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?
Apply this to your situation
This page answers the general question as of 1986. Ask about yours and see what current South Dakota law means for your facts, with citations you can check.
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.
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 said his predecessor's Opinion 78-39 could not answer this question. The proposed company lacked State Bar sponsorship and an agreement for participating attorneys to prorate fees if the company could not fulfill its promises. The 1986 opinion does not state what result 78-39 reached for the earlier plan.
The AG also cited public policy: treating this contract as insurance would provide consumers the regulatory protections afforded by the Legislature. The opinion does not identify particular licensing steps or consumer remedies.
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 may have been amended since 1986, and the treatment of prepaid legal services plans may have developed further. Consult the current SDCL Title 58 and the Division of Insurance for the current treatment of legal services plans.
What the opinion meant at the time
For the company described, the AG's answer was that its promise to cover specified legal expenses constituted an insurance business under Title 58. The opinion did not prescribe its next regulatory steps.
For consumers, the opinion says the proposed contract should be treated as insurance so they receive the regulatory protections the Legislature provides. It does not describe specific complaint, solvency, or claims procedures.
For attorneys and plan sponsors, the opinion identifies the missing State Bar sponsorship and fee-proration agreement as reasons the AG would not use Opinion 78-39 to answer this company's question. It does not hold that the presence of those features would exempt another plan from Title 58.
For insurance regulators, the opinion applies SDCL 58-1-2(1) to the described promise to pay or indemnify against legal expenses. The AG also notes the plan's risk assessment, indemnification, and need for loss reserves.
Common questions
Q: What was a "prepaid legal services plan"?
A: In the question posed to the AG, purchasers paid a premium or purchase price for a promise that the company would pay attorneys directly or reimburse purchasers for specified legal expenses. The opinion does not describe other plan designs.
Q: Why did the AG distinguish Opinion 78-39?
A: The AG did not state the earlier opinion's outcome. He said it could not answer the new question because the proposed company lacked State Bar sponsorship and a guarantee that legal expenses would be paid regardless of its financial stability. He then applied SDCL 58-1-2(1) to the company's own promise to pay or indemnify purchasers.
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: The opinion does not list licensing, filing, or reserve requirements for the company. It concludes only that the proposed contracts place the company in the insurance business under Title 58.
Q: Would a discount plan (where members got a percentage off attorney fees) be insurance?
A: The opinion did not address discount plans. It analyzed a company promising to pay attorneys or reimburse purchasers for specified legal expenses, so it does not decide how a discount-only arrangement would be classified.
Q: What protections did Title 58 give consumers?
A: The AG said classification as insurance would provide consumers with "those regulatory protections afforded by the Legislature." He did not enumerate the protections in this opinion.
Background and statutory framework
The proposed contract required a premium or purchase price. In return, the company promised to pay attorneys directly or reimburse purchasers for specified legal expenses if they needed counsel. The AG noted that those expenses could vary and that the plan involved risk assessment and a need for loss reserves.
South Dakota's 1986 opinion concluded that the proposed company was doing an insurance business. It did not classify every type of prepaid legal services plan.
SDCL 58-1-2(1) covers an undertaking to "indemnify another or pay or provide a specified or determinable amount, or benefit upon determinable contingencies." The AG applied that language to the company's promise to hold purchasers harmless from specified legal expenses.
The opinion distinguished Opinion 78-39 because the proposed company had neither State Bar sponsorship nor an agreement by participating attorneys to prorate fees if the company could not fulfill its promises. It did not say how common either arrangement was or what happened to plans after 1986.
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
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