A regulation is a formal rule established by an
administrative agency that carries the force of law, just like a
statute enacted by the state legislature. If a state administrative agency did enact a regulation dealing
with certificates of insurance, then ACORD and ISO would be required
to modify their standard forms in response.
However, in most instances,
what ACORD and ISO have been responding to is state department of
insurance (DOI) bulletins that have been issued in about 30 states
addressing the uses of certificates of insurance. These certificate
bulletins generally say that certificates may not be used to amend
the underlying policy without prior DOI approval, that using an
unapproved certificate to set forth terms that are not reflected
in the policy may be considered a misrepresentation, and that doing
so could subject an agent or broker to administrative, civil, or
even criminal penalties.
DOI certificate bulletins probably do not qualify as regulations.
To understand why that is so, consider how state governments are
organized. Like the federal government, they are established on
the principle of separation of powers, with each of the three branches
of government playing a distinct role. The power to make law is
given to the legislative branch. The power to execute law is given
to the executive branch. What that means is that components of the
executive branch or other administrative agencies, such as state
DOIs, do not have any inherent law-making authority.
For executive departments and other administrative agencies to
enact rules or regulations that carry the force of law, state legislatures
commonly enact a statute to delegate legislative power to them.
Typically, states adopt a general administrative procedure act (APA)
or a specific enabling statute that sets forth the rule-making procedures
that the executive department or administrative agency must follow
to use that delegated power. Usually, they are required to publish
proposed regulations, allow a period for comment, hold public hearings,
and perhaps submit the final regulation to the legislature for approval.
It does not appear as if any rule-making procedures were followed
in connection with any of the DOI certificate bulletins. Therefore,
they probably do not qualify as regulations, do not carry the force
of law, and are not binding on the citizens of that state or the
courts. They merely communicate the DOI's
interpretation of state law.
Recent Caselaw: Montague v. Dixie National
Life Ins.
A recent federal case bears that out. In
Montague v. Dixie National Life Ins. Co., U.S. Dist. Ct. No.
3:09–687–JFA, 2010 U.S. Dist. LEXIS 17535 (D.S.C., Feb. 26, 2010),
a claimant alleged that lawyers for two health insurers wrote a
draft of a DOI bulletin for the director's signature, which set
forth an interpretation of a South Carolina statute, and that the
insurers used the bulletin as "cover" to thwart payments under the
claimant's policy. She sued the DOI, seeking a declaration that
the bulletin was an ultra vires
act (beyond the scope of legitimate authority) and therefore void.
The district court, however, dismissed her suit for lack of federal
jurisdiction. It held that, because the director's issuance of a
bulletin by itself had no legal effect whatsoever, her complaint
against the DOI did not qualify as a "case or controversy" under
the U.S. Constitution. Here is the court's discussion.
Bulletin 2008–15 was promulgated, ostensibly,
pursuant to the power of [the Director of the DOI], in his official
capacity, to regulate the insurance industry in South Carolina and
apprise the industry of any relevant changes in the law. Assuming,
without deciding, that [the Director] has the power to issue such
a bulletin, the court must determine whether the bulletin has the
ability to affect the rights and legal relations of the parties.
The South Carolina Administrative Procedures Act
(the "APA"), S.C. Code Ann. § 1–23–10(4)(2005), generally governs
whether actions taken by state agencies carry the force of law.
The APA specifies that "policy or guidance issued by an agency"
do not have the force of law while "regulations" do. [Citations.]
A regulation comprises "each agency statement of general public
applicability that implements or prescribes law or policy or practice
requirements of any agency." [Citation.] South Carolina requires
the following to enact a regulation:
In order to promulgate a regulation, the APA
generally requires a state agency to give notice of a drafting period
during which public comments are accepted on a proposed regulation;
conduct a public hearing on the proposed regulation overseen by
an administrative law judge or an agency's governing board; possibly
prepare reports about the regulation's impact on the economy, environment,
and public health; and submit the regulation to the Legislature
for review, modification, and approval or rejection.
[Citation.] [The] South Carolina Supreme Court has explicitly
found that "[a]n Interpretive Bulletin is not binding on the courts"
and do[es] not have the force of law. Garris
v. Cincinnati Ins. Co., 311 S.E.2d 723, 726 (S.C. 1984) (superceded
by statute on other grounds).
No indication appears in [the claimant's] complaint or in her
response to [the DOI's] motion to dismiss that the above procedure
was followed in the creation and issuance of Bulletin 2008–15. Instead,
Bulletin 2008–15 appears to be a mere statement of policy guidance;
lacking force of law and expressly contemplated in [the APA]. No
facts in the complaint allow the court to infer that the procedures
set forth in the APA preceded the issuance of Bulletin 2008–15 nor
does [the claimant] direct the court to an express grant of authority
from the legislature to issue the bulletin. In the absence of facts
pled to establish that Bulletin 2008–15 carries the force of law,
the court finds that it cannot affect the legal relationship between
any of the parties to this case.
Most State Insurance Departments Acknowledge Lack of Legal Authority
Most state departments of insurance will admit that unilateral
bulletins, memos, circular letters, advisory opinions, etc., issued
without following proper rule-making procedures do not have any
legal effect. For example, the
Colorado Division of Insurance states the following in a consumer
information section of its website.
Regulations and Bulletins
help insurers and consumers understand the specifics
of how insurers must conduct business in Colorado,
and set forth standards and procedures for conducting
business.
Regulations interpret
but do not exceed the scope of the more general
statutes passed by the Colorado General Assembly.
Bulletins express
the Division's interpretation of or position on
existing law, including both regulations and statutes,
but do not have the force of law.
There are exceptions. California has a specific statute,
Cal. Ins. Code § 10507.5(d), which says, in pertinent part,
that bulletins issued by the commissioner establishing mandatory
contents of "guaranteed living benefits" policies "shall have the
same force and effect, and may be enforced by the commissioner to
the same extent and degree, as regulations issued by the commissioner
until the time that the commissioner issues additional or amended
regulations." Here, the legislature has delegated more power to
the insurance commissioner, elevating his or her unilateral bulletins
to the status of true regulations. But that arrangement is highly
unusual. In most other states, an insurance commissioner is not
a lawmaker.
Conclusion
What does all this mean? It means that the DOI certificate bulletins
that have been issued unilaterally without following proper rule-making
procedures set forth the DOI's interpretation
of state law, but whatever they say is probably not legally
binding. If the DOI takes disciplinary action against an insurer
or an agent for acting contrary to a directive in such a
bulletin, the DOI's interpretation of state law may be
challenged in state court. It also means that most of the
changes to standard ACORD and ISO certificates were not actually
compelled by law.