The Office of General Counsel issued the following informal opinion on March 27, 2002, representing the position of the New York State Insurance Department.
RE: Proposed Fertility Warranty Agreement.
1) Is a company that issues the proposed fertility warranty agreement in New York State thereby doing an insurance business within the meaning of the New York Insurance Law?
2) If the proposed fertility warranty agreement is an insurance contract within the meaning of the New York Insurance Law, does it constitute an authorized kind of insurance that may be written in New York State?
3) May the proposed fertility warranty agreement be sold in New York State through a purchasing group whose members are patients receiving infertility treatments through the ABC Insurance Fund physician network program?
1) Yes, the proposed fertility warranty agreement constitutes an insurance contract and a company that issues the proposed fertility warranty agreement in New York State is thereby doing an insurance business within the meaning of the New York Insurance Law.
2) No, although the proposed fertility warranty agreement constitutes accident and health insurance under N.Y. Ins. Law § 1113(a)(3) (McKinney 2000), it can not be written in New York because it is conditioned on the failure of a treatment to work and, as such, is against public policy.
3) No, the proposed fertility warranty agreement can not be sold in New York State through a purchasing group because such insurance contracts do not constitute liability insurance under either the federal Liability Risk Retention Act, 15 U.S.C. § 3901(a)(1) and (2) (2001) or Article 59 of the N.Y. Ins. Law, § 5902(g) and (h) (McKinney 2000).
The elements of the inquirers proposal may be summarized as follows. The inquirer formed and owns a corporation, the ABC Insurance Fund ("ABC"). ABC will establish a network of physicians who are certified Reproductive Endocrinologists and establish treatment protocols. ABC will solicit bids from drug manufacturers to provide their drugs at a stated price to mail-order pharmacies for use within the network and ABC will receive a commission from the drug companies on the sale of the drugs prescribed for the patients, which drugs are included in ABCs formulary. The commission money will be used to fund the ABC "warranty" program.
The network patient would be given the opportunity to purchase a fertility warranty agreement issued by an insurance company through a purchasing group. The inquirer describes the proposed fertility warranty agreement as an insurance product, in the nature of an insurance certificate under a group insurance policy. A draft of the fertility warranty agreement provides that:
The terms of the "warranty" are as follows: Patients who are undergoing infertility treatment and fail to get pregnant after 3 cycles of treatment within 16 months will be paid the following benefit [the draft Fertility Warranty calls this "the Stated Benefit Amount"]. For patients 37 years old or younger who are undergoing IVF 9 invitro fertilization) treatment the benefit is $350; for OI (ovulation induction) $275; and for patients between the ages of 38 and 43, $200. The benefit is paid to the patient provided that: 1. The patients [sic] is screened for acceptance by a participating physician, 2. The patient undergoes treatment using qualified drug (one on our formulary), and 3. The patients [sic] fails to test positive for pregnancy within 60 days of the expiration date of the warranty.
The insurance company would pay qualifying patients the stated benefit should the treatment be unsuccessful.
Under the proposed ABC program, the fertility warranty agreement would be written through a purchasing group, which will be owned by the inquirer but whose members would be the infertility patients in the ABC program. The purchasing group will provide the insurance element of the proposal, the fertility warranty agreement. Either ABC or a corporation that the inquirer will form, XYZ Corporation ("XYZ"), will act as an insurance agent for the purchasing group in collecting the premium money from purchasing group members and paying them to the insurance company. The inquirer states that "the issuing carrier" of the proposed fertility warranty agreement will be licensed to do an insurance business in the State of New York, but this could change if the business can be done on an excess line basis. The inquirer would set the insurance premium at $25 per patient, based on a rough estimate. The inquirer states that there is no valid statistical data on the success rates of infertility treatments upon which the insurance premium may be set on an actuarial basis. The inquirer further states that an unnamed insurance company that the inquirer contacted seemed interested in this business, even though it had no idea what kind of insurance it would constitute. The business, however, would be reinsured one hundred per cent by an existing Bermuda reinsurer that the inquirer owns.
The stated benefit under the proposed fertility warranty agreement amounts to a lump sum payment that represents a partial refund to the patient of some of the cost of the drugs used in the therapy but only where the infertility treatment does not result in a pregnancy.
Doing an insurance business
The totality of the proposal must be assessed in order to determine whether the issuance of the Fertility Warranty agreement would constitute the doing of an insurance business in New York State. What constitutes "doing an insurance business" in New York State is delineated in N.Y. Ins. Law § 1101(b)(1) (McKinney 2000). It provides, in pertinent part, as follows:
(b)(1) Except as provided in paragraph two three or three-a of this subsection, any of the followings acts in this state, effected by mail from outside this state or otherwise, by any person, firm, association, corporation or joint-stock company shall constitute doing an insurance business in this state and shall constitute doing business in the state within the meaning of section three hundred two of the civil practice law and rules:
(A)making, or proposing to make, as insurer, any insurance contract, including either issuance or delivery of a policy or contract of insurance to a resident of this state . or solicitation of applications for any such policies or contracts;
(B)making, or proposing to make, as warrantor, . any contract of warranty, . as a vocation and not as merely incidental to any other legitimate business or activity of the warrantor, ;
(C)collecting any premium, membership fee, assessment or other consideration for any policy or contract of insurance;
The term "insurance contract," for purposes of the N.Y. Insurance Law is defined in N.Y. Ins. Law § 1101(a)(1) (McKinney 2000) as follows:
(1)"Insurance contract" means any agreement or other transaction whereby one party, the "insurer", is obligated to confer benefit of pecuniary value upon another party, the "insured" or "beneficiary", dependent upon the happening of a fortuitous event in which the insured or beneficiary has, or is expected to have at the time of such happening, a material interest which will be adversely affected by the happening of such event.
The foregoing statute goes on to define other key terms associated with the concept of "insurance contract", as follows:
(2)"Fortuitous event" means any occurrence or failure to occur which is, or is assumed by the parties to be, to a substantial extent beyond the control of either party.
(3)"Contract of warranty, guaranty or suretyship" means an insurance contract only if made by a warrantor, guarantor or surety who or which, as such, is doing an insurance business.
In evaluating the proposal, the fact that the inquirer chose to refer to the agreement between the insurance company and the patient as a "warranty" is not determinative of whether the agreement is appropriately characterized under the Insurance Law as a warranty. While the Insurance Law does not define the term "warranty," a warranty generally relates in some way to the nature or efficiency of a product or service. Commonly, the warrantor agrees to repair or replace a poorly performing product. Ollendorf Watch Co., Inc. v. Pink, 279 N.Y. 32, 17 N.E. 2d 675 (1938). The proposed fertility warranty agreement is not a warranty because it does not relate to the efficacy of the infertility drugs used in the course of the selected infertility treatment, nor does it relate to the effectiveness of the physicians treatment.
The fertility warranty agreement obligates the issuing insurance company to pay a fixed sum of money to the infertility patient to whom the agreement is issued should the fertility treatment (part of which involves taking a drug) that she undergoes fail to result in a pregnancy within a specified time. The inability of the person who purchases the proposed fertility warranty agreement to become pregnant without medical intervention constitutes a fortuitous event within the meaning of the statute. The fact that the person is infertile is substantially beyond the control of either the patient or the insurance company. Furthermore, an infertility patients interest in achieving a pregnancy is a material interest under the New York Insurance Law, which would be adversely affected by the failure to become pregnant after receiving the infertility treatments.
Therefore, we conclude that the proposed fertility warranty agreement is an insurance contract and its issuance in New York State constitutes the doing of an insurance business within the meaning of the New York Insurance Law.
Is the proposed fertility warranty agreement an authorized kind of insurance that may be written in New York State?
Only those authorized kinds of insurance that are delineated in N.Y. Ins. Law § 1113(a) (McKinney 2000) may be written by insurance companies licensed to do such business in New York State. Accident and health insurance is defined in N.Y. Ins. Law § 1113(a)(3)(McKinney 2000) which provides as follows:
(3)"Accident and health insurance," means (i) insurance against death or personal injury by accident or by any specified kind or kinds of accident and insurance against sickness, ailment or bodily injury,
Infertility coverage generally comes within the foregoing statutory definition in that it provides insurance against the treatment of infertility.
In response to the inquirers question on this point, accident and health insurance can not be written in New York State by an unauthorized insurer through a New York licensed excess line broker because, under N.Y. Ins. Law § 2105(a) (McKinney 2000), the authority of excess line brokers to place insurance with unauthorized insurers does not include accident and health insurance, except in very limited circumstances not relevant here.
The coverage afforded under the proposed fertility warranty agreement is much more limited than infertility coverage that has been approved by the Department, in that it only provides a lump sum payment that covers a minimal part of the cost of the treatments. Further, this coverage is only provided should the medical treatment fail to result in a pregnancy. The payment of minimal insurance benefits for the consequences of medical treatment, not the treatment itself, is not an authorized kind of insurance that can be written in New York State because it is the Departments determination that this type of coverage is against public policy.
In response to a liability insurance availability crisis, Congress enacted into law in 1981 the Product Liability Risk Retention Act, which was amended in 1986 to broaden its reach to other kinds of commercial liability insurance. Today, the law is known as the federal Liability Risk Retention Act of 1986 ("LRRA"), 15 U.S.C. §§ 3901- 3006 (2001). New York enacted Article 59 of the New York Insurance Law in 1988 (N.Y. Ins. Law §§ 5901 5913 (McKinney 2000)), conforming New York Law to the LRRA. Under both the LRRA and Article 59, group liability insurance, as defined therein, may be purchased from an insurer on a group or quasi-group basis through a purchasing group. "Purchasing group" is defined in § 3901(a)(5) of the LRRA as follows:
(3)"purchasing group" means any group which -
(A)has as one of its purposes the purchase of liability insurance on a group basis;
(B)purchases such insurance only for its group members and only to cover their similar or related liability exposure, as described in subparagraph (C);
(C)is composed of members whose businesses or activities are similar or related with respect to the liability to which members are exposed by virtue of any related, similar, or common business, trade, product, services, premises, or operations; and
(d)is domiciled in any State.
A parallel provision is contained in N.Y. Ins. Law § 5902(m) (McKinney 2000).
A purchasing group is a mechanism for the purchase of liability insurance from an insurance company on a group basis. The LRRA and Article 59 of the New York Insurance Law applies only to liability insurance as defined in these laws. Both words contained in the name are separately defined in 15 U.S.C. § 3901(a)(1) and (2), which provides as follows:
(1)"insurance" means primary insurance, excess insurance, reinsurance, surplus lines insurance, and any other arrangement for shifting and distributing risk which is determined to be insurance under applicable State or Federal law;
(A)means legal liability for damages (including costs of defense, legal costs and fees, and other claims expenses) because of injuries to other persons, damage to their property, or other damage or loss to such other persons resulting from or arising out of -
(i) any business (whether profit or nonprofit), trade, product, services (including professional services), premises or operations, or
(ii) any activity of any State or local government, or any agency or political subdivision thereof; and
(B)does not include personal risk liability and an employers liability with respect to its employees other than legal liability under the Federal Employers Liability Act (45 U.S.C. § 51 et seq.);
The definition of these terms, which is contained in N.Y. Ins. Law § 5902(g) and (h), is virtually identical to the definitions contained in the LRRA except that the insurance definition relates to that which is determined to be insurance under the laws of New York State.
The purchasing group mechanism is not available as an option for the coverage of infertility patients under the proposal because the proposed fertility warranty agreement does not constitute liability insurance within meaning of either the LRRA or Article 59 of the New York Insurance Law. The agreement does not cover the legal liability of anyone for damages because of injuries to other persons resulting from or arising out of any business or services. Those who participate in the ABC program and purchase the proposed fertility warranty agreement do not constitute acceptable members of a purchasing group because they are not engaged in any business to which the insurance relates nor does the policy cover the liability of any person. Therefore, the criteria for establishing a purchasing group are not present. Accordingly, the proposed fertility warranty agreement can not be sold in New York State through a risk retention purchasing group.
For further information, you may contact Associate Attorney Barbara A. Kluger at the New York City office.