A conflict is brewing between the National Conference of Insurance Legislators (NCOIL) and the National Association of Insurance Commissioners (NAIC), even though neither side wants to admit it. The two private trade associations, with memberships composed of public officials, are on a collision course over what lawmaking power may be constitutionally delegated to nonpublic entities.

The delegation practice in question is known as “incorporation by reference” (IBR), a supposedly benign process whereby noncontroversial technical and procedural changes are introduced into law without debate or scrutiny. In essence, many insurance statutes across the country make reference to NAIC guidance documents and model laws and regulations. An update by the NAIC effectively changes the law in every state that makes such references.

Of late, NCOIL members and insurance trade associations have begun to express concern that the NAIC, which relies on IBR to transmute its pronouncements into law and regulation rapidly, is introducing substantive changes into state codes and thereby running afoul of constitutional restraints on the delegation of legislative authority.

Twice in Chicago, the site of NCOIL’s summer meeting, NCOIL participants discussed the need for IBR reform. NCOIL’s past president, state Sen. Travis Holdman, R-Ind., presented at the meeting’s welcome breakfast about his state’s effort to reassess language that has been incorporated by reference into Indiana law and regulation since 1991, with an eye toward reviewing any “substantive” changes. Holdman tried to make clear he was not trying to “pick a fight” with the NAIC, but felt he had a “constitutional obligation” to ensure that non-delegable authority was and is not being wielded unconstitutionally.

At a subsequent session focused on dialogue between the NAIC and NCOIL, four insurance commissioners gave prepared remarks and answered questions about IBR. Maine Insurance Superintendent Eric Cioppa shared his view that the NAIC material incorporated by reference is not only technical in nature—as it is focuses on accounting, actuarial and financial examination practices—but is also merely guidance and not authority upon which enforcement actions could be based. He opined that how each states chooses to treat NAIC work products is exclusively their own concern, a sentiment later echoed by his commissioner colleagues.

Cioppa’s assertion to the contrary, the NAIC does actively promulgate de facto national standards that have the force of law. The issue may play out at the state level, but the scope of the NAIC’s reach is truly national. And a June decision out of the Pennsylvania Supreme Court may change all that.

Protz v. Workers’ Compensation Appeal Board, concerning the incorporation of American Medical Association (AMA) standards into state law, raises questions about the legality and sustainability of the NAIC’s current arrangement. The Protz court struck down the state’s IBR scheme with the AMA without resorting to the distinction between “substantive” and “nonsubstantive” changes that has animated the controversy between the NAIC and NCOIL. In fact, the Pennsylvania court held the entire scheme, which is virtually identical to the one currently enjoyed by the NAIC, to be unconstitutional on the basis of the scope and duration of the authority delegated to the private body.

Applying that reasoning, NCOIL could play a trump card against the NAIC by suggesting a narrower and appropriately defined scope and duration of IBR authority. The Protz two-step would go something like this:

  1. Require basic policy choices to be made by the Legislature; and
  2. Include standards to guide and restrain the exercise of delegated administrative functions, including a definite and predictable schedule of review.

Such an approach would recommend that state legislatures avoid adopting standards sight unseen without guiding criteria.

No matter how NCOIL and the NAIC characterize their approaches to this issue, there’s no question it will come up again and again, simply by virtue of the roles these groups play and the constituencies they represent. Constitutional fidelity demands that there be only one appropriate outcome – that the NAIC’s shadow governance be brought to heel.

Image by Creativa Images

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