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Regulation and Compliance > State Regulation

Lost in translation

By Matthew S. Vuolo

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U.S. insurance companies that offer expatriate benefits to employees on temporary assignment abroad may assume that the laws of the states outside of where a policy is issued do not apply to that policy. Unfortunately, this is not the case. In reality, courts and regulators outside the jurisdiction where an insured person is situated may declare that local law is applicable on an extraterritorial basis.

Understanding extraterritoriality

As companies continue to increase their global reach and relocate employees for temporary assignments overseas, insurers and multinational organizations must become familiar with the issues arising from extraterritoriality. In essence, extraterritoriality gives State A the power to exercise authority over a policy that was executed in State B, yet covers individuals located in State A. There are a number of risks inherent in using out-of-state contracts to provide insurance coverage for people located in jurisdictions other than where the group policy is issued. Specifically, a court or regulator may determine that local law shall apply to local coverage even though the group insurance policy was issued outside the jurisdiction.

In the context of expatriate benefits, the insured, despite being on temporary assignment abroad, is often domiciled in State A while covered under a policy issued in State B, where the employer may be headquartered or incorporated.  Matters are often further complicated when an insurer uses a multiple-employer trust (MET) or offshore paper. With respect to the former, an employer requests to participate in a MET to which the insurer has issued a master group policy. The employer can be located in State A, the employee’s dependents in State B and the MET, to which the policy is issued, in State C. This arrangement presents a host of extraterritorial issues that an insurer must address, beginning, perhaps, with filing and approval of the policy forms. Indeed, under this scenario, which is not uncommon, a group benefit plan may be subject to the laws and regulations of multiple jurisdictions.

The application of law

Extraterritorial application of laws relies on a choice of law analysis. A highly-complex issue, insurers consider choice of law notorious for its uncertain outcomes. This analysis involves interplay of laws from numerous jurisdictions. Traditionally, the place of contracting or the execution of the contract was said to govern the choice of law. However, modern law also looks at the following factors:

 residence, domicile, nationality, principal place of business or place of incorporation of the parties, including dependents;

 respective governmental interests of any states involved;

 protection of expectations;

 ease of determining and applying the chosen law;

 place of the negotiation of the contract;

 place of performance of the terms and conditions of the contract; and

 location of the subject matter of the contract (i.e., where the event occurred).

Generally, state statutes use five types of statutory language to define the extraterritorial or non-extraterritorial scope of its statutes:

  1. Most focus on the policy’s place of issuance or delivery, using language such as “issued for delivery or delivered in this state,” “delivered in this state,” “issued in this state” and “delivered or issued in this state.”
  2. Many use similar language, but focus on the place of issuance or delivery of both the policy and certificate, or use only the word “policy,” but define “policy” to include “certificate.”
  3. Some center on insuring a person in the state, using language such as “covering subjects located, resident, or to be performed in this state” and “covering a group in this state.”
  4. Others concentrate on the insurer or the policy, using language such as “each insurer,” “no insurer” and “any policy.”
  5. Certain statutes utilize “deemer” language, such as “deem contracts on state property, lives or interests to be made in this state.”

Most courts apply the plain meaning of these statutes, yet with differing interpretative analysis. Such differing analyses present the insurer with unique regulatory requirements in most states, regardless of whether the group policy is a true out-of-state policy or is issued to a MET, and notwithstanding that the insured is on temporary assignment abroad. 

In fact, states consider many factors when determining extraterritorial application of insurance laws, including whether the insured has a spouse and/or dependents who continue to live in the U.S.  Given the extent of the issues being considered, extraterritorial applicability requires a very fact-specific analysis.

 In New York, for instance, courts have predominantly held, in the group insurance context, that a statute that applies only to policies “delivered or issued for delivery” in the state applies only to group policies, not certificates.  In the late 1960s and early 1970s, however, some New York courts applied the “center of gravity” theory of conflict of laws to essentially disregard the “delivered or issued for delivery” in its statutory limitations to apply state-specific insurance law to out-of-state policies. Under the “center of gravity” theory, New York residence of the insureds, delivery of certificates, and other contacts as well as a dominant New York interest in its residents having the benefit of the state’s privileges overrode the “delivered or issued for delivery” in its statutory limitation.

Many states specifically address an insurer’s extraterritorial obligation as it pertains to group coverage issued in another state, vis-à-vis a MET or otherwise. For example:

Arkansas: A fully insured multiple-employer trust that intends to provide benefits to citizens of that state must, among other things, register with the Arkansas Insurance Commissioner prior to enrolling members.

Delaware: A group health policy and certificate issued and delivered to a trust or an association outside of the state, which will be delivered or issued for delivery in the state, must be filed with the Insurance Commissioner.

Missouri: If a group policy is issued in another state but coverage is offered to residents of Missouri, the certificate of coverage must be filed for approval prior to use there.

Oregon: An insurer may not even offer a group health policy that insures individuals in the state, whether the policy is to be issued in Oregon or another state, unless the Director of the Department of Consumer and Business Services determines that the requirements of certain sections of Oregon insurance law are satisfied.

Planning ahead: the key to an effective expat benefits plan

Expatriate insurance is a lucrative business for insurers and an essential benefit for multinational employers worldwide. Insurance producers who may place expat coverage for large multinational employers should know and understand the manner in which insurers provide such coverage in order to better serve their clients. After all, state regulatory compliance not only best serves the insurer, but also the insureds.

As insurers and multinational companies look to implement expatriate benefits plans, successful administration of these plans requires a level of regulatory compliance many companies may not know exists. Extraterritorial applicability of laws with respect to expatriate benefit plans requires a fact-specific analysis; regulatory compliance, however, is easily managed with the proper resources and legal support.

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