If a company sells South Dakota consumers a contract that, in exchange for an upfront premium, promises to pay or reimburse their legal fees if they later need an attorney, is that company in the insurance business? Does it have to comply with South Dakota's insurance regulations, even though it isn't a traditional insurer?
Plain-English summary
A company wanted to sell prepaid legal services plans in South Dakota to individuals and groups. The model was familiar: customer pays a premium, company promises to cover legal fees if the customer needs an attorney. The company would either pay the attorney directly or reimburse the customer. The wrinkle was that the company had no State Bar sponsorship for its plan and no agreement from participating attorneys to scale back fees if the company became insolvent.
Representative Bernard Christenson asked AG Mark Meierhenry whether the company was doing an "insurance business" under SDCL Title 58. If yes, the company would need to comply with the licensure, reserve, and consumer-protection requirements of state insurance regulation. If no, the company could operate without that oversight.
The AG's answer was yes. The key was SDCL 58-1-2(1), which defined insurance as undertaking to "indemnify another or pay or provide a specified or determinable amount, or benefit upon determinable contingencies." A prepaid legal services plan fit that definition exactly. The customer paid a premium, the contingency was the future need for legal services, and the company's obligation was either indemnification (reimbursement) or direct payment to the attorney. The statute did not distinguish between those payment forms.
The AG also distinguished a prior 1978 opinion (78-39) that had reached a different conclusion about a different plan. The 1978 plan had carried State Bar sponsorship and agreements from participating attorneys to take pro-rata fees if the sponsor became insolvent. That structural protection had taken it outside Title 58's reach. The 1986 plan lacked both, so the AG opinion concluded that the company was selling insurance.
The opinion's closing public-policy point reinforced the legal conclusion: classifying the contract as insurance gave South Dakota consumers the regulatory protections the Legislature had built into Title 58, including financial solvency requirements, complaint mechanisms, and licensing of insurance producers.
Currency note
This opinion was issued in 1986. 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. South Dakota's insurance code in Title 58 has been amended many times since 1986, and prepaid legal services plans are now a subject of more developed regulation under both state and federal law. Consult the current SDCL Title 58 and the Division of Insurance for current treatment of legal services plans.
What the opinion meant at the time
For the prepaid legal services company, the opinion was a regulatory roadblock. The company had hoped to operate outside the insurance code. The AG's reading forced it to either obtain an insurance license (which would have required capital, reserves, and ongoing compliance) or stop selling in South Dakota.
For South Dakota consumers considering buying a prepaid legal plan, the opinion was protective. It meant that any legal-expense indemnity plan sold in the state had to come through a regulated insurer. The consumer could rely on the Insurance Division's solvency oversight and complaint process if the plan failed to perform.
For the South Dakota State Bar and participating attorneys, the opinion drew a useful structural line. A bar-sponsored, attorney-backed plan with fee-proration agreements could potentially operate outside Title 58 (per the 1978 opinion 78-39). A purely commercial plan without those protections fell squarely within Title 58. Lawyers thinking about participating in either kind of plan had a framework for evaluating the structure.
For insurance regulators, the opinion gave a usable test: look at SDCL 58-1-2(1) and ask whether the plan involves indemnification or payment of a determinable amount upon a determinable contingency. If yes, it's insurance.
Common questions
Q: What was a "prepaid legal services plan"?
A: A contract where the customer paid a periodic premium and, in exchange, received the promise that legal fees for covered matters would be paid by the plan provider. Coverage scope varied: some plans covered only consultation, some covered specific transactions, some covered litigation. The structure resembled health insurance.
Q: Why did the 1978 opinion (78-39) come out differently?
A: The 1978 plan had two structural features that the 1986 plan lacked: State Bar sponsorship and binding agreements from participating attorneys to accept pro-rata payment if the plan provider became insolvent. Those features meant the attorneys (not the plan provider) effectively bore the financial risk. Without them, the plan provider was the indemnifier and looked exactly like an insurance company.
Q: Did it matter that the company paid the attorney directly rather than reimbursing the customer?
A: No. SDCL 58-1-2(1)'s "indemnify another or pay or provide" language covered both. The AG specifically said "the statutory definition makes no distinction regarding whether the guaranteed payment is made to the claimant or insured."
Q: What would the company have had to do to comply?
A: Obtain an insurance certificate of authority from the South Dakota Division of Insurance, comply with capital and reserve requirements, license its sales force, file rate and form documents for approval, and submit to the regulatory oversight set out in SDCL Title 58.
Q: Would a discount plan (where members got a percentage off attorney fees) be insurance?
A: The opinion focused on indemnification and payment plans. A pure discount plan, where the customer still owed the fee (just at a reduced rate), is structurally different and typically not insurance under SDCL 58-1-2(1) because there is no indemnification or payment by the plan operator. The opinion didn't address discount plans directly.
Q: What protections did Title 58 give consumers?
A: Financial solvency requirements (so the company could pay claims), complaint mechanisms through the Division of Insurance, prohibitions on unfair claims practices, and oversight of policy forms and rates. Without Title 58 classification, none of those protections applied.
Background and statutory framework
Prepaid legal services plans were a growing product in the 1980s, paralleling the rise of HMOs in health care. The marketing pitch was that consumers could budget for legal expenses just as they budgeted for health expenses, with a known monthly cost replacing the unknown future fee. The model worked when the underwriting was sound and the provider stayed solvent. When either failed, customers were left holding worthless contracts.
The regulatory question of whether these plans were insurance was litigated and opined on across many states in the 1980s and 1990s. South Dakota's 1986 opinion reflected the emerging majority view: yes, they were insurance, unless the structure carved out a clear non-insurance form (such as the bar-sponsored, attorney-backed model from the 1978 opinion).
SDCL 58-1-2(1) was a broad capture: "indemnify another or pay or provide a specified or determinable amount, or benefit upon determinable contingencies." The legislative choice to draft the definition broadly was intentional. It was designed to prevent regulatory arbitrage by companies that wanted to sell indemnity-like products without bearing insurance regulation. The AG's 1986 application followed the legislative purpose.
The 1978 sponsorship-based exception remained narrow. It depended on structural features that very few commercial plans replicated. Most prepaid legal plans entering the South Dakota market after 1986 either accepted insurance regulation or did not sell in the state.
Citations and references
Statutes:
- SDCL 58-1-2(1) (insurance definition)
- SDCL Title 58 (insurance regulation)
Earlier AG opinions referenced:
- Opinion 78-39 (State Bar sponsored plan; distinguished)
Source
Original opinion text
Legal services insurance contracts
Dear Representative Christenson:
You have requested an opinion from this office based upon the following factual situation:
FACTS:
A certain company proposes to sell contracts in South Dakota, to both individuals and groups. A contract will require payment of a premium or purchase price, presumably having some relation to the company's expected claims under the contract. When a contract purchaser needs an attorney, the company will either pay fees directly to counsel or reimburse the purchaser for those amounts actually paid. In either case, the company is promising to pay or indemnify against legal expenses. Additionally, the company apparently does not have either State Bar sponsorship, nor any agreement by participating attorneys for proration of fees should the company be unable to fulfill its promises.
Based on the above facts, you have asked the following question:
QUESTION:
Is the company doing an insurance business under Title 58 of the South Dakota Codified Laws?
I have reviewed my predecessor's Opinion No. 78-39, and do not believe that it can be used to answer your question. First, the current proposal has no State Bar sponsorship, and no guarantee that the legal expenses will be paid (and services thereby provided), regardless of the company's financial stability.
Second, and more importantly, is the fact that the company is undertaking to 'indemnify another or pay or provide a specified or determinable amount, or benefit upon determinable contingencies.' SDCL 58-1-2(1). The statutory definition makes no distinction regarding whether the guaranteed payment is made to the claimant or insured. Whether or not the company pays the contract purchaser for subsequent legal expenses, or pays the attorney directly, the fact remains that this company is entering into a contractual promise to hold the purchaser harmless from specified types of legal expenses. These expenses can vary in amount. The plan therefore has all of the regular attributes of insurance, including risk assessment, indemnification, the need for loss reserves, etc.
Finally, as a matter of public policy, it is appropriate to define this type of contract as insurance, in order to provide South Dakota consumers with those regulatory protections afforded by the Legislature. In view of all of the above considerations, it is my opinion that the answer to your question is yes.
Respectfully submitted,
Mark V. Meierhenry
Attorney General