The Office of General Counsel issued the following informal opinion on November 14, 2002, representing the position of the New York State Insurance Department.
Re: Formation of Company to Conduct Business in New York as Title Agent.
Does the proposed title insurance agency arrangement, as outlined below, violate the New York Insurance Law?
Based on the specific set of facts provided, the proposed title insurance agency arrangement does not violate the Insurance Law.
A group of real estate professionals and companies will hold an equity interest in a New York Title Agent ("title agent") as co-owners. The equity interests held by each co-owner will be non-voting and will be purchased for cash. The relevance of pointing out that each co-owners equity interest will be "non-voting" and "purchased for cash" is that the title agent will conduct customary title insurance agent business with the general public and that it will be managed by an owner-management team that is independent of the co-owners. In addition, the cash payment for the non-voting interests evidences that consideration was not accorded to any potential referrals of title insurance policies by any co-owner. In addition, co-owners will not be in a position to influence or control the management and business affairs of the Company.
There is no affirmative obligation of any co-owner to use the title agent in connection with the title insurance policies issued in connection with any of their respective real estate transactions; neither are they obligated to refer any specified amount of title business to the title agent. Each co-owner that obtains title insurance will pay the standard premiums and fees.
The title agent will actively conduct the business of a title insurance agency with the public generally and in connection therewith shall make all required disclosures under the Real Estate Settlement Procedures Act (RESPA). The title agent will distribute dividends to its equity owners, including the co-owners, on the basis of their respective percentage of equity ownership and not the amount of premiums paid by the co-owners. In addition, there will be no agreement regarding the amount of title insurance business each co-owner will refer to the title agent.
The inquirer seeks confirmation that, based on the above facts, referrals of title insurance business by the co-owners to the title agent will not violate the Insurance Law.
N.Y. Ins. Law § 6409(d) (McKinney 2000) provides:
(d) No title insurance corporation or any other person acting for or on behalf of it, shall make any rebate of any portion of the fee, premium or charge made, or pay or give to any applicant for insurance, or to any person, firm, or corporation acting as agent, representative, attorney, or employee of the owner, lessee, mortgagee or the prospective owner, lessee, or mortgagee of the real property or any interest therein, either directly or indirectly, any commission, any part of its fees or charges, or any other consideration or valuable thing, as an inducement for, or as compensation for, any title insurance business. Any person or entity who accepts or receives such a commission or rebate shall be subject to a penalty equal to the greater of one thousand dollars or five times the amount thereof.
Section 6409(d) prohibits a title insurance corporation or anyone acting for or on its behalf from giving, among other things, any rebate or other consideration for the referral of title insurance business to such title insurance corporation or an agent thereof. Specifically, Section 6409(d) prohibits the rebating of any portion of the fee, premium or charge made, or payment to any "applicant for insurance, or to any person, firm, or corporation acting as agent, representative, attorney, or employee of the owner, lessee, mortgagee or the prospective owner, lessee, or mortgagee of the real property or any interest therein." An owner or co-owner, that belongs to one of the categories above, is prohibited by Section 6409(d) from receiving, in terms of profits, compensation that will be based on a portion of the fees, premiums and charges that emanate from the referrals such owner or co-owner has made to the title insurance corporation or agent. The inquirer stated that the title agent will distribute dividends to its equity owners, including the co-owners, on the basis of their respective percentage of equity ownership and not on the amount of premiums paid by the co-owners or the amount of business they refer to the title agent.
In addition, it is the Departments position that, where an owner or co-owner of a title agent is the sole source of business for such title agent and belongs to one of the prohibited class of persons in Section 6409(d), whatever compensation such owner or co-owner receives from the title agent constitutes a rebate on the title insurance business such owner or co-owner referred to the title agent. According to the facts, the title agent will actively conduct business with the general public, thus, the co-owners will not be the sole source of business for the title agent and there will, in fact, be significant and multiple sources of title insurance business for the title agent. Further, there will be no agreement regarding the amount of title insurance business each co-owner will refer to the title agent.
Based on the specific set of facts provided, there is no violation of Section 6409(d) of the Insurance Law.
For further information you may contact Senior Attorney D. Monica Marsh at the New York City Office.