The Office of General Counsel issued the following opinion on April 5, 2001, representing the position of the New York State Insurance Department.
Re: Limitation on Commissions and Rebating
1. May a firm engage the services of a licensee in which it has a 49% ownership interest to place its employee insurance benefits coverage without violating N.Y. Ins. Law §§ 2103(i)(1), 2104 (McKinney 2000)?
2. May the licensee share its profits, including the commissions earned on the policy, with the firm for whom it placed the coverage?
1. Yes. As qualified herein, the placement does not fall within the prohibitions of N.Y. Ins. Law §§ 2103(i)(1), 2104 (McKinney 2000).
2. No. This would constitute rebating under N.Y. Ins. Law § 4224 (McKinney 2000). As explained further in the analysis portion of this letter, the insurer may not pay a commission on the coverage.
A limited liability company ( the "LLC") intends to seek agent (both life and property/casualty) and broker licenses from the Insurance Department. There are four members of the LLC, consisting of an accounting firm, an insurance brokerage, each with a 49% interest and two individuals, each with a 1% ownership interest. Each of the two individuals will be licensed as brokers and agents in their individual capacity and each will be a sub-licensee of the LLC. One of the individuals will be a principal of the brokerage and the other will be a principal of the accounting firm.
The LLC will operate as a general insurance agency/brokerage, offering coverage of all types to the general public, including the accounting firms clients. The accounting firm, which is a partnership, will not receive any fees or commissions in connection with the business placed by the LLC, its interest being limited to a distribution of LLCs net profits.
The accounting firm desires to switch its employee insurance benefits business (group accident and health and group life) 1 from its current broker to the LLC after it becomes licensed. The accounting firm will receive no fee or commission in connection with its employee benefits business. Although it is anticipated that the commission revenue received by the LLC from placing the accounting firms employee insurance benefits business will never exceed 10% of its aggregate net commissions in any twelve month period, you asked for the Departments confirmation that N.Y. Ins. Law §§ 2103(i)(1), 2104 (McKinney 2000) would not be violated even if the commission revenue received by the LLC on this business exceeded 10%.
N.Y. Ins. Law § 2104(d)(3) (McKinney 2000) provides:
The superintendent may refuse to issue a license or renewal license, as the case may be, to any applicant if he finds that such applicant has been or will be, as aforesaid, receiving any benefit or advantage in violation of section two thousand three hundred twenty-four of this chapter, or if he finds that more than ten percent of the aggregate net commissions, received during the term of the existing license, if any, or to be received during the term of the license applied for, by the applicant resulted or will result from insurance on the property and risks set forth in subparagraphs (A), (B), and (C) of paragraph one of subsection (i) of section two thousand one hundred three of this article.
N.Y. Ins. Law § 2103(i)(1)(B) (McKinney 2000), the relevant paragraph provides:
The superintendent may refuse to issue, suspend or revoke a license, as the case may be, to or of any applicant if he finds that such applicant has been or will be, as aforesaid, receiving any benefit or advantage in violation of section two thousand three hundred twenty-four of this chapter, or if he finds that more than ten percent of the aggregate net commissions received during the twelve month period immediately preceding, if any, or to be received during the ensuing twelve months, by the applicant, resulted or will result from insurance on the property and risks:
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(B) of the members of an applicant firm or association and their respective spouses, and of the owners of any interest in such firm or association and their respective spouses, and of any corporation of which such firm or association or the members or owners and their respective spouses, either individually or in the aggregate, own more than fifty percent of the shares, and of any affiliated or subsidiary corporation of such corporation, and of any other firm and the members thereof and their respective spouses, of which other firm a member or members of the applicant firm or association or their respective spouses are members or owners; .
The employee benefits policies will be both accident and health and life and will be written on a group basis with the partners of the accounting firm and the employees each paying part of the premium. The accounting firm will be the group policyholder and the employees will be the certificateholders. Insofar as the policies are written on the risks of the employees of the accounting firm, the Office of General Counsel agrees with that N.Y. Ins. Law §§ 2103(i)(1)(B) and 2104(d)(3) (McKinney 2000) are not applicable. The statutory limitation is on the property and risks of the members of an applicant firm or association. In the instant case, the risks being insured are those of the employees of the accounting firm who, unlike the accounting firm itself, are not members of the applicant firm, the LLC.2 However, the partners of the accounting firm would also be covered under the policies. Consequently, as members of the LLC (the applicant firm or association), they would come within the purview of the statute and the 10% limitation would apply.
To the extent that these group accident and health and life policies cover the risks of the employees of the accounting firm, rather than risks of the accounting firm itself, a prior opinion dated February 21, 1979 which held that former N.Y. Ins. Law § 114(4) (now N.Y. Ins. Law § 2103(i)(1)(C)) applied to the group insurance business3 written on employees of the parent corporation, is overruled. The analysis rather should be whether the property or risks insured are those of the group policyholder or, as in the instant case, the employees of the group policyholder.
N.Y. Ins. Law § 4224(c) (McKinney 2000) provides in pertinent part:
No such life insurance company and no such savings and insurance bank and no officer, agent, solicitor or representative thereof and no such insurer doing in this state the business of accident and health insurance and no officer, agent, solicitor or representative thereof, and no licensed insurance broker and no employee or other representative thereof, and no licensed insurance broker and no employee or other representative of any such insurer, agent or broker, 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 annuity contract or policy of accident and health insurance 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 valuable consideration or inducement whatever which is 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 benefits to accrue on any such policy or contract, or knowingly receive any paid employment or contract for services of any kind, or any valuable consideration or inducement whatever which is not specified in such policy or contract.
The net profits of the LLC will include the commissions received on the sale of the employee benefit policies to the accounting firms. If the accounting firm were to receive 49% of the net profits of the LLC, a portion of that amount would be derived from the commissions earned on the employee benefit policies. This is valuable consideration and would be a rebate of premium to the partners in the accounting firm, as would the 1% net profit to the principal of the accounting firm who is also the sub-licensee of the LLC. The statute prohibits the LLC from rebating premium and also prohibits the accounting firm and the sub-licensee principal of the accounting firm from receiving the rebate.
The Department believes that the solution that you suggested, deducting the amount of commissions from the net profits and distributing it to the other members of the LLC before any other distribution is made would not be acceptable. The statute prohibits an agent or broker from giving any valuable consideration, whether directly or indirectly, as an inducement to insure. Before distributing net profits, part of the commission would likely be used for the benefit of the LLC.4 By increasing the value of the LLC, the members would also be benefited in that they would be members of a more valuable LLC. Accordingly, this solution would still be seen as an inducement, used by the LLC, to have the accounting firm use the LLC for procuring its employee benefits insurance policies. Accordingly, the LLC is foreclosed from receiving a commission on this business. The insurer providing these policies would be required to charge the filed rate and could not reduce the premium to reflect that it would not be paying a commission on the business.
For further information you may contact Supervising Attorney Joan Siegel at the New York City Office.
1 The premium will be paid by both the employer and the employees.
2 This result might be different if the employer were obligated to provide this coverage for its employees.
3 The opinion distinguished between a group policy and an individual policy issued to and paid for by the employees in which case there would be no limitation imposed.
4 For example, the funds would be used for operating expenses that might include the purchase of new computer equipment.