTrust to Workers' Compensation Trust. After the Bureau investigated this practice, the LGC board voted to execute a promissory note for approximately $17.1 million payable to HealthTrust, although the board made the note interest-free.
B. RSA chapter 5–B
Until the legislature enacted RSA chapter 5–B in 1987, there were no specific laws addressing pooled risk management programs operated by nonprofit organizations. The stated purpose of RSA chapter 5–B "is to provide for the establishment of pooled risk management programs and to affirm the status of such programs established for the benefit of political subdivisions of the state." RSA 5–B:1. In its
declaration of purpose, the legislature stated that "pooled risk management is an essential government function" that provides "focused public sector loss prevention programs, accrual of interest and dividend earnings which may be returned to the public benefit and establishment of costs predicated solely on the actual experience of political subdivisions in the state." Id. Pursuant to RSA chapter 5–B, "pooled risk management programs which meet the standards established" by that chapter are "not subject to insurance regulation and taxation by the state." Id. ; see RSA 5–B:6.
From its inception, RSA chapter 5–B has required pooled risk management programs to file certain information with the secretary of state's office. RSA 5–B:4. However, it was not until 2010 that the legislature vested that office with the authority to enforce RSA chapter 5–B by bringing administrative actions and imposing penalties for violations of its provisions. See Laws 2010, 149:3 (codified as RSA 5–B:4–a ). RSA 5–B:5, I, sets forth the following standards that pooled risk management programs must meet to comply with RSA chapter 5–B:
Each pooled risk management program shall meet the following standards of organization and operation. Each program shall:
(a) Exist as a legal entity...
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