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 August 30, 2002, representing the position of the New York State Insurance Department.

RE: NY Ins. Law §§ 2324 and 4224 - Inducement to Purchase Insurance

Question Presented:

May a company that is licensed as an insurance broker in New York, which also sells non-insurance-related services (such as payroll and benefits administration services), charge a lower fee to its insurance brokerage customers for such non-insurance-related services than it charges its customers who purchase the non-insurance-related services but not the insurance brokerage services?

Conclusion:

A company that is licensed as an insurance broker in New York, which also sells non-insurance-related services (such as payroll and benefits administration services), may not make a distinction in the fees it charges for its non-insurance-related services based on whether or not the customer also purchases the insurance brokerage services. However, such insurance broker is not prohibited from making a distinction in the fees it charges for its non-insurance-related services where such distinction is based on the type and amount of non-insurance-related services it provides to a particular customer.

Facts:

A licensed insurance broker, in addition to its insurance brokerage services, provides non-insurance-related services for a fee. Such non-insurance-related services were described as "human resource services, such as payroll, health and retirement benefits administration and employee training."

The insurance broker "provides its customer with integrated payroll and benefits administration services. It has developed sophisticated proprietary software that allows its clients to deliver benefits, payroll, vacation and other employment information to their employees when and how the employees need that information . . . via a user-friendly interface available at the employees’ desks." The insurance broker sells such services to both its insurance brokerage customers and others who do not purchase the insurance brokerage services. When a customer purchases only the non-insurance-related services, this insurance broker provides such services through the customer’s own insurance broker.

The insurance broker contends that it is less cost effective and more time consuming to provide its non-insurance-related services through a customer’s own insurance broker because delays and errors result from communications being relayed through an additional party (the customer’s own insurance broker). The insurance broker also contends that it is unable to efficiently maintain its customers’ benefits records when working through another insurance broker.

The insurance broker is considering offering two different pricing structures for its non-insurance-related services, whereby the insurance brokerage customers would be charged less for such services than customers who only purchase the non-insurance-related services. The insurance broker asserts that such pricing structure is based on the higher costs that it incurs due to inefficiencies experienced in providing its non-insurance-related services through a customer’s own insurance broker.

Analysis:

N.Y. Ins. Law § 2324(a) (McKinney 2002 Pocket Part), which applies to contracts of property/casualty insurance, states:

No authorized insurer, no licensed insurance agent, no licensed insurance broker, and no employee or other representative of any such insurer, agent or broker shall make, procure or negotiate any contract of insurance other than as plainly expressed in the policy or other written contract issued or to be issued as evidence thereof, or shall directly or indirectly, by giving or sharing a commission or in any manner whatsoever, pay or allow or offer to pay or allow to the insured or to any employee of the insured, either as an inducement to the making of insurance or after insurance has been effected, any rebate from the premium which is specified in the policy, or any special favor or advantage in the dividends or other benefit to accrue thereon, or shall give or offer to give any valuable consideration or inducement of any kind, directly or indirectly, which is not specified in such policy or contract, other than any article of merchandise not exceeding fifteen dollars in value which shall have conspicuously stamped or printed thereon the advertisement of the insurer, agent or broker, or shall give, sell or purchase, or offer to give, sell or purchase, as an inducement to the making of such insurance or in connection therewith, any stock, bond or other securities or any dividends or profits accrued thereon, nor shall the insured, his agent or representative knowingly receive directly or indirectly, any such rebate or special favor or advantage, provided, however, a licensed insurance agent or a licensed insurance broker may retain the usual commission or underwriting fee on insurance placed on his own property or risks, if the aggregate of such commissions or underwriting fees will not exceed five percent of the total net commissions or underwriting fees received by such licensed insurance agent or insurance broker during the calendar year. (emphasis added)

N.Y. Ins. Law § 4224(c) (McKinney 2000), which applies to contracts of life insurance, and accident and health insurance, states:

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 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 stocks, bonds, or other securities, or any dividends or profits accruing or to accrue thereon, 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, 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. (emphasis added)

Hence, an insurance broker licensed in New York is prohibited from offering or giving as an inducement, or interdependent with any policy, any valuable consideration that is not specified in a policy or contract of property/casualty, life, or accident and health insurance to its insurance brokerage customer, except that with respect to making, negotiating or procuring a property/casualty insurance policy, an insurance broker may give its customer an article of merchandise not exceeding fifteen dollars in value that has conspicuously stamped or printed thereon the advertisement of the broker.

The pricing discount that the subject insurance broker wishes to provide on its non-insurance-related services to its insurance brokerage customers constitutes an inducement or valuable consideration because the discount is provided to all insurance brokerage customers regardless of the actual expenses incurred in providing such service. The discounted price of the non-insurance-related services would act as an inducement to customers to also purchase the insurance brokerage services, which is prohibited under N.Y. Ins. Law §§ 2324(a) and 4224(c).

An insurance broker, however, is not prohibited under the New York Insurance Law from making a distinction in the fees it charges for its non-insurance-related services where such distinction is based on a factor other than the insurance status of the customer; for example, if the distinction was based on the type and amount of non-insurance-related services provided to a particular customer. Hence, if the insurance broker finds that it expends more time in providing its non-insurance-related services for a particular customer, it may price the service for that particular customer accordingly. What an insurance broker may not do is make a discount available to only its insurance brokerage customers.

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