The Office of General Counsel issued the following informal opinion on September 23, 2002, representing the position of the New York State Insurance Department.
Re: Permissible Rebating on Ocean Marine Insurance
May an insurance broker enter into a settlement agreement with an insured without violating New Yorks anti-rebate statute, N.Y. Ins. Law § 2324(a) (McKinney 2000), whereby the insurance broker would return money to the insured because the broker gave an incorrect estimate of ocean marine insurance premium to the insurer, and this error was not realized until after all the premiums had been paid on an installment basis by the insured?
Yes. An insurance broker may enter into a settlement agreement with an insured without violating New Yorks anti-rebate statute, N.Y. Ins. Law § 2324(a) (McKinney 2000), whereby the insurance broker would return money to the insured because the broker gave an incorrect estimate of ocean marine insurance premium to the insurer, and this error was not realized until after all the premiums had been paid on an installment basis by the insured.
An insurance broker sold an ocean marine insurance policy to the insured. The insured overpaid for the insurance due to an error on the brokers part that was not realized until after all the premiums were paid on an installment basis by the insured.
The broker would like to enter into a settlement agreement with the insured wherein the individual broker would return part of the premium paid to the insured from the brokers own pocket due to the brokers error in estimating the premium.
The inquirer would like to know whether or not such a refund would violate the anti-rebating statutes of the N.Y. Insurance Law.
The policy at issue here only covered damages resulting from ocean marine transportation, not manufacturing defects. This is important because the Insurance Law treats these two policies differently under the anti-rebating statutes. This opinion is only concerned with ocean marine insurance.
With respect to property/casualty insurance, N.Y. Ins. Law Section 2324(a) (McKinney Supp. 2002) provides in relevant part:
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. . . . (emphasis added)
According to the express language of Section 2324, insurance agents and brokers are prohibited from directly or indirectly offering rebates or inducements other than an article of merchandise not exceeding $15 in value, in connection with the sale of insurance, when such rebates or inducements are not specified in the policy or contract of insurance.
However, N.Y. Ins. Law Section 2324(e) (McKinney Supp. 2002) lists certain exceptions to the applicability of the anti-rebating rule stated above, and provides as follows:
This section shall not apply to any policy or contract of reinsurance nor to any contract or policy of life insurance, accident insurance or health insurance which is subject to the provisions of section four thousand two hundred twenty-four of this chapter, nor to any contract or policy of marine insurance, other than contracts or policies of automobile insurance, or of marine protection and indemnity insurance, nor to any insurance contract, or rate of insurance in connection with any insurance contract either against loss or damage to, or legal liability in connection with, any property located wholly outside of this state or any activity carried on outside of this state or any motor vehicle or aircraft principally garaged and used outside of this state. (emphasis added)
In light of the above section 2324(e), ocean marine insurance is exempted from the applicability of section 2324(a), the anti-rebating statute for property/casualty insurance. Therefore, in this specific circumstance, the broker may enter into a settlement agreement with the insured and refund partial monies for overpayment of premium.
For further information, you may contact Senior Attorney Meredith S. Kaufer at the New York City Office.
1 Because section 2324(a) did not apply here, we did not address the issue of whether the broker could have actually given a refund in the form of a settlement under circumstances when section 2324(a) does apply.