Beyond state lines: A primer on insurance law extraterritoriality 

As a child, what fascinated me most about the game of Capture the Flag was the flag. Which team would ultimately exercise authority over it? Would it be the team guarding the territory or the team trying to capture it? A comparable situation exists with state insurance laws. We commonly refer to it as extraterritoriality.

This 19-letter word refers to a concept where one state’s laws apply to plans issued in another state (known as the situs state) for participants residing in the one state. In other words, a fully insured plan issued by an insurer in State 1 is also subject to the laws of State 2 for a plan participant residing in State 2.

This conflicts-of-laws issue is not new. Back in 2009, the National Association of Insurance Commissioners published a 54-page treatise on the subject, observing:

The act of a state other than the state in which the contract has been delivered or issued for delivery to impose their unique regulatory requirements … constitutes the extraterritorial application of that state's regulatory authority. However, whether a state considers the application of its insurance regulatory laws to be "extraterritorial" in a given situation will not necessarily be the same from state to state. Some states share the insurance industry's point of view, but other states regard much of what is commonly understood as extraterritorial as simply trying to regulate insurance activity within its own borders. 

Generally, states fall into three categories on extraterritoriality:

• Clearly extraterritorial. Many states have a statutory confirmation that their laws apply beyond their borders. Texas is a good example. Its Insurance Code has several clear statements, including a provision that state law applies to “a resident of this state under a group accident and health insurance policy delivered, issued for delivery, or renewed outside this state.”
• Clearly not extraterritorial. Some states take a hands-off approach if a policy is validly issued in another state. Take Michigan, which regulates “transactions of insurance.” Its law exempts any “[t]ransaction of group or blanket insurance or group annuities in which a master policy was lawfully issued to an employer located in another state for the benefit of employees residing in this state.”
• Sometimes extraterritorial. Sometimes, extraterritoriality depends on the situation. Here are two examples. First, the Maryland Insurance Administration has confirmed that its laws are not extraterritorial, except where a participant brings an allegation that an insurer engaged in an unfair trade practice. Second, California’s Insurance Code is not extraterritorial as long as the employer’s principal place of business and majority of employees are located outside of the state. In addition, California’s domestic partner coverage mandate applies to registered domestic partners residing in the state, regardless of whether the plan was issued.

To clarify, self-funded ERISA plans are not subject to insurance extraterritoriality because of ERISA preemption.

This is not a theoretical issue for multistate employers with fully insured plans. To continue the analogy, participants might play the role of the flag. In other words, legitimate questions may arise about a state insurance law where they reside, even though covered by a policy issued elsewhere. Examples include covering dependents beyond age 26, post-COBRA insurance continuation or a coverage mandate (like fertility or gender-affirming care). What is the fully insured plan to do in this case?

Here are some recommended steps:

• Review the plan document, summary plan discussion and related insurance certificates and documents.
• Discuss with your insurer, benefits consultant, and/or legal counsel.
• If the state of residence is not extraterritorial, explore whether the insurer can amend the policy or offer an alternative in providing the requested benefit, being mindful that this might set a precedent in the future.
• Communicate the outcome with the participant.