Could Kentucky's insurance commissioner regulate a county self-insurance pool that was exempt from the insurance code?

Plain-English summary

The Department of Insurance asked about the Kentucky Association of Counties All Lines Fund, a liability pool for local governments. The AG answered two distinct questions. First, it said a regulation barring government self-insurance group members from jointly paying one another's debts did not apply to this pool, which had been certified under an exemption from the insurance code. It also reasoned that banning shared liability would conflict with the purpose of the local-government pooling statute.

Second, the AG said the commissioner could require documentation that the pool's trust fund was adequate. The exemption depended on maintaining such a fund, along with a risk-management system and required filing. If a pool failed a condition, the AG said it would lose its exemption and could be treated as an unlicensed insurer.

Currency note

This opinion was issued in 1992. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Historical summary

Local government risk pools

The AG concluded that the joint-liability restriction in 806 KAR 1:010 did not govern the certified pool described in the request. Its reasoning turned on the exemption in KRS 304.1-120(6) and on KRS 65.150's authorization for local governments to associate for liability and property-damage coverage. The opinion nevertheless treated adequate trust funding as a continuing condition of the exemption.

Insurance regulators

The opinion said the commissioner could demand information showing the soundness of a certified pool's trust fund. It relied on the commissioner's examination and investigation powers in KRS 304.2-100 to determine whether the pool still qualified for its exemption.

Common questions

Did the joint-liability ban apply to the county pool?

No. The AG said the regulation implementing the insurance code did not apply to a pool certified under the exemption in KRS 304.1-120(6).

Could the commissioner still request trust-fund records?

Yes. The opinion said the commissioner could require documentation establishing whether the pool maintained adequate coverage for claims, a condition of the exemption.

What did the opinion say would happen if a pool failed an exemption condition?

The AG said the group would no longer enjoy the exemption and would be acting as an unlicensed insurer under the law it reviewed.

Background and statutory framework

KRS 65.150 allowed local governments to associate for coverage. KRS 304.1-120(6) exempted qualifying self-insurance associations from the insurance code, subject to conditions including an adequate trust fund, loss-prevention system, and filing. The AG read 806 KAR 1:010 as a code regulation that could not be imposed on the exempt pool, but read KRS 304.2-100 as giving the commissioner authority to examine whether its trust fund still met the exemption condition.

Citations and references

• KRS 65.150: local-government pooling authority.
• KRS 304.1-120(6): exemption and conditions for qualifying self-insurance associations.
• KRS 304.2-100: commissioner's examination and investigation powers.
• 806 KAR 1:010: regulation the AG found inapplicable to the certified pool.
• KRS 304.2-110 and KRS 304.39-300: authority the regulation cited.

Source

• Landing page: https://www.ag.ky.gov/Resources/Opinions/Opinions/OAG92-124.htm

Original opinion text

OAG 92-124

July 29, 1992

Stephen B. Cox

Department of Insurance

P.O. Box 517

Frankfort, Kentucky 40602

Dear Mr. Cox:

You have presented two questions concerning a self-insured group called Kentucky Association of Counties All Lines Fund. KALF is a self-insurance liability pool organized under the interlocal cooperation act. It provides coverage to local governments under the authority of KRS 65.150.

Your first question is whether your administrative regulation 806 KAR 1:010, section 4(1)(e), applies to KALF. That regulation states in part:

If the liability self-insurance group is composed of governmental entities, the agreement shall not jointly and severally bind group members to pay the debts of others.

The regulation cites two statutes as the basis for its statutory authority. The first, KRS 304.2-110, says, “The Commissioner [of insurance] may make reasonable rules and regulations necessary for or as an aid to the effectuation of any provision of this code.” The other statute, KRS 304.39-300, allows the commissioner to promulgate rules “to provide effective administration of this subtitle” (which addresses the motor vehicle reparations act, popularly called no-fault insurance). The regulation thus provides an aid to the administration of subtitle 39 of the insurance code.

KRS 304.1-120(6) states that no provision of the insurance code applies to “the members of a bona fide association, composed of any number of members, who join together to self insure against professional liability or public liability risks for bodily injury or property damage . . . .” Your letter states that KALF is included within that description, and in fact the department of insurance has issued a “certificate of filing as a liability self-insurance group” under this statute.

Since no provision of the insurance code (other than 1-120(6)) applies to KALF, we conclude that the department's administrative regulation implementing subtitle 39 of the code cannot be applied to KALF. Additionally we note that KRS 65.150(3) states that local governments “may associate, pursuant to KRS 65.210 to 65.300, for the purpose of insuring themselves against any liability or property damage.” We assume that the very reason that those parties would associate in the first place is to distribute risk liability among the members of the group. A regulation that forbids them to share liability would conflict with the purpose of this statute.

You also ask whether the commissioner of insurance may require KALF to submit documentation showing the adequacy of its trust fund.

KRS 304.1-120(6) exempts KALF and similar groups from the insurance code provided they meet the following conditions:

• establishment of a trust fund “to provide adequate coverage for claims made against members”;

• establishment of a comprehensive loss prevention and risk management system;

• filing with the department of insurance a certification showing the date of operation of the trust fund, the identity of its members, and the programs established for the members.

We interpret this section as exempting KALF from the code only as long as it meets the required conditions; should KALF fail to meet one of the conditions, it would no longer enjoy the exemption and would be acting as an unlicensed insurer. At that point, KALF would clearly fall under the general regulatory authority of the department of insurance.

KRS 304.2-100 gives the following broad powers to the commissioner of insurance:

(2) The commissioner shall examine and inquire into violations of this code, shall enforce the provisions of this code with impartiality and shall execute the duties imposed upon him by this code.

(3) The commissioner shall have the powers and authority expressly conferred upon him by or reasonably implied from the provisions of this code.

(4) The commissioner may conduct such examinations and investigations of insurance matters, in addition to examinations and investigations expressly authorized, as he may deem proper upon reasonable and probable cause to determine whether any person has violated any provisions of this code or to secure information useful in the lawful administration of any such provision. . . .

We believe that this section gives the commissioner ample authority to require KALF and similar groups to supply information establishing the adequacy of their trust funds. If KALF is not maintaining an adequate trust fund, then it is in violation of the insurance code; and the commissioner is authorized to investigate as he deems proper to determine whether a violation has occurred. A sufficient examination would at the least require information regarding the soundness of the trust funds maintained by KALF and others. We therefore conclude that the commissioner may by regulation require any entity certified under KRS 304.1-120(6) to provide documentation to the department regarding the adequacy of its trust fund.

Sincerely,

Chris Gorman

Attorney General

Ross T. Carter

Assistant Attorney General