The Office of General Counsel issued the following informal opinion on November 26, 2002, representing the position of the New York State Insurance Department.
Re: Profit Sharing with an Unlicensed Entity.
Does the proposed insurance agency arrangement, as outlined below, violate the New York Insurance Law?
The proposed insurance agency arrangement would not violate the New York Insurance Law, provided that certain requirements are met.
A licensed insurance agency corporation wants to form a new corporation that would be licensed as an insurance agency. This new corporation would provide property/casualty, life and accident and health insurance products to members of ABC. Both the new corporation and ABC would be stockholders of the new corporation, owning 51% and 49% of the stock respectively. The commissions received by the new corporation would be used to pay the expenses of running the business. If there is a profit at the end of the fiscal year, the surplus may be kept to fund future operations or distributed to the stockholders as dividends.
An unlicensed entity, such as ABC and a licensed agent may become owners of an insurance agency provided that ABC does not act as an insurance agent or broker or share in commissions with the licensee. However, ABC may receive compensation from the new corporation, as an owner, which must be in the form of dividends declared in the usual course of business of the corporation.
N.Y. Ins. Law § 2324 (McKinney 2000 and Supp. 2002) prohibits rebating and discrimination in connection with the sale of property/casualty insurance. That section provides, in relevant part, as follows:
(a) 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 . . .
(b) Within the meaning of subsection (a) hereof, the sharing of a commission with the insured shall be deemed to include any case in which a licensed insurance agent or a licensed insurance broker which is a subsidiary corporation of, or a corporation affiliated with, any corporation insured, received commissions for the negotiation or procurement of any policy or contract of insurance for the insured. . . .
Thus, section 2324 prohibits, among other things, the sharing of commissions with the insured or providing rebates from the premium as an inducement to the making of insurance or after insurance has been effected. The Department has previously held that in situations where, as here, an unlicensed entity forms a corporation that will be licensed as an agency and this entity sells insurance to members of the unlicensed entity, if the commissions earned by the corporation could ultimately inure to the benefit of the insured, this would constitute a violation of section 2324. However, the Department has recently opined that this arrangement would be permissible under section 2324 if the following elements are met:
1. The members of the organization do not receive a known and quantifiable benefit or quid pro quo from any insurance premium savings that may result from the formation of the new corporation.
2. The benefits inure in a manner that is wholly unrelated to the purchase of insurance by the members. i.e., there is no proportionality or relationship between the amount of insurance purchased by an individual member of the organization and the degree of benefit enjoyed by the member.
3. The benefits derived do not, as a practical matter, function as an inducement to purchase or retain insurance.1
The rationale behind this is that in a true rebate scenario, an identifiable quid pro quo exists and this was the evil that the statute was intended to prevent. Consequently, in the instant case, provided that the elements as delineated above are present, the arrangement would be permissible under section 2324.2
In addition, N.Y. Ins. Law § 2103(i)(1)(c) (McKinney 2000) states that the Superintendent may refuse to issue a license to the applicant (the new corporation) if he finds that more than 10% of the aggregate net commissions to be received during the term of the license being applied for will result from insurance on the property or risks of the shareholders of the new corporation that own more than fifty percent of the shares of the new corporation. Specifically, N.Y. Ins. Law § 2103(i)(1)(c) (McKinney 2000) provides, in relevant part, as follows:
(i)(1)The superintendent may require from every applicant and from every proposed sublicensee, before or after issuing any such license, a statement subscribed and affirmed as true by the applicant under the penalties of perjury as to the ownership of any interest in an applicant firm, association or corporation and as to facts indicating whether any applicant has been by reason of an existing license, if any, or will be by reason of the license applied for, receiving any benefit or advantage in violation of section two thousand three hundred twenty-four of this chapter, and also as to such facts as he may deem pertinent to the requirements of this subsection. The superintendent may refuse to issue, suspend or revoke a license, as 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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(C) of the shareholders of an applicant corporation and their respective spouses, and of any affiliated and subsidiary corporations of such applicant corporation, and of any subsidiary and affiliated corporations of a corporation owning any interest in such applicant corporation, and of any firm or association and the members thereof and their respective spouses which either individually or collectively own more than fifty percent of the shares of the applicant corporation, and of any corporation of which such firm or association and its members 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.
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However, in the present case, the new corporation would not be receiving commissions on the property and risks of ABC. Rather, the insurance policies would cover the risks of the members of ABC who themselves are not shareholders of ABC. Additionally, ABC owns less than 50% of the shares of the new corporation. Therefore, there would be no basis on which the Superintendent could refuse to issue a license to the new corporation under section 2103(i)(1)(c).
For further information you may contact Senior Attorney Pascale Joasil at the New York City Office.
1See General Counsel Opinion
2Please note that the same result would be reached under N.Y. Ins. Law § 4224 (McKinney 2000) which prohibits rebating and discrimination in connection with the sale of life and accident and health insurance.