Request By:
Jon W. Ackerson, Esq.
3400 First National Tower
Louisville, Kentucky 40202
Opinion
Opinion By: Robert F. Stephens, Esq., Attorney General; Mark F. Armstrong, Esq., Assistant Attorney General
We are in receipt of your letter in which you ask whether the business of the legal entity (hereinafter "company") described in OAG 78-601 (August 25, 1978) 1 is insurance as that term is defined in KRS 304.1-030. 2 Before discussing the applicable law, it is necessary to describe in further detail the functional structure of the company.
The company enters into contracts with dentists in which the dentists agree to provide certain dental services to the subscribers at a reduced cost and to provide other dental services at no additional charge to the subscribers. The dentists receive an initial fee from the company as consideration for the reduced fees and the services rendered at no additional cost to the subscribers. This initial fee is paid to the dentists without regard to whether the subscribers use the services. For the services rendered at a reduced cost, the dentists charge the subscribers directly and the company is not liable for any charges incurred by the subscribers.
Based upon this description of the company's activities, we conclude that the company is not engaging in the business of insurance. Our conclusion is amply supported by the case law and discussion set forth in Annot., 167 A.L.R. 322 (1947). In the seminal case of
Jordan v. Group Health Ass'n, 107 F.2d 239 (D.C. Cir., (1939), the Group Health Association ("GHA") was held not to be engaged in the insurance business. GHA, like the company here arranged for medical services to be rendered by independent physicians:
"In effect the [GHA] plan is one by which the members by making regular, limited payments receive service and supplies in variable degrees according to their needs . . . ." Jordan, supra, at 243.
It is necessary here to diverge from a discussion of the Jordan case, supra, to illuminate the significance of its holding. In
Epmeir v. United States, 199 F.2d 508 (7th Cir., 1952), the Court defined insurance as:
". . . [A] contract, whereby, for an adequate consideration, one party undertakes to indemnify another against loss arising from certain specified contingencies or perils. Fundamentally and shortly, it is contractual security against possible anticipated loss. Risk is essential and, equally so, a shifting of its incidence from one to another."
Epmeir v. United States, supra.
Thus, the central question is whether risk of loss has shifted from the subscribers to the company. The Court in the Jordan case, supra, answered this question in the negative, "The agreement is not to pay to the member or to anyone else the amount of loss which is caused to him." Jordan, supra, at 246. Like GHA in the Jordan case, supra, the risk of loss does not shift from the subscriber to the company. That is, neither the subscriber nor the dentist may look to the company for payment or indemnification for dental services received or rendered, compare
McCarty v. King City Medical Service Corp., 26 Wash. 2d 676, 175 P.2d 662 (1946) reh. den. (1947).
In one situation, the company pays an initial fee to the dentists for the services rendered at no additional charge to the subscriber. This initial fee is paid whether these services are obtained. In the other situation, the benefit received by the subscriber is merely a reduced rate. In both situations, the role of the company is that of a group buying agent negotiating a price for dental care, cf.
Webster City. Mem. Hosp. v. United Mine Wkrs., Etc., 536 F.2d 419, at 420 (D.C. Cir., 1976).
Of course, shifting of risk of loss is not the sole test in determining whether the company is offering insurance. Rather, the entire plan must be examined to determine whether it provides a "service" or "indemnity,"
California Physicians' Service v. Garrison, 172 P.2d 4, 16 (1946). As noted above, the company here is in the character of a bargaining agent for subscribers. More to the point, neither the dentist who renders the service nor the subscriber who receives it looks to the company for money to compensate either for the cost of the service. Thus, even taken as a whole, the plan offered by the company does not constitute insurance, compare
People v. California Mutual Ass'n, 441 P.2d 97 (Cal., 1968).
In summary, we are of the opinion that a legal entity which arranges with dentists for the rendering of dental services at no cost or a reduced cost to its subscribers in return for a sum certain paid by the subscribers to the company does not constitute insurance within the meaning of KRS 304.1-030. In such an arrangement, when neither the subscriber nor the dentist looks to the company for payment to compensate either for charges incurred, there is neither a shifting of risk of loss nor indemnification given under the plan in particular or as a whole.
Footnotes
Footnotes
1 The specific nature of this legal entity is described as follows:
"The company will operate in the following manner. The company will contact individuals and groups and offer to them a number of dental services, such as teeth cleaning, x-rays, exams and diagnoses, local anesthetics, along with other more complex and expensive dental services, such as crowns and bridge work and oral surgery. The subscriber to this plan pays a fixed, predetermined per capita yearly premium. In exchange for his per capita fixed prepayment, he [or his family] receives a series of dental services, such as previously outlined, at either no cost or at a reduced, predetermined fixed fee to be paid directly to the dentist. The dentists who are participating in this plan and providing these services are individual practitioners who offer their services from their offices. There is no clinic established from which these dental services would be provided; instead, the members of the plan select a particular dentist from a list furnished to them of dentists participating in this plan." Letter from Jon Ackerson to Robert F. Stephens, p. 1, August 7, 1978.
2 KRS 304.1-030 provides:
"'Insurance' is a contract whereby one undertakes to pay or indemnify another as to loss from certain specified contingencies or perils called 'risks,' or to pay or grant a specified amount of determinable benefit or annuity in connection with ascertainable risk contingencies, or to act as surety."