Judge Finds Illinois Insurance Department's Policy Prohibiting Offshoring To Be Improper Rulemaking


On November 27, 2013, the Circuit Court of Cook County, Illinois issued an Order in a lawsuit filed by the American Council of Life Insurers, Inc. ("ACLI") v Andrew Boron, Director of the Illinois Department of Insurance and the Illinois Department of Insurance ("Department"). The lawsuit sought to declare invalid and unenforceable Department Bulletin 2013-01 as improper rulemaking.

Bulletin 2013-01 was issued January 18, 2013 by Director Boron to all insurers, utilization review organizations and TPAs conducting business affecting Illinois insureds to regulate offshore activity. Bulletin 2013-01 observed that to reduce costs, many insurance companies are considering alternative means of administering contracts and healthcare plans covering Illinois residents and that one such alternative is the outsourcing of TPA and utilization review functions to facilities located outside of the United States. In fact, the Department has previously issued TPA licenses to a number of TPAs located outside the United States, and other TPAs and insurers have relied upon the Department's licensure of these offshore TPAs and entered into contracts with them.

The Department issued the Bulletin with the intent to provide "guidance" from the Department that entities performing services regarding Illinois insureds are prohibited from conducting their activities offshore. The Bulletin stated that insurers utilizing the services of a TPA or a utilization review organization are subject to market conduct examinations under the Illinois Insurance Code. The Bulletin took the position that "offshoring" of utilization review or TPA functions denied the Department "convenient and free access to books and records," even if the books and records were maintained on a domestic server located in the United States. Therefore, the Department prohibited such offshoring of TPA and UR functions.

The ACLI filed the lawsuit on May 23, 2013. Count One of the ACLI's Complaint alleged Bulletin 2013-01 was invalid and unenforceable because it was a rule that was not promulgated according to the procedures set forth by the Illinois Administrative Procedures Act ("APA") and was also issued and enforced by the Department without following the procedures set forth in the Illinois APA. The ACLI moved for summary judgment.

On October 18, 2013, the Department repealed Bulletin 2013-01. The Department then moved to dismiss the ACLI's Complaint as moot. The court held a hearing on the parties' motions and determined that, notwithstanding the withdrawal of the Bulletin, the Department maintained a policy of generally prohibiting offshoring. During the hearing the court stated: "The rule was the improper rule. The [B]ulletin is just how you communicated." The court issued an Order denying the Department's Motion to Dismiss and granting the ACLI's Motion for Summary Judgment on Count One of the Complaint. The Court also indicated that the ACLI would be able to recover attorneys' fees from the Department, but the Court has not yet determined the amount of fees.

Yvonne Clearwater, Acting Deputy Director of Health Products at the Department has recently stated: "The Department Bulletin 2013-01 is void. At this time, the Department has no policy that generally prohibits offshoring. However, the Department does review Company practices on a case-by-case basis for compliance with the Illinois Insurance Code."

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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