New York State Seal
STATE OF NEW YORK
INSURANCE DEPARTMENT
25 BEAVER STREET
NEW YORK, NEW YORK 10004

George E. Pataki
Governor

Gregory V. Serio
Superintendent

The Office of General Counsel issued the following informal opinion on April 29, 2004, representing the position of the New York State Insurance Department.

Re: Credit Property Insurance

Question Presented:

Does the New York State Insurance Law prohibit a bank from acting as a creditor and owning an insurance agency that receives commissions on the sale of credit property insurance that is required by the creditor to protect the creditor’s security interest in personal property?

Conclusion:

The New York Insurance Law does not prohibit a bank from acting as a creditor and owning an insurance agency that receives commissions on the sale of credit property insurance that is required by the creditor to protect the creditor’s security interest in personal property, subject to certain percentage limitations on commissions earned from such business.

Facts:

ABC bank owns 100% of JJJ insurance agency, a New York licensed insurance agent. ABC bank conditions personal automobile loans upon the purchase of credit property insurance by the debtor against the loss or damage to the automobile, covering ABC bank’s security interest in such property. ABC bank offers debtors the option of purchasing the credit property insurance through JJJ insurance agency or to furnish a valid policy by an insurer authorized to do an insurance business in this state.

Analysis:

N.Y. Ins. Law § 2502 (McKinney 2000 & Supp. 2004) states in pertinent part:

(a)(1) No person, firm, or corporation engaged in the business of financing the purchase of real or personal property, lending money on the security thereof, or servicing a mortgage thereon, and none of its trustees, directors, officers, agents or other employees, shall require, as a condition precedent to financing any such purchase or making any such loan or renewing or extending any such loan or mortgage or performing any other act in connection therewith, that the person, firm or corporation for whom the transaction is undertaken negotiate any policy of insurance or renewal thereof covering such property through a particular insurance company, agent or broker.

(2) Banks, trust companies, savings banks, savings and loan associations, federal savings associations and national banks shall not extend credit, lease or sell property of any kind, or furnish any services, or fix or vary the consideration for any of the foregoing, on the condition or requirement that the customer obtain insurance from the bank, trust company, savings bank, savings and loan association, federal savings association or national bank, its affiliate or subsidiary, or a particular insurer, agent or broker, provided, however, that this prohibition shall not prevent any bank, trust company, savings bank, savings and loan association, federal savings association or national bank from engaging in any activity described in this subdivision that would not violate section 106 of the Bank Holding Company Act Amendments of 1970, as interpreted by the Board of Governors of the Federal Reserve System. This prohibition shall not prevent a bank, trust company, savings bank, savings and loan association, federal savings association or national bank from informing a customer that insurance is required in order to obtain a loan or credit, that loan or credit approval is contingent upon the customer's procurement of acceptable insurance, or that insurance is available from the bank, trust company, savings bank, savings and loan association, federal savings association or national bank; provided, however, that the bank, trust company, savings bank, savings and loan association, federal savings association or national bank shall also inform the customer in writing that his or her choice of insurance provider shall not affect the bank, trust company, savings bank, savings and loan association, federal savings association or national bank's credit decision or credit terms in any way. Such disclosure shall be given prior to or at the time that a bank, trust company, savings bank, savings and loan association, federal savings association national bank or person selling insurance on the premises thereof solicits the purchase of any insurance from a customer who has applied for a loan or extension of credit.

N.Y. Banking Law § 357 (McKinney 2001) states:

1. The licensee may require a borrower, on loans of two hundred and fifty dollars or more, excluding insurance premiums and precomputed interest, to insure tangible personal property, except household goods, taken as security for a loan against any substantial risk of loss, damage or destruction for an amount not to exceed the lesser of the reasonable value of the property insured or the principal amount of the loan, and for the customary insurance term approximating the term of the loan contract. The policy may insure the interest of the borrower as well as the interest of the licensee. A policy covering a motor vehicle securing the loan may also insure the borrower against liability for bodily injury and property damage, but such liability insurance shall be at the option of the borrower and shall not be required by the licensee. The premiums for all such insurance shall not exceed the premiums chargeable in accordance with rate filings made with the superintendent of insurance for such insurance by the insurer. Such insurance shall be written by, or through, a duly licensed insurance agent or broker, or shall be provided directly by a company qualified to do business in this state.

2. For purposes of this section, the term "household goods" shall mean clothing, furniture, appliances, one radio and one television, linens, china, crockery, kitchenware, and personal effects (including wedding rings) owned by the consumer and his or her dependents, but shall not include works of art, other electronic entertainment equipment, items acquired as antiques, and other jewelry.

3. When a licensee provides credit life insurance, credit accident and health insurance, or credit unemployment insurance, or credit property insurance pursuant to section two thousand three hundred forty of the insurance law, or any combination thereof with respect to one or more borrowers, such licensee may collect from the borrower a premium or identifiable charge which shall not exceed the premium rates or identifiable charges chargeable in accordance with rate filings made with the superintendent of insurance for such insurance by the insurer, subject to a refund of the insurance charge computed as provided in paragraph (a) of subdivision five of section three hundred fifty-one of this article, in the event of prepayment by cash, a new loan, refinancing or otherwise. Only one such amount may be collected in connection with any loan contract irrespective of the number of obligors and only one obligor need be insured.

Based upon the facts provided, N.Y. Banking Law § 357 permits ABC bank to require a borrower of automobile loans of $250 or more, to insure the automobile for an amount not to exceed the lesser of the reasonable value of the property insured or the principal amount of the loan, and for the customary insurance term approximating the term of the loan contract. Premiums for such insurance must comply with rate filings approved by the Superintendent for such insurance and such policies may be sold by JJJ insurance agency, which is a duly licensed insurance agent. Under N.Y. Ins. Law § 2502 (McKinney 2000 & Supp. 2004), ABC bank may not condition the extension of its automobile loans to customers upon the purchase of insurance through JJJ insurance agency or any other particular insurance company, agent, or broker. However, ABC bank is not prohibited from informing a customer that insurance is required in order to obtain a loan or credit, that loan or credit approval is contingent upon the customer's procurement of acceptable insurance, or that insurance is available from the bank through JJJ insurance agency. N.Y. Ins. Law § 2115(a)(1) permits the bank to refer the customer to JJJ insurance agency, provided that the bank does not discuss specific insurance policy terms and conditions of the credit property insurance and does not receive compensation for the referral of the customer to any agent based upon the purchase of insurance. N.Y. Ins. Law § 2116 contains the same conditions with respect to referrals to brokers as well. Section 2502(a)(2) requires ABC to inform the customer in writing that his or her choice of insurance provider will not affect the ABC bank’s, credit decision or credit terms in any way. ABC bank is required to make this disclosure prior to or at the time that it solicits the purchase of any insurance from a customer who has applied for an automobile loan.

N.Y. Comp. Codes R. & Regs. tit 11, § 186.3 through § 186.7 (2002) detail the disclosure requirements of N.Y. Ins. Law § 2502.

While it is clear that the New York Insurance Law and New York Banking Law do not prohibit ABC bank from acting as a creditor and owning an insurance agency that receives commissions on the sale of credit property insurance required by the creditor to protect the creditor’s security interest in personal property, N.Y. Ins. Law § 2324 and 2103(i) limit the commissions that can be earned by JJJ insurance agency from business with all of its affiliates.

N.Y. Ins. Law § 2324 (McKinney 2000 & Supp. 2004) states in pertinent part:

(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, 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.

(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.

Based upon the facts provided, JJJ insurance agency may earn commissions covering the property and risks of its parent corporation, ABC bank, but these commissions may not exceed five percent of total commissions received by JJJ insurance agency.

The five percent limitation, however, applies only to commissions on insurance business subject to the prohibitions of § 2324. N.Y. Ins. Law § 2324(e) states that § 2324 does not apply to "any insurance contract, or rate of insurance in connection with, any property located wholly outside of this state." Moreover, the percentage limitation in §2324 does not apply to commissions earned by the agent or broker in another state pursuant to the authority of a license issued to an agent or broker by such other state. The limitations of business between JJJ insurance agency and ABC bank only apply to business placed pursuant to the New York license. Although commissions on property insurance business on such property risks are not subject to the percentage limitations in § 2324, they are included in determining the total net commissions or underwriting fees received by the licensed insurance agent or insurance broker during the calendar year.

N.Y. Ins. Law § 2103(i) (McKinney 2000 & Supp. 2004) states in pertinent part:

(i)(1) The superintendent may require from every applicant and from every proposed sub-licensee, 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 the case may be, to or of any applicant if he finds that such applicant 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:

* * *

(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.

N.Y. Ins. Law § 2103(i) (McKinney 2000 & Supp. 2004), with regard to insurance agents, permits the superintendent to refuse to issue, revoke, or suspend a license if he finds that a licensee or sub-licensee has received or will receive any benefit or advantage in violation of § 2324 or finds that more than ten percent of the aggregate net commissions, received during the twelve months immediately preceding, if any, or to be received during the ensuing twelve months, by the licensee or sub-licensee result from insurance property and risks of all of the entities listed in the statute including any subsidiary and affiliated corporations of a corporation owning any interest in such applicant corporation. The same limitations apply to brokers under N.Y. Ins. Law § 2104(d)(3).

Since ABC bank and JJJ are affiliated companies, under § 2103(i), JJJ insurance agency may receive commissions for covering the property and risks of its affiliate corporation, ABC bank, provided that the commissions received or to be received within a twelve month time period by JJJ insurance agency for covering the property and risks of ABC bank do not exceed ten percent of the aggregate net commissions.

Therefore, although the New York Insurance Law and New York Banking Law do not prohibit a bank from acting as a creditor and owning an insurance agency that receives commissions on the sale of credit property insurance that is required by the creditor to protect the creditor’s security interest in personal property, commissions earned on such business is limited by the provisions of N.Y. Ins. Law § 2324 and § 2103(i). In addition, any referrals from ABC bank to an insurance agent must comply with N.Y. Ins. Law § 2115.

For further information you may contact Special Counsel Athan Shinas at the Albany Office.