Groups to which insurers may issue group life insurance policies, group disability insurance policies and related certificates

Issued and entered August 7, 1984 by Nancy A. Baerwaldt, Commissioner of Insurance

The staff of the Insurance Bureau reviews life and disability insurance advertisements intended for use in Michigan. This review shows that some insurers are not aware of limitations in the type of groups in Michigan to which insurers may issue group life insurance policies, group disability insurance policies, and their related certificates. Some insurers identify an interest shared by a large number of people, create an out-of-state trust identified with that interest, sell a group life or disability insurance policy to that trust, and then market group certificates in Michigan. Thus, an insurer might sell a group disability insurance policy to the National Homemakers Trust -- a trust it has created -- even where no association underlies that trust.

Section 3601 of the Insurance Code of 1956, as amended (Code), MCLA 500.3601; MSA 24.13601, does not condone fictitious groups for group disability insurance.

Sec. 3601. Group disability insurance is hereby declared to be that form of voluntary disability insurance covering not less than 5 employees or members, with or without their eligible dependents, written under a master policy issued to any governmental corporation, unit, agency, or department thereof, or to any corporation, copartnership, individual employer, or any association, upon application of any executive officer or trustee of such association having a constitution or bylaws, and formed in good faith for purposes other than that of obtaining insurance where officers, members, employees, or classes or departments thereof may be insured for their individual benefit. The benefits for such dependents shall not include indemnities for loss of time from any cause.

Thus, there is no problem when an established association, such as the American Association of Retired Persons, seeks a master disability policy for the benefit of its members. However, fictitious groups, as discussed above, would not qualify for group disability insurance as limited by Section 3601. Similarly, in Chapter 44 of the Code, MCLA 500.4400 et seq.; MSA 24.14400 et seq., only certain groups may be issued group life insurance, including employee groups, national guard groups, debtor groups, and discretionary groups authorized by the Commissioner of Insurance. Groups that do not meet the standards of Chapter 44 may not be issued group life insurance policies, and their related certificates, in Michigan.

Apart from not being aware of standards in Section 3601 or Chapter 44, some insurers may not believe the standards apply to them due to sections of the Code that deal with certificates of authority. Section 402 of the Code, MCLA 500.402; MSA 24.1402, provides that no person shall act as an insurer and no insurer shall issue any policy or otherwise transact insurance in Michigan except as authorized by a subsisting certificate of authority granted to it by the Commissioner of Insurance pursuant to the Code. Section 402a of the Code, MCLA 500.402A; MSA 24.1402a, states:

Sec. 402a. The following constitute transactions of insurance in this state, whether effected by mail or otherwise:

(1) The issuance or delivery of contracts of insurance to persons resident in this state, or

(2) The solicitation of applications for such contracts, or

(3) The collection of premiums, membership fees, assessments or other consideration for such contracts, or

(4) The doing or proposing to do any act in substance equivalent to any of the foregoing.

Section 402b(d) of the Code, MCLA 500.402B(d); MSA 24.1402b(d), sets forth an exclusion from Sections 402 and 402a for certain transactions of out-of-state group or blanket insurance. It reads:

Sec. 402b. The following do not constitute transactions of insurance in this state within the meaning of sections 402 and 402a: . . .

(d) Transaction of group or blanket insurance or group annuities in which a master policy was lawfully issued and delivered in states in which the insurer was authorized to transact insurance. However, the delivery in this state of certificates for out-of-state group policies under trusts which are established or marketed by an entity not insured or subject to the laws of Michigan, shall constitute the transaction of insurance, and shall be subject to the requirements of chapter 22.

Since this exclusion only relates to Sections 402 and 402a, its only significance is that an insurer transacting this insurance does not have to be licensed in Michigan. There is no suggestion that the policies and certificates issued in Michigan do not have to meet Michigan standards. Thus, insurers may not rely upon Section 402b(d) to escape the limits on groups created by Section 3601 and Chapter 44.

A second and independent reason for concluding that Section 402b(d) does not free insurers from Section 3601 and Chapter 44 constraints lies in Section 402b(d) itself. It only applies to "group or blanket insurance or group annuities." A fictitious group is not within the definition of group life insurance or group disability insurance as contained in the Code, so the exclusion contained in Section 402b(d) would not apply to transactions involving fictitious groups.

In summary, Section 3601 of the Code only allows insurers to solicit, issue, or deliver in Michigan group disability policies, and their related certificates, to groups formed in good faith for purposes other than that of obtaining insurance. Also, to comply with Chapter 44 of the Code, insurers may only solicit, issue, or deliver in Michigan group life insurance policies, and their related certificates, to groups defined by that chapter. Section 402b of the Code, which sets forth insurance transactions for which insurers do not need a Michigan certificate of authority, does not free insurers from the constraints of Section 3601 and Chapter 44.