The Office of General Counsel issued the following informal opinion on October 4, 2000, representing the position of the New York State Insurance Department.
RE: Insurers Payment of Bonuses to Insurance Brokers and Agents
Questions Presented:
1) Does the New York Insurance Law prohibit for-profit insurers that issue accident and health insurance from paying brokers and/or agents bonuses or other compensation in addition to the ordinary commissions paid for facilitating the sale of such insurance?
2) If such payments are permissible, does the Insurance Law permit payment to be made in the form of the insurers stock or stock options?
3) If the Insurance Law permits the payment of bonuses or other additional compensation, may the insurer use the following benchmarks as the criteria for making such payments:
a) premium revenue,
b) medical loss ratio,
c) retention of accounts?
Conclusions:
1) The New York Insurance Law does not prohibit for-profit insurers that issue accident and health insurance from paying brokers and/or agents bonuses or other compensation in addition to the ordinary commissions paid for facilitating the sale of insurance. However, the bonuses or other additional compensation to be paid, and the criteria established for making such payments, must be filed with the Department for the Superintendents approval, in accordance with the statutes and regulations relating thereto. See N.Y. Ins. Law §§ 3216, 3221, 3231 and 4235 (McKinney 1985 & Supp. 2000); N.Y. Comp. Codes R. & Regs. tit. 11 A, § 52.1 52.95 (1995 1999).
2) The Insurance Law does not prohibit the payment of bonuses or other additional compensation to be made in the form of the insurers stock. However, options on authorized but unissued stock may not be distributed by a domestic stock insurance company to anyone other than an officer or employee of the insurer pursuant to N.Y. Ins. Law § 1207 (McKinney Supp. 2000). Furthermore, § 1207 requirements are deemed to apply to foreign insurers and United States branches of alien insurers via the "substantial compliance" provision contained in N.Y. Ins. Law § 1106 (e) (McKinney 1985).
3) Generally speaking, the suggested criteria are not per se impermissible. However, each rate and form application is approved or disapproved by the Superintendent based on the specific information provided therein.
Analysis
N.Y. Ins. Law § 3201 (b) (1), (c) (3) (McKinney 1985 & Supp. 2000), which apply to, among other things, accident and health insurance, state in relevant part:
(b) (1) No policy form shall be delivered or issued for delivery in this state unless it has been filed with and approved by the superintendent as conforming to the requirements of this chapter and not inconsistent with law
(c) (3) The superintendent may disapprove any accident and health insurance policy form for delivery or issuance for delivery in this state if the benefits provided therein are unreasonable in relation to the premium charged or any such form contains provisions which encourage misrepresentation or are unjust, unfair, inequitable, misleading, deceptive, or contrary to law or to the public policy of this state.
Insurance rates must be filed with the superintendent along with the policy forms. See N.Y. Ins. Law §§ 3216, 3221, 3231, 4235 (McKinney 1985 & Supp. 2000).
N.Y. Ins. Law § 3217 (a) (McKinney Supp. 2000) further states in relevant part:
The superintendent shall issue such regulations he deems necessary or desirable to establish minimum standards, including standards of full and fair disclosure, for the form, content and sale of accident and health insurance policies and subscriber contracts of corporations organized under this article and article forty-three of this chapter or entities licensed pursuant to article forty-four of the public health law.
N.Y. Comp. Codes R. & Regs. tit. 11 A, § 52.1 52.95 (1995 1999) establish the minimum standards referred to in § 3217 (a). Regulation 52, among other things, clarifies that commission payments and/or other compensation payable to brokers and agents must be included with the form and rate filings.
For-profit insurers that issue accident and health insurance are not prohibited by either statute or regulation from paying bonuses or other additional compensation to their agents and brokers. However, the payments must not so affect the insurers rates that the benefits provided are unreasonable in relation to the premium charged. In that instance, the bonus or other additional compensation would be disapproved. N.Y. Ins. Law § 3201 (c) (3) (McKinney 1985).
While the Insurance Law does not specifically prohibit for-profit insurers that issue accident and health insurance from providing stock as payment for bonuses or other additional compensation, options on authorized but unissued stock may not be distributed by a domestic stock insurance company to anyone other than its own officers and employees pursuant to N.Y. Ins. Law § 1207 (McKinney Supp. 2000). Furthermore, § 1207 requirements are deemed to apply to foreign insurers and United States branches of alien insurers via the "substantial compliance" provision contained in N.Y. Ins. Law § 1106 (e) (McKinney 1985), which states:
(e) Except as otherwise specifically provided in this chapter no foreign insurer and no United States branch of an alien insurer shall be or continue to be authorized to do an insurance business in this state if it fails to comply substantially with any requirement or limitation of this chapter, applicable to similar domestic insurers hereafter to be organized, which in the judgment of the superintendent is reasonably necessary to protect the interests of the people of this state.
With respect to the criteria upon which a bonus or other compensation may be paid, there is no per se statutory or regulatory prohibition against basing such payment on premium revenue, medical loss ratio, or retention of accounts. In Circular Letter No. 6 (1988) the Department advised that it did not object to an insurer conditioning its payment of additional compensation on favorable loss history provided that the insurer demonstrated such payment would not result in unlawful discrimination or conflict of interest (such as the agent or broker having control over the payment of claims). Thus, whether an insurers proposed criteria will be approved will depend on the specific information it provides with its form and rate filings. The criteria must be just, fair and equitable, and not "contrary to law or to the public policy of this state." N.Y. Ins. Law § 3201 (c) (3) (McKinney 1985).
For further information you may contact Attorney Sally A. Geisel at the New York City Office.