Seventh Circuit Appellate Court Decision: Stop-loss v. Reinsurance
A Federal Court of Appeals verdict reversed the decision of both Wisconsin arbitrators and the Federal District Court in Edstrom Industries Inc. v. Companion Life Insurance Co., No. 07-2165, where the arbitrator and trial court failed to apply Wisconsin law holding that stop-loss insurance is not considered to be “reinsurance”.
Wisconsin Federal District Court sustained an arbitrator’s decision in a stop loss case between the group Edstrom Industries and its stop loss carrier. The arbitrator had ruled in favor Of Companion Life, holding that Edstrom failed to disclose information to its stop-loss carrier, Companion Life, concerning a seriously ill dependent child.
Edstrom argued that Wisconsin law stated that an insured’s misrepresentations in an application for insurance cannot influence the insurer’s obligation unless the insured “knew or should have known that the representation was false”. Companion Life argued that their policy language in the stop-loss contract gave them “the complete unfettered right at its sole election” to raise the deductible when they became aware of the child’s medical condition, regardless of whether Edstrom knowingly or unknowingly failed to disclose this information. The arbitrator concluded that the Wisconsin law did not apply, noting that reinsurance contracts are usually exempt from state laws regulating insurers.
The Federal District Court upheld the arbitrator’s ruling on the basis that stop-loss insurance is of the same kind as “reinsurance,” and Wisconsin law is exempt, however a review by the Seventh Circuit Court of Appeals concluded that the language stating that “stop-loss insurance, unlike traditional group-health insurance is akin to reinsurance” only means that stop-loss and reinsurance is similar, not the same. The Court of Appeals held that “Edstrom is not an insurance company, but an insured…Companion is not a reinsurance company, but an insurance company.”
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