American Trust Admin v. Sebelius, 81-046

• Decision Date: 04 June 1999
• Docket Number: 81-046
• Parties: AMERICAN TRUST ADMINISTRATORS, INC., Appellant, v. KATHLEEN SEBELIUS, as the Commissioner of Insurance for the State of Kansas, Appellee.IN THE SUPREME COURT OF THE STATE OF KANSAS Opinion filed
• Court: Kansas Supreme Court

AMERICAN TRUST ADMINISTRATORS, INC., Appellant v KATHLEEN SEBELIUS, as the Commissioner of Insurance for the State of Kansas, Appellee

No. 81,046

IN THE SUPREME COURT OF THE STATE OF KANSAS

Opinion filed June 4, 1999

Appeal from Shawnee district court, TERRY L. BULLOCK, judge.

SYLLABUS BY THE COURT

1. A final decision is one which finally decides and disposes of the entire merits of the controversy and reserves no further questions or directions for the future or further action of the court.

2. K.S.A. 60-2103(a) provides that when an appeal is permitted by law from a district court to an appellate court, the time within which an appeal may be taken shall be 30 days from the entry of the judgment.

3. A finding of not guilty of criminal contempt may not be appealed; however, a finding of not guilty in a civil indirect contempt may be appealed. Such a judgment of not guilty in a civil proceeding is an order affecting a substantial right and, therefore, a final order from which an appeal might be taken.

4. A judgment in the case of civil indirect contempt is a matter within the sound discretion of the trial court and will not be disturbed on appellate review unless abuse of discretion clearly appears from the record.

5. Judicial discretion is abused when judicial action is arbitrary, fanciful, or unreasonable, which is another way of saying that discretion is abused only where no reasonable person would take the view adopted by the trial court.

6. Discretion must be exercised not in opposition to, but in accordance with, established principles of law. It is not an arbitrary power. In its practical application in this state, judicial discretion is substantially synonymous with judicial power.

Appeal dismissed in part and affirmed in part.

Justin T. Liby, of Liby & McVay, L.L.C., of Kansas City, Missouri, argued the cause and was on the briefs for appellant.

Rebecca A. Sanders, of the Kansas Insurance Department, argued the cause, and Margaret A. Gatewood, of the same agency, was with her on the brief for appellee.

The opinion of the court was delivered by DAVIS, J.:

American Trust Administrators, Inc., (ATA) appeals a decision of the district court denying its petition to hold Kathleen Sebelius as the Commissioner of Insurance (Commissioner) for the State of Kansas in contempt for failure to abide by a court order regarding the approval of a stop-loss policy issued by ATA on behalf of Protective Life Insurance Company. ATA argues that the court erred in determining that the Commissioner has the authority to regulate stop-loss insurance and that the court erred in determining that the Employee Retirement Security Act of 1974 (ERISA), 29 U.S.C. 1001 et seq. (1994), did not preempt such regulation.

ATA is a Kansas corporation licensed to act as a third-party administrator within Kansas. As such, it provides administrative services to small employers who choose to self-fund their employee benefit plans. Kathleen Sebelius, as Commissioner of Insurance, is responsible for the administration of the Kansas Insurance Code, codified at Chapter 40 of the Kansas Statutes Annotated, and all rules and regulations enacted thereunder.

The dispute between ATA and the Commissioner arose by reason of the Commissioner's adoption of Insurance Department Bulletins 1993-12 and 1993-12 (Addendum), regulating stop-loss insurance in Kansas. ATA, as a third-party administrator for Protective Life Insurance Company, markets stop-loss insurance in Kansas.

Stop-loss insurance is generally sold to an employer with a self-funded group benefit plan in order to provide protection against catastrophic losses. The stop-loss policy reimburses the employer when its losses exceed certain "attachment points." The specific attachment point is reached when the amount of claims incurred and paid on behalf of an individual participant during a plan year exceeds a certain amount. From that point forward, the policy reimburses the employer with regard to claims for that individual. The "aggregate attachment point" is reached when the amount of claims incurred on behalf of all participants during a plan year exceeds a certain amount. From that point forward, the policy reimburses the employer with regard to claims of all participants. Because the insurance company does not pay benefits directly to the participants and is not involved in administering the benefit plan, stop-loss insurance has generally been held by courts not to be health insurance. See Brown v. Granatelli, 897 F.2d 1351, 1354 (5th Cir.), cert. denied 498 U.S. 848 (1990); United Food & Commercial Workers v. Pacyga, 801 F.2d 1157, 1161-62 (9th Cir. 1986); 1 Appleman, Insurance Law & Practice 26 (1999 Supp.).

The United States Supreme Court has created a distinction with regard to ERISA between fully insured welfare benefit plans and self-insured welfare benefit plans. Those plans that purchase group health insurance are subject to state insurance regulations while those that self-fund their benefit plans are subject only to ERISA mandates. See FMC Corp. v. Holliday, 498 U.S. 52, 62-63, 112 L. Ed. 2d 356, 111 S. Ct. 403 (1990); Metropolitan Life Ins. Co. v. Massachusetts, 471 U.S. 724, 747, 85 L. Ed. 2d 728, 105 S. Ct. 2380 (1985).

The Kansas Insurance Department began receiving complaints from insurers that some third-party administrators were selling stop-loss coverage with specific attachment points under $10,000, thereby allowing employers to circumvent compliance with small group reform legislation such as K.S.A. 40-2209d - p. For example, rather than adopt a group health policy with a $5,000 deductible, an employer could declare itself self-funded and purchase stop-loss insurance with a $5,000 attachment point, thereby entirely avoiding state requirements regarding its benefit plan. See Lenhart, ERISA Preemption: The Effect of Stop-Loss Insurance on Self-Insured Health Plans, 14 Va. Tax Rev. 615, 638-39 (1995).

The Kansas Insurance Department conducted a study to address the problem of companies using stop-loss insurance to circumvent state regulations on benefit plans. After the study of the problem, the Kansas Insurance Department adopted Bulletin 1993-12 in 1993, which established certain criteria for the issuance of stop-loss policies to small employers. The Bulletin, which was sent to all insurance companies doing business or authorized to do business in Kansas, provides, among other requirements, that the stop-loss policies issued in Kansas not have specific attachment points less than $10,000 and that the aggregate attachment points be no less than 120% of expected claims. The Bulletin provided that stop-loss policies not meeting those requirements would be considered group health policies and be subject to insurance laws and regulations. An addendum, Bulletin 1993-12 (Addendum), was later added to clarify some language used in the previous bulletin.

In 1995 ATA, as a third-party administrator, filed on behalf of Protective Life Insurance Company a stop-loss policy which failed to meet the requirements of the Bulletin 1993-12. ATA believed that there was no authority for the Commissioner to regulate stop-loss insurance in Kansas and further believed that such plans were exempt from state regulation under ERISA.

The Commissioner took no action on ATA's stop-loss policy for 30 days, which, in accord with K.S.A. 40-2215(d), amounted to an approval of the policy. However, the Insurance Department soon began proceedings under 40-2215(g) to withdraw its approval of the filing on the basis that the stop-loss policy of ATA did not conform to Bulletins 1993-12 and 1993-12 (Addendum). ATA appealed the disapproval of its 1995 stop-loss policy by the Commissioner. Upon exhaustion of administrative remedies, the disapproval was sustained by final order of the Kansas Insurance Department on July 18, 1996. ATA filed a petition for judicial review of agency action pursuant to the Act for Judicial Review and Civil Enforcement of Agency Action, K.S.A. 77-601 et seq.

On judicial review, ATA argued that (1) Bulletin 1993-12 was preempted by ERISA; (2) the Commissioner did not have statutory authority to regulate stop-loss insurance; and (3) Bulletin 1993-12 was arbitrary and capricious. After providing the parties a full opportunity to address these issues, the trial court, in a memorandum order dated April 25, 1997, granted ATA's petition for judicial review and overturned the decision of the Commissioner to disapprove the stop-loss policy submitted by ATA. In its memorandum order, the court held that Bulletin 1993-12 was not preempted by ERISA but also held that the Commissioner did not have statutory authority to regulate stop-loss insurance. Thus, the court did not need to address ATA's contention that the Bulletin was arbitrary and capricious. In reaching its conclusion that the Commissioner could not regulate stop-loss insurance, the court noted that while K.S.A. 40-2215 gives the Commissioner power to regulate accident and sickness insurance, stop-loss insurance is not accident and sickness insurance. The court overturned the decision of the Commissioner disapproving ATA's 1995 stop-loss policy. No appeal was perfected from the April 25, 1997, memorandum order.

On July 1, 1997, the legislature added subsection (b) to K.S.A. 40-2201. L. 1997, ch. 190, 24. Subsection (b) states: "The term 'policy of stop loss or excess loss insurance coverage' means a policy, contract, endorsement, attachments, amendments or other modifications that insure against losses of the policyholder issued by a stock, mutual company or association or any other insurer."

On July 9, 1997, the Commissioner, taking the position that the amendment provided authority for the regulation of stop-loss insurance, notified ATA that it must comply with the 1993-12 Bulletins in regard to its stop-loss policy or risk disapproval of the same. Based upon the amended version of K.S.A. 40-2201(b), the ...