Locke Lord QuickStudy: TPA Exams: Are Insurers At Risk?

Regulatory Risk
Insurance regulators are increasingly investigating and examining (Regulatory Exams) third party administrators (TPAs).  Are insurers doing business with TPAs at risk from these Regulatory Exams?  Absolutely.  Insurance regulators will not only hold the TPAs responsible for violations of insurance laws, but likely also will expand the scope of the Regulatory Exams to include insurers doing business with those TPAs.  In fact, insurance regulators are being specifically trained at industry educational seminars in connection with Regulatory Exams of TPAs.  Insurers and TPAs alike are at risk of increased regulatory scrutiny of their relationships.  Notwithstanding their contractual obligations in TPA agreements, insurers are not in control of their own information and records in the TPAs’ possession and control in the wake of Regulatory Exams of the TPAs.  Insurance regulators will have access to the insurers’ information through the Regulatory Exams of the TPAs and as a result, insurers could end up facing fines and penalties (or worse) from violations of law established through the Regulatory Exams of the TPAs. 

Of particular concern to insurers is where insurance regulators in multiple states conduct Regulatory Exams of TPAs doing business with many different insurers.  A Regulatory Exam of a single TPA may lead to expanded Regulatory Exams of many insurers.  Typically, insurance regulators focus on TPAs in which consumer complaints are high or rapidly increasing.  An increase in consumer complaints against the TPA could result in multiple Regulatory Exams of insurers unrelated to the business in which the consumer complaints are problematic.  In other words, doing business with a TPA that is experiencing high levels of consumer complaints for one insurer could adversely impact another unrelated insurer doing business with that TPA.  We are seeing more and more Regulatory Exams of TPAs by multiple states which increases the likelihood that the NAIC Market Actions Working Group (MAWG) may become involved. 

Examination Authority & MAWG Scrutiny
The NAIC Third Party Administrator Statute (Model 90), as well as, state statutes requiring licensing or registration of TPAs provide the insurance regulator with an express right to examine the books and records of a TPA.¹  If the TPA has significant business across multiple insurers with business in many states, the potential exists for the TPA to become subject to MAWG scrutiny.  MAWG Regulatory Exams are extremely tedious and absorb a great deal of resources, time and money, in addition to the resulting regulatory fines and penalties if violations of insurance laws are established. 

Typically, examinations of TPAs include a review of one or more of the following business functions:²

• TPA Operations and Management
• Complaint Handling
• Contracts and Written Agreements

Examiners typically review all written agreements between the TPA and its clients (e.g., insurers and payers).  Ultimately, insurers should take all steps necessary to limit their exposure in connection with an examination or investigation of its TPA and avoid being drawn into its own Regulatory Exam by virtue of the information regulators might have gleaned from their review of the TPA. 

Potential Areas of Concern

• Access to Information & Loss of Control|
  How will the insurer know which Books and Records are being disclosed during the TPA’s Regulatory Exam and whether the information is being sufficiently protected?

• Cooperation in Defense of Claims
  Will the insurer have to cooperate in the TPA’s Regulatory Exam? Who is liable for the costs and expenses incurred during the Regulatory Exam?

• Regulatory Compliance & Violations Resulting in Insurer Fines & Penalties
  Could the insurer be liable for the TPA’s regulatory fines and penalties?

• Indemnification and Breach of Contract Issues Between TPA and Insurer
  If the Regulatory Exam identifies statutory violations, which party is responsible and does one party have an action against the other?

• Conflicts of Interest Between TPA and Insurer
  Will the TPA’s interests be adverse to the insurer’s interest if the Regulatory Exam is expanded to include the insurer?  Will the TPA be prohibited from testifying as an expert witness for the benefit of the insurer?

• Strain on the TPA’s Resources
  Will the insurer’s business being administered by the TPA suffer from the strain on the TPA’s resources diverted to responding to the Regulatory Exam?

Conclusion
Insurers should actively monitor the TPAs with which it has relationships.  In the event that the TPA is subject to a Regulatory Exam, the insurer should review its TPA Agreement to understand its rights under the agreement in order to minimize any potential impact on the insurer as a result of information gleaned by the regulator in its Regulatory Exam of the TPA.  Further, the insurer must keep the lines of communication open with the TPA to insure that the TPA continues to devote adequate resources to administering the insurer’s business during Regulatory Exams.

¹See e.g.,  NAIC Third Party Administrator Statute (Model 90), § 4 (2012); Cal. Ins. Code § 1759.3; 215 ILCS 5/511.109, Mo. Rev. Stat. § 376.1082; and Tex. Ins Code § 4151.201.

²2015 NAIC Market Regulation Handbook, p. 919.