New York State Seal
STATE OF NEW YORK
INSURANCE DEPARTMENT
25 BEAVER STREET
NEW YORK, NEW YORK 10004

The Office of General Counsel has issued the following informal opinion on January 28, 2000.

A Litigation Settlement Offer May Constitute an Improper Rebate/Inducement

Question Presented:

Could the settlement of a potential law suit constitute an "inducement" under N.Y. Ins. Law Section 4224(c)(McKinney 1985)("the anti-rebating law")?

Conclusion:

The settlement of a potential lawsuit could be an inducement under N.Y. Ins. Law Section 4224(c) if it appeared that the settlement was an inducement to or interdependent with the insured's placement of the insurance policies with the agent. However, there would be no violation of the "anti-rebating law" if it can be shown that there is a bona fide dispute between the agent and the insureds, that the terms of the settlement are not out of proportion to agent's potential liability and that the settlement is not dependent upon or an inducement for the insureds placing business with the agent.

Facts:

An insurance agent, sold over $20,000,000 of life insurance policies which, it turned out, did not meet the needs of the individuals who purchased the policies and, in

fact, subjected them to significant tax liability. The insureds have replaced these policies with those of another insurance company.

The insureds intended to commence extensive litigation against the agent seeking $7 million in damages based on his alleged negligence in not properly advising the insureds on all aspects of the transaction. The agent sought to settle this matter before litigation was commenced and there is a possibility that the matter will be settled for $1 million to be paid to the insureds by the agent.

After agreeing in principle to the proposed settlement, the agent sought to convince the insureds to place at least some of the replacement business with him and there is a remote possibility this may be achieved. Should this occur, the question arises as to whether the payment of the settlement amount might appear to be a rebate in violation of N.Y Ins. Law Section 4224(c).

Anasysis:

N.Y. Ins. Law Section 4224(c) states in pertinent part:

No such life insurance company and....no officer, agent, solicitor or representative thereof...shall pay, allow or give, or offer to pay, allow or give, directly or indirectly, as an inducement to any person to insure, or shall give, sell or purchase, or offer to give sell or purchase, as such inducement, or interdependent with any policy of life insurance or insurance contract ... any valuable consideration or inducement whatever not specified in such policy or contract; nor shall any person in this state knowingly receive as such inducement, any rebate of premium or policy fee or any special favor or advantage in the dividends or other benefits to accrue on any such policy or contract....

In the instant situation, it appears that there is a bona fide dispute between the agent and the insureds and that the agent desires to enter into this settlement for three reasons: 1) to avoid a potentially large judgment against him at trial, 2) to avoid lengthy and costly litigation and 3) to avoid the publicity that would be attendant to such a trial. For these reasons it appears that he would be willing to enter into this settlement agreement whether or not the insureds give him any replacement business. In addition, the settlement amount is not out of proportion to his potential liability. Thus, the settlement appears to be independent of and not intertwined with the placement of the insurance with the agent.

For the above stated reasons it does not appear that the agent will violate N.Y. Ins. Law Section 4224(c) if he settles the potential litigation with the insureds for $1 million and also receives some portion of the insureds' replacement business.

For further information you may contact Associate Attorney Rochelle Katz of the Department’s New York Office.