The Office of General Counsel issued the following informal opinion on October 24, 2001, representing the position of the New York State Insurance Department.
Re: Proposal by XYZ to Form a Not-for-profit Corporation to Act as its Insurance Broker.
1) May ABC, a not-for-profit corporation wholly owned by XYZ, a municipal cooperative formed by public school districts pursuant to §119-o of the N.Y. Gen. Mun. Law (McKinney 1999), be issued an insurance brokers license under the N.Y. Ins. Law to act as the insurance broker for the group accident and health insurance policies under XYZs cooperative employee benefits programs which insurance covers school district employees, retirees and families?
2) Would it constitute an improper rebate of premium under § 4224 of the N.Y. Ins. Law (McKinney 2000) for an insurer to pay, and ABC to receive, commissions upon group accident and health insurance policies that cover school district employees, retirees and families?
1) Yes, ABC may be licensed if it is competent and otherwise qualified to hold such a license under N.Y. Ins. Law § 2104 (McKinney 2000).
2) No, neither the payment nor receipt of such commissions constitutes an improper rebate of premium under § 4224 of the N.Y. Ins. Law (McKinney 2000).
XYZ is an unincorporated association of over fifty-five New York public school districts (the "Members") that became operational in 1998 under a cooperation agreement as a municipal cooperative pursuant to the authority conferred by § 119-o of the N.Y. Gen. Municipal Law. The inquirer describes how XYZ acts on a nonprofit basis to enable the school districts to work cooperatively on their employee benefits programs in order to provide better information, pricing, products, and services to the members, employees, and taxpayers. The instant inquiry has to do with XYZs desire to gain more effective control than it currently has over the group accident and health insurance which is part of the cooperative employee benefits programs.
The XYZ Coordinator, DEF has been performing consulting work for XYZ, including a due diligence search for accident and health insurance and would continue to do consulting work for XYZ. XYZ has not yet purchased accident and health insurance on a group basis, but instead it has arranged for individual purchases by Members, with the insurance rated on a group basis. It intends to purchase group insurance policies in the future. Although DEF has so far been designated as the producer of record for the insurance policies issued to some school districts as an interim measure, it does not wish to act in that capacity in the future.
As XYZ moves towards purchasing group accident and health insurance, it wishes to gain more control over the insurance portion of the cooperative employee benefits plans. In order to accomplish this end XYZ proposes to form its own dedicated insurance producer as a not-for-profit, tax-exempt, corporation by the name of ABC. ABC would be wholly owned by XYZ and be licensed in New York as an insurance broker. It would investigate the best insurance options for XYZ and be the producer of record on all the group accident and health insurance policies issued under the cooperative employee benefits program.
ABC would not have any start-up capital when it is incorporated and it would have no employees. John Doe, a Vice President of DEF, is on the XYZ board of directors as a non-voting member acting in the capacity of Secretary of the Board. It is intended that when ABC is formed that John Doe would hold a similar position with ABC and be the sole sub-licensee for purposes of its insurance broker license. ABC would be designated by the school districts as the broker of record on the insurance policies.
The insurance commissions and other fees ABC would receive from insurance companies that would write the group insurance under the cooperative employee benefits programs will be retained by ABC and be used entirely to pay negotiated fees to product and service providers hired to perform the following services for XYZ and its Members:
Consolidated billing and common-remittance services;
Administrative, regulatory, and tax compliance services;
Consulting, coordinating, accounting, auditing, and legal services;
Educational seminars for school districts and their employees;
Exploration and research on best employee benefits products and services.
The product and service providers will be selected by XYZ and be hired by ABC. As to the insurance-related services they would perform, including insurance billing, contacting insurance companies and presenting insurance proposals to XYZ (duties previously performed by the Members themselves) the product and service providers would be paid on a fee-for-services basis by ABC. All of the insurance commissions earned by ABC will be used by ABC to pay the selected product and service providers for the services (insurance-related and others) bulleted above.
XYZ is seeking legal advice from its own counsel as to its authority, as a tax-exempt nonprofit association that is a municipal cooperative, to form ABC as a not-for-profit, tax-exempt, corporation.
This Department cannot advise XYZ as to whether it has the legal authority to incorporate ABC as a not-for-profit corporation. This is a matter upon which XYZ is appropriately seeking legal advice from its own counsel. However, this Department will address the insurance issues raised by XYZ proposal. The Insurance Department, for purposes of this response only, will assume that XYZ can form ABC, as it has proposed.
N.Y. Ins. Law § 2101(c) (McKinney 2000) defines "insurance broker", in pertinent part, as follows:
(c) In this article, insurance broker means any person, firm, association or corporation who or which for any compensation, commission or other thing of value acts or aids in any manner in soliciting, negotiating or procuring the making of any insurance or annuity contract or in placing risks or taking out insurance, on behalf of an insured other than himself or itself [Emphasis added]
Under § 2104 of the N.Y. Ins. Law (McKinney 2000) the Superintendent may issue an insurance brokers license to any corporation which is deemed by him to be trustworthy and competent to act as a broker, which is qualified to act as an insurance broker and which has complied with the statutory requirements for licensure. The Superintendent of Insurance has wide discretion in licensing insurance brokers. Nash v. Stewart (Sup.Ct., A.D. 3d Dept.,1968) 31 A.D.2d 564, 294 N.Y.S.2d 1025, app. den. 23 N.Y.2d 643, 298 N.Y.S.2d 1025.
Section 2104(d)(3) of the N.Y. Ins. Law (McKinney 2000) provides that under specified circumstances the Superintendent has the authority to refuse to issue a license. The statute provides, as follows:
(3) 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. [Emphasis added]
Of relevance to the instant inquiry is insurance on the property and risks enumerated in § 2103(i)(1)(C) of the N.Y. Ins. Law (McKinney 2000) which provides, in pertinent part, as follows:
(C) of the shareholders of an applicant corporation and their respective spouses, [Emphasis added]
Under N.Y. Ins. Law § 2104(d)(3) (McKinney 2000) the Superintendent could refuse to issue a license to applicant ABCif he finds that more than ten percent of the aggregate net commissions to be received during the term of the license being applied for will result from insurance on the property and risks of XYZ, the sole shareholder. However, under the proposal, ABC would not be receiving commissions upon insurance of the property and risks of XYZ. The insurance policies do not cover the property or risks of XYZ. Rather, the insurance policies cover the risks of the employees, retirees and the families of its Members. Therefore, under the facts there would be no basis on which the Superintendent could turn down the corporate licensing application of ABC under N.Y. Ins. Law § 2104(d)(3) (McKinney 2000).
This office took a similar position in an opinion dated April 5, 2001 which concluded that an accounting firm that owned forty-nine percent of an LLC seeking licensure as an insurance agent and broker can place its employee insurance benefits coverage through the agent and broker without violating N.Y. Ins. Law §§ 2103(i)(1)(B) or 2104 (McKinney 2000) because the group accident and health policies therein covered the risks of the employees of the accounting firm (the group policyholder) and not the risks of the accounting firm itself. Using a similar analysis, namely whether the property or risks insured are those of the shareholder of the applicant corporation, we conclude that the criteria contained in § 2103(i)(1)(C) have not been met in the instant situation.
N.Y. Ins. Law § 4224 (McKinney 2000) proscribes certain activities as rebating for purposes of life, accident and health insurance. Subdivision (c) provides, in pertinent part, as follows:
(c) No such life insurance company and no such insurer doing in this state the business of accident and health insurance . shall pay, allow or give, or offer to pay, allow or give, directly or indirectly, as an inducement to any person to insure, .or 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 for services of any kind, or any valuable consideration or inducement whatever which is not specified in such policy or contract. [Emphasis added]
The foregoing statute is identical in its prohibitions to those contained in N.Y. Ins. Law § 2324 which is applicable to property and casualty insurance. In an opinion dated February 26, 2001, arising under § 2324 of the N.Y. Ins. Law (McKinney 2000), this office concluded that there was no known and quantifiable benefit, or quid pro quo, to the members of the credit union where a licensed employee of an unlicensed entity wholly owned by the credit union and acting as an insurance broker, sold insurance in connection with loans made by the credit union to the members (who are also owners of the credit union) and, therefore, no prohibited rebating.
Similarly, it is our conclusion that where group accident and health insurance policies are issued under cooperative employee benefits programs of the members of a municipal cooperative, the same considerations as were taken into account in the February 26, 2001 opinion apply to the instant situation as well. While the commissions would inure to the benefit of XYZ and its Members they do not inure directly to the benefit of the employees, retirees and family members. The services that would be paid for by the insurance commissions earned by ABC. would be used to hire product and service providers to perform services (insurance-related and otherwise) to benefit XYZ and the Members directly and not the employees, retirees and families. These individuals would not benefit in any quantifiable fashion from any insurance premium savings that may result from the new insurance purchasing mechanism that XYZ wishes to establish through the formation of ABC. Any such benefits inure in a manner wholly unrelated to the purchase of insurance by any given employee, i.e., there is no proportionality or relationship between the amount of insurance purchased by an employee, retiree or family member and the degree of benefit, if any, from the use of the commission monies to pay fees for the services specified which benefit XYZ and its Members. There is no quid pro quo, as between the insureds and the insurance company(s), for the placement of the insurance.
The proposed arrangement may affect, but not in any quantifiable fashion, the insurance expenses of the XYZ cooperative employee benefit programs. Any benefit derived simply does not, as a practical matter, function as an inducement to purchase or retain insurance. Neither does the proposed arrangement involve the payment of a valuable consideration or inducement to the insured employees, retirees and family members not stated in the insurance policy. No prohibited rebating or other violation of N.Y. Ins. Law § 4224 (McKinney 2000) would occur should the proposal go forward.
In conclusion, ABC may be licensed as an insurance broker and XYZs proposal would not result in a violation of the anti-rebating statute of the N.Y. Insurance Law.
For further information, you may contact Associate Attorney Barbara A. Kluger at the New York City office.