September 19, 1978

Ms. Jane Nelson 
South Dakota Department of Commerce
  and Consumer Affairs 
State Capitol 
Pierre, South Dakota 57501

Official Opinion No. 78-39

Prepaid Legal Services of South Dakota

Dear Ms. Nelson:

You have requested an opinion from this office based upon the following factual situation:

FACTS: 

Prepaid Legal Services of South Dakota, Inc., has proposed a prepaid legal plan for groups and employers and their employees. (See Exhibit A.) 
    
Under the plan, the financial stability will be guaranteed by the participating attorneys.  In other words, attorneys will agree to accept proration of fees if the fund is insufficient to pay the contractual guarantee.  The plan will be “Open Panel” with a claims review committee. The anticipated fee will be $6-$7 per month, per family. 
    
In effect, the plan will be sponsored by the State Bar of South Dakota (subject to the approval by vote of the membership of the State Bar.)

Based on the above facts, you have asked the following question:

QUESTION: 

Is this proposal doing an insurance business under Title 58 of the South Dakota Codified Laws?

The question of whether prepaid legal services plans constitute “insurance” is not a new one on the national scene; it is, however, a question which has not been dealt with in South Dakota in any manner which would answer the questions you raise here.  It is also worth nothing at this point that there are substantial differences in the various types of plans being devised and offered around the country which in turn make for differing considerations on the “insurance” questions involved.

As is apparent on its face, the plan you have proposed for review is based upon the plan adopted in the State of Kansas.  I am not aware that you plan deviations in your plan from the Kansas model, and this opinion is based on this factual assumption.

In Opinion No. 74-25, the Kansas Attorney General, Mr. Vern Miller, concluded that the Kansas Insurance Code did not apply to the Kansas Bar-sponsored, prepaid, legal services plan.  Kansas had the benefit of a recent state supreme court decision on the question of whether a similar group health plan was “insurance” and the above-cited opinion is based heavily on the similarity of the Kansas prepaid legal services plan to the group health plan which was found to be not “insurance” by the Kansas Supreme Court.  The Attorney General's Opinion likewise concluded that the prepaid legal services plan of the State Bar of Kansas was also not “insurance.”

The Attorney General for the State of Idaho has also considered the question of the application of state insurance laws to a prepaid, bar-sponsored, legal services plan.  (Official Opinion No. 75-29.)  The conclusion reached by the Idaho Attorney General was that the plan there offered was closer to a personal services contract than to “insurance” and when viewed as a whole was not the sort of plan which exhibited any compelling reasons for being regulated as “insurance.”

SDCL 58-1-2(1) defines insurance as: 
    
“Insurance” is a contract whereby one undertakes to indemnify another or pay or provide a specified or determinable amount or benefit upon determinable contingencies.

Indemnity is a basic element of insurance as defined above.  If, for example, the plan were to provide reimbursement to an individual for legal fees incurred, there is then “indemnity” resembling other forms of insurance.  If, however, the plans provide services as the central element, then there is not “indemnity” in the traditional sense and according to court decisions and a noted insurance expert, no “insurance” then exists.  California Physicians' Service v. Garrison, 172 P.2d 4 (1976); or Feinstein v. Attorney General, 36 N.Y.2d 199 (1975); Keaton, INSURANCE LAW, Section 8.2C at 522.

In the plan proposed, there is a structure which appears to follows more closely the “provision of services” model than the “indemnity” model, and thus it appears to me that the proposed plan fits into the above line of cases finding such plans not to be “insurance.”  While I recognize that the courts are not unanimously in agreement with this position, I believe this position does have sufficient support in the law and is based upon a sound recognition that service plans such as that proposed can provide the service for which prepayment is made and do not have the same financial accountability problems that typical “indemnity insurance” carries. In the plan offered, a provider- sponsored plan, stability will be guaranteed by the participating attorneys who would essentially underwrite the providing provisions of the services due in the event that group finances were inadequate to fully compensate for such services.  There is, therefore, not the same need for “insurance” regulation of this type of provider-guaranteed service plan as there is for the traditional indemnity insurance model.

In view of all of the above considerations and authorities, it is my view that the answer to your question is no.

Respectfully submitted,

William J. Janklow
Attorney General

WJJ:DOC:mam