This book focuses primarily on the regulation of individual life insurance. However, since a large proportion of the insurance written is done on a group basis, some reference to the regulation of this portion of the business is appropriate.

Unlike individual life insurance which involves the issuance of a separate contract on the life of each individual insured, a group insurance contract provides coverage to a number of persons under a single contract issued to someone other than the person insured. The group contract, termed the master contract, provides benefits to a group of individuals having a specified relationship to the policyholder. The most common situation involves an employer as the policyholder providing coverage to its employees. Although the insured individuals are not parties to the master contract, they do possess legally enforceable rights; hence they are sometimes referred to as third-party beneficiaries. They receive certificates of coverage describing the coverage provided. Coverage of the individual begins and terminates in accordance with the provisions of the contract.

Also in contrast to individual policies, a characteristic of group insurance is the possible use of experience rating. If a group is sufficiently large, the actual experience of the particular group will be a factor in establishing the ultimate premium rate to be charged to the policyholder.

Furthermore, whereas an applicant for individual insurance generally must show evidence of insurability, under group insurance individual members of the group typically are not required to show such evidence. Instead, an insurer underwrites the group as a whole rather than examining the insurability of the individual members of the group. The function of group underwriting is to minimize the problem of adverse selection and to minimize the administrative costs associated with group insurance. Because of group underwriting and lower acquisition costs (vis-à-vis commission levels paid on individual contracts), group coverage typically can be provided at lower cost than individual coverage.

The nature of group life insurance has been significantly affected by the laws and regulations imposed by both the states and the federal government. The impact of state regulation arises from the requirements imposed on insurers and the products they sell. Such requirements typically affect only those benefit plans funded by insurance contracts. In contrast, the federal laws affecting group life insurance are generally directed toward benefit plans established by employers for their employees regardless of the funding method employed.

The first substantial group policy was written in 1912 by the Equitable Life Assurance Society of the United States on the lives of nearly 3,000 employees of Montgomery Ward. Initially there appeared to be no express authority needed to market life insurance on a group basis. This was life insurance and, under the prevailing law emphasis on the freedom of contract, such could be written without special authorization. For several years, group life insurance was sold in various states without express statutory validation.

Nevertheless, from its inception, the concept of group insurance generated substantial opposition by various interests including some actuaries, life insurance company trade associations, fraternal orders and agent organizations. Agents foresaw a loss of commission income. Small life insurers were concerned about the potential reduction in their markets. Fraternal benefit societies believed that the insurance business might be taken over by a few large insurers. There was even resistance from labor unions which perceived group insurance to be a scheme to bind the worker to his or her job and obviate the need for unions.

Initially the opponents of group life insurance premised their resistance on the principle of unfair discrimination—that is, selling group life insurance at lower rates than those charged for comparable individual coverages and not requiring evidence of insurability. The discrimination argument suffered a severe blow when several states between 1913 and 1917 enacted laws expressly recognizing group life insurance, with its different cost structure, as a class of business separate and distinct from ordinary and industrial insurance. The opposition then shifted to other rationales such as "unsound underwriting," encouraging the formation of only "stable" groups, and the undermining of the agency force upon which individual life insurance depends. In response, many but not all states enacted statutory controls defining permissible group insurance and the circumstances under which it could be issued.

In 1917, when group life insurance was in its infancy and the resistance was most intense, the NAIC established some early ground rules for the conduct of group life insurance which apparently reflected the prevailing underwriting practices at the time. A model group life insurance company definition was adopted providing that group life insurance coverage was restricted to employees of individual employers; the eligibility for coverage had to extend to all employees, the insured group had to consist of at least 50 members; employers had to pay some of the cost, if the plan required employee contributions; at least 75 percent of those eligible had to be insured; and persons could not select the amount of insurance. Although the NAIC adopted its 1917 model definition, the organization did not strongly promote its enactment by the various states. Even so, over a 25-year period almost 20 states adopted laws patterned after the model definition although several were less restrictive.

Group life insurance received impetus from the wage ceilings imposed by the federal government during World War II and the Korean War which caused additional compensation to assume the form of increased benefits in lieu of increased wages. Further impetus arose from court decisions establishing pensions and insurance as appropriate subjects for collective bargaining. With increasing demand for group insurance, the NAIC reviewed the subject in the 1940s and revised its model in 1946 and again in 1948. Such changes incorporated the pattern emerging in the individual states. Liberalizations were made with respect to both the types of groups eligible for group life insurance and the underwriting requirements. For example, labor unions were recognized as eligible groups, the minimum number of lives required were reduced from 50 to 25, etc. While these changes tended to expand the availability of group life insurance, the definition was also amended to include a $20,000 maximum limit on the amount of coverage per individual.

In the immediately ensuing years additional changes were made ultimately culminating in the NAIC Group Life Insurance Definition and Group Life Insurance Standard Provisions Model Act which was adopted in 1956. The Model Act provides that no policy of group life insurance shall be delivered in the state unless it conforms to one of several descriptions contained in the Act. Through amendments, such descriptions reflected further liberalizations over time. By late 1994 nearly 40 states had adopted laws which basically conform to the NAIC Model. Most other states have laws which vary somewhat from the model.

In short, when group life insurance was initially written in the early 1900s, various insurers and agent groups urged the development of regulatory safeguards for such a new and untried coverage. Different rationales were put forth, including the need to prevent unfair discrimination, preservation of orderly markets, and the protection of the smaller agents and insurers. In 1917 the NAIC adopted the group life definition which imposed various limitations on the types of groups for which group coverage could be provided as well as establishing various underwriting restrictions. Although these limitations were imposed for what were believed to be valid reasons at a time when both the life insurance business and the regulators were entering into unchartered seas, this highly restricted regulatory approach did not prove to be enduring. States which had adopted the definition concept were subject to intense pressures to liberalize such restrictions. During the 1940s and 1950s, the NAIC Model was revised several times to reflect what was occurring in the several states. The prominent role which group life insurance now occupies attests to the fact that the pressures of the marketplace prevailed. Although the considerable time and effort expended over the years to create a uniform definition of permissible group life insurance has achieved a substantial degree of commonality among the states, there still remains significant diversity even among those states having enacted some form of the Model Law. In addition, there are some states without a statute controlling group life insurance. Therein such coverage can be written on any group which the insurer deems feasible in its underwriting judgment.

Growing out of this history, the more significant current state laws and regulations affecting group life insurance are those relating to the types of eligible groups for coverage, benefit limitations and contractual provisions. In addition, since groups often have members in more than one state, the extent of regulatory jurisdiction of various states may become a significant issue.

Eligible Groups. A majority of the states govern the types of groups eligible for group insurance. The laws of these states commonly state that a group insurance contract may not be delivered to a policyholder in the state unless the group meets certain statutory eligibility requirements for its type of group. At least five types of groups are acceptable in virtually all states: (a) individual employer groups, (b) negotiated trusteeships, (c) trade associations, (d) creditor-debtor groups and (e) labor union groups. (f) Multiple employer welfare arrangements are also acceptable in several states.

Individual Employer Groups. The most common type of eligible group is the individual employer group. The employer may be a corporation, a partnership or a sole proprietorship. In addition to those persons considered to be employees of a firm, generally coverage may be written for retired employees and employees of subsidiary and affiliated firms. Usually partners and individual proprietors are eligible for coverage if they are actively engaged in the conduct of the organization.

Negotiated Trusteeships. Negotiated trusteeships (Taft-Hartley trusts) arise as the result of collective bargaining between a union and the employers of union members. Generally the union employees are in the same or related industries typically characterized by frequent movement of members among employers (for example, trucking). The Taft-Hartley Act prohibits employers from paying funds directly to a labor union for the purpose of purchasing insurance. Instead payments are made to the trust fund established for the purpose of purchasing the insurance. The group insurance contract is issued to the trustees. The trustees can elect to self-fund the benefits or purchase insurance contracts with themselves as the policyholders. Since eligible employees include only members of the collective bargaining unit, nonunion employees must be provided for in some other manner.

Trade Associations. For eligibility purposes a trade association is defined as an association of employers formed for purposes other than obtaining insurance. Typically such associations include a large number of employers who lack the minimum number of employees to qualify for an individual employer group insurance contract. Although some states permit the master contract to be issued directly to the trade association, most states require the establishment of a trust. By paying premiums to the association or the trust, individual employers may provide coverage for their employees.

Since adverse selection and administrative costs tend to be greater in trade association groups, most insurance company underwriters and state laws specify that a minimum percentage, such as 50 percent, of the employers must participate in the plan and that the plan cover at least a specified minimum number of employees, perhaps as high as 500.

Creditor-Debtor Groups. Creditor-debtor relationships give rise to various groups which are eligible for group term life insurance. Typically coverage is made available to organizations such as banks, finance companies and retailers for time-payment purchases, personal loans or charge accounts. Unique to credit insurance is the fact that the creditor is not only the policyholder—it also must be the beneficiary. Any payments to the creditor must be used to cancel the insured portion of the debt. Responsibility for the payment of the premiums for group credit life insurance may be shared by the creditor and debtor or may be totally paid by either party.

Traditional restrictions imposed by eligibility statutes also reflect insurer underwriting practices. These include the following: (1) Many states limit the maximum amount of coverage which may be written on a single debtor. Furthermore, the amount of coverage may not exceed the amount of the indebtedness; hence the coverage decreases as the debt is paid. (2) States commonly limit the loan duration, in plans under which the debtor contributes to the payment of the premium, to maximum periods such as 5 or 10 years. (3) Many states require that all eligible debtors be insured when the creditor pays the entire premium and that at least 75 percent of eligible debtors be insured under contributory plans. States also require a minimum number of entrants into the plan, for example, 100 for each policy year.

Because of abuses which have been associated with credit life insurance with respect to coercion, excessive premium rates and lack of disclosure, many states have imposed additional regulations pertaining to group credit life insurance. Common provisions include (1) proper disclosure to the debtor, including a description of the coverage provided and the charges for such coverage, (2) an option for the debtor to provide coverage through existing insurance or to obtain coverage from another source, (3) a requirement that a charge by the creditor to the debtor for coverage may not exceed the premium charged by the insurance company, (4) a requirement that there be a refund of any unearned premium paid by the debtor if the indebtedness is paid off prior to its scheduled maturity, and (5) a limitation on the maximum rates that may be charged by insurance companies.

Labor Union Groups. Labor unions may establish group insurance plans to provide benefits for their members with the master contract issued to the union itself. In addition to the Taft-Hartley prohibition against employer payments of insurance premiums to unions, state laws usually bar plans under which the union members pay the entire cost themselves. Thus, premiums come from either union funds or jointly from union funds and member contributions.

Multiple Employer Welfare Arrangements. The multiple-employer welfare arrangement (MEWA) is a method of marketing group benefits to employers having a small number of employees. MEWAs are legal entities (1) sponsored by an insurance company, an independent administrator or some other person or organization and (2) organized to provide group benefits to the employees of more than one employer. Each MEWA is an insurance company or a professional administrator. MEWAs may be organized as trusts in which case there is a trustee who can be an individual but usually is a bank.

MEWAs may provide a single type of insurance (such as life insurance) or a wider range of coverages (for example, life, medical expense, or disability income insurance). An employer need not be a member of a trade association to obtain coverage. Instead, an employer desiring coverage may subscribe to become a member of a MEWA receiving a joinder agreement spelling out the relationship between the employer and the MEWA, including the specific coverages to which the employer has subscribed. The employer does not have to subscribe to all of the coverages offered.

The MEWA may either self-fund the benefits or purchase the appropriate insurance coverage(s) with the MEWA (rather than the employer) being the master contract holder. In either case the employees of the subscribing employers are provided benefit descriptions (certificates of insurance in insured MEWAs) similar to what is done in the usual group insurance arrangement.

MEWAs are either administered by insurance companies or third-party administrators and are either self-funded or are insured. Generally, there are three types of MEWAs: the fully insured multiple employer trusts administered by an insurance company, insured third-party-administered MEWAs, and self-funded third-party-administered MEWAs.

Other Groups. Other types of groups may also be eligible for group insurance coverage under the laws and regulation of several states—for example, alumni associations, professional associations, veterans’ groups, savings account depositors and credit card holders. Insurer underwriting practices and/or state regulation may impose more stringent requirements on these groups than on those involving an employer-employee relationship. Individual evidence of insurability might be required and a larger minimum size is commonly imposed.

In addition to defining the types of eligible groups, most states prohibit group insurance contracts unless there are at least a specified minimum of persons insured under the contract. The minimum number of persons required can vary not only as between the states but also within a given state by the type of coverage and/or the nature of the group. Commonly the minimum requirement for group life insurance established by an individual employer is 10 persons. A higher minimum, for example, 100 persons, may be imposed for other plans such as those established by trusts, labor unions or creditors.

Contractual Provisions. Every state regulates contractual provisions of group insurance. In many instances certain provisions are mandated to be included in group policies. Such provisions can be altered only if they result in more favorable treatment of the persons insured or at least as favorable to the insured persons and more favorable to the policyholder. (The standard provisions for group policies, as set forth in the NAIC Model, are in lieu of those mandated for individual policies.) As a result of state regulation combined with industry practices, the provisions of most group life policies are relatively uniform from company to company and state to state. An insurer’s policy forms can usually be used in all states although riders may be used in those instances necessary to bring certain provisions in compliance with the regulation of some states.

Benefit Limitations. Although the 1956 NAIC Model Law established maximum dollar amounts of coverage permitted each insured, today virtually no state imposes limits on the level of benefits which may be provided under group insurance provided by an employer to an employee. However, in several states, statutory limitations continue with respect to the amount of coverage that can be provided under contracts issued to other than individual employer groups. Furthermore, some states restrict the amount of life insurance coverage which can be provided to dependents.

Regulatory Jurisdiction. Quite commonly a group life insurance contract will insure persons living in more than one state. This raises the issue as to which state or states possess regulatory jurisdiction over the contract. Resolution of this issue can be crucial since such factors as minimum enrollment percentages, maximum amounts of permitted coverage and required contract provisions can vary as between the states.

Few problems occur if the insured group constitutes an eligible group in all of the states in which insured individuals reside. Individual employer groups, negotiated trusteeships, labor unions and creditor-debtor groups fall within this category. Under the legal doctrine of comity, pursuant to which states recognize within their own boundaries the laws of other states, it is commonly accepted that the state in which the group insurance contract is delivered to the policyholder possesses the governing jurisdiction. Consequently, the group contract need conform only to the laws and regulations of this one state even though certificates of coverage are delivered into other states. However, a few states have enacted statutes explicitly prohibiting insurance issued in other states covering the residents of the enacting state unless such contracts conform with its laws and regulations. Such statutes are effective for insurers licensed in the enacting states but their effectiveness is subject to question for insurers not so licensed (nonadmitted insurers) because of the possible lack of regulatory jurisdiction over such insurers.

Although most states accept the place of contract delivery as the governing state, states tend not to be willing to accept arbitrary forum shopping where a policyholder seeks a situs (place of delivery) solely on the basis of what is the most desirable place from a regulatory viewpoint. Unless the state of delivery possesses a significant relationship to the insurance transaction, other states may seek to exercise their regulatory authority. It has become common practice that an acceptable situs must be at least one of the following: the state where the policyholder is incorporated or the trust is created, the state where the policyholder’s principal office is located, the state in which the greatest number of insured individuals are employed, or any state in which an employer or labor union that is party to a trust is located.

Regulatory jurisdiction becomes increasingly complex for those types of groups which are not considered to be eligible groups in all states, for example, multiple-employer welfare arrangement groups (MEWAs). If the state lacks regulation to the contrary and the insured group would be eligible in other states, the situation is akin to that described above. Most other states accept the doctrine of comity and won’t interfere with the jurisdiction of the state of delivery. But some states either prohibit coverage from being issued or require that coverage conform with its laws and regulations other than those pertaining to eligible groups.

Federal statutes and regulations do not directly affect the provisions of a group life insurance policy. Instead they affect the design of an employer’s benefit plan which in turn can influence the provisions in a group life contract purchased by the employer. For example, the Age Discrimination in Employment Act prohibits an employer from eliminating benefits for older employees although it does permit some reduction in coverage. When an employer opts for such reductions, they are reflected in the benefits provided by the insurance policy.

The two federal laws having the most impact on the design of group life insurance plans are the Internal Revenue Code and ERISA (the Employees Retirement Income Security Act). The former determines the deductibility of employer contributions to the plan and the manner of income taxation of employees who are covered by the plan. The latter requires employers to establish and maintain a group life insurance plan pursuant to a written plan document specifying the plan fiduciary (or fiduciaries) having the responsibility for selecting the insurer. ERISA imposes duties on the fiduciary to protect the plan participants and requires the employer to disclose and report specified information to both the plan participants and to the federal government.