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

The Office of General Counsel issued the following informal opinion on June 8, 2000, representing the position of the New York State Insurance Department.

RE: [Company E] Insurer's Life Insreance's General Agent Compensation Plan and N.Y. Ins. Law  §§4228 and 1509 (McKinney 1985 & Supp. 2000)

Questions Presented:

1) Is a general agent who is an affiliate of a company subject to the provisions of N.Y. Ins. Law §4228 (McKinney 1985 & Supp. 2000)?

2) May a company make use of the N.Y. Ins. Law §4228 (e)(11) (McKinney 1985 & Supp. 2000) monitoring exemption when its general agent is an affiliate?

3) Is a company responsible for limiting commission payments and expense allowances made to sub-agents by its affiliated general agent?

Conclusions:

1) A general agent who is an affiliate of a company is not subject to the provisions of N.Y. Ins. Law §4228 (McKinney 1985 & Supp. 2000).

2) A company may make use of the N.Y. Ins. Law §4228 (e)(11) (McKinney 1985 & Supp. 2000) monitoring exemption when its general agent is an affiliate.

3) A company is not responsible for limiting commission payments and expense allowances made to sub-agents by its affiliated general agent.

Facts:

Company E Life Insurance ("Company E") received Department approval for a general agency compensation plan it submitted during the last quarter of 1999. The plan provides for Company E to compensate ABC Network, LLC ("ABC"), currently a wholly-owned subsidiary of Company E as a general agent. Company E converted its branch office agents to ABC employees on January 1, 2000.

ABC is a financially independent entity, which is solely responsible for the costs of its general agency operations including, but not limited to, its sub-agents’ commissions, security benefits, development allowances, prizes, awards and production-based conventions. ABC will be compensated by

Company E and other related and unrelated insurers under arm’s length selling agreements pursuant to which the amount of compensation will vary with the sales and production of insurance products.

Under the plan, compensation paid by Company E to ABC will not exceed N.Y. Ins. Law §4228 (McKinney 1985 & Supp. 2000) compensation limitations, nor will Company E provide ABC with any of the types of payments or benefits described in §4228 (e)(11) (A) – (D). Also, Company E will monitor all payments to ABC in accordance with §4228 requirements.

Company E has advised that it plans to transfer ABC to an affiliated holding company, ABC Distribution Holding Corporation, which is wholly-owned by ABC Client Solutions, LLC, which in turn is wholly-owned by ABC Financial Inc. (formerly "The Company E Incorporated"). Company E is a wholly-owned subsidiary of ABC Client Solutions, LLC.

Analysis:

General agents are not bound by the monitoring requirements or expense limitations set forth in §4228. N.Y. Ins. Law §4228 (a) (McKinney 1985 & Supp. 2000) states in relevant part, "[t]he provisions of this section shall apply to all domestic life insurance companies and to all foreign and alien life insurance companies doing business in this state…engaged in the direct sale of individual life insurance policies or individual annuity contracts." The statute clearly applies only to the specified life insurance companies. Where statutory language is clear and unambiguous, it must be applied as written. See Encore College Bookstores, Inc. v. Auxiliary Serv. Corp. of State Univ. of New York, 87 N.Y.2d 410, 639 N.Y.S.2d 990 (1995); Washington Post Co. v. New York State Ins. Dep’t, 61 N.Y.2d 557, 475 N.Y.S.2d 263 (1984); Scott, Sardano & Pomeranz v. Records Access Officeer of City of Syracuse, 65 N.Y.2d 294, 491 N.Y.S.2d 289 (1985). Thus, the plain meaning of § 4228 requires that it only be applied to Company E and not ABC.

N.Y. Ins. Law §4228 (e)(11) (McKinney 1985 & Supp. 2000) provides:

(e) Notwithstanding any limitations set forth in subsection (d) of this section:

(11) If a company pays an agent or a general agent for the production of policies or contracts issued by the company, the company shall not be required to monitor for compliance with this section the payments and allowances paid by such agent or general agent to any agent or general agent with respect to such policies or contracts if the agent or general agent receiving such payments:

(A) receives no company-provided security benefits;

(B) does not receive additional compensation as permitted by paragraph four of this subsection, compensation or expense allowance from a paying entity that itself is receiving additional compensation from the company as permitted by paragraph four of this subsection;

(C) receives no prizes or awards from the company; and

(D) is not eligible to qualify for attendance at company-sponsored agent conventions, conferences, or business meetings based on the amount of business produced by such agent or general agent.

Thus, while a company in compliance with §4228 (e)(11) (A), (B), (C) and (D) payment restrictions must still monitor payments made to its general agent, it is not required to monitor payments made to sub-agents by its general agent.

The term "general agent" used in §4228 (e)(11) is defined by N.Y. Ins. Law §4228 (b)(14) (McKinney 1985 & Supp. 2000) as "an agent who is appointed directly by a company, other than a local salaried representative of such company, who recruits, trains or supervises other agents or who has the right to appoint agents". Section 4228 (b)(14) does not draw a distinction between independent general agents and company-affiliated general agents. Had the legislature intended to make such a distinction, an express exception for affiliate-agents would have been written into the statute. Thus, the fact that ABC is an affiliate of Company E does not alter Company E’s ability to make use of §4228 (e)(11)’s monitoring exemption. Accordingly, Company E must monitor its payments to ABC, but is not required to monitor payments made by ABC to ABC’s sub-agents.

Likewise, N.Y. Ins. Law §4228 (d) (McKinney 1985 & Supp. 2000), which restricts commission payments made by a company to its agents or general agent, does not require Company E to assume responsibility for limiting commission payments made by ABC to its sub-agents. While this provision does limit the amount of commissions a company may pay its general agent, it does not state or suggest that a company is responsible for limiting the commissions its general agent pays to its own sub-agents.

The application of §4228 as above discussed is not altered by the wording of N.Y. Ins. Law § 1509 (McKinney 1985), which states:

No holding company or controlled person shall directly or indirectly or through another person do or cause to be done for or in behalf of the

controlled insurer any act intended to affect the insurance operations of the insurer which, if done by the insurer, would violate section four thousand two hundred twenty-eight, four thousand two hundred twenty-nine, four thousand two hundred thirty or any sections specified in section two thousand four hundred two of this chapter.

ABC was not established so that Company E could evade §4228; it was established so that Company E could remain competitive in the post-Gramm-Leach-Bliley-Act environment. Thus, ABC’s financial arrangements with its sub-agents does not constitute an act done "for or in behalf of" Company E. Furthermore, the financial arrangements between ABC and its sub-agents will not affect the insurance operations of Company E. ABC is an independent entity, of which Company E is not financially or otherwise responsible. Also, Company E is, as already discussed, subject to §4228’s expense and

monitoring restrictions. Therefore, Company E is not having an affiliate commit an act "which if done by the insurer would violate section four thousand two hundred twenty-eight".

Moreover, the legislature was aware of §1509 when it amended §4228, but made no attempt to distinguish between affiliated and unaffiliated transactions. As noted by the N.Y. Appellate Division in National Org. for Women v. Metropolitan Life Ins. Co., 131 A.D. 356, 358-359, 516 N.Y.S.2d 934, 936 (1st Dep’t 1987):

While it is the duty of courts, if at all possible and consistent with the canons of statutory interpretation, to construe two separate statutes in harmony, it is well recognized that a special statute in irreconcilable conflict with a general statute covering the same subject matter is controlling insofar as the special act applies…we must presume that when the Legislature acts, it does so with full knowledge of its existing statutes.

Thus, the legislature did not intend to have §1509 override §4228, the later and more specific legislation.

Based on the above, it is clear that ABC is not subject to N.Y. Ins. Law §4228 (McKinney 1985 & Supp. 2000) expense limitations and monitoring requirements, Company E may avail itself of the monitoring exemption of §4228 (e) (11) and Company E is not responsible for limiting the commission payments and expense allowances ABC makes to its own sub-agents.

For further information you may contact Attorney Sally A. Geisel at the New York City Office.