The Office of General Counsel issued the following opinion on January 4, 2005, representing the position of the New York State Insurance Department.
Re: Department Approval of Consulting Agreement between Domestic Property/Casualty Insurer and Unaffiliated Entity
Is a consulting agreement, between a domestic stock property/casualty insurance company ("Company A") and an unaffiliated entity ("Company B")1 that provides that Company Bs principal will serve as the president of Company A for valuable consideration while continuing to serve as president of Company B, required to be approved by the Department?
Yes, the Department requires that such agreement be submitted for review and approval.
The inquirer posed a hypothetical question, with limited facts.
The inquirer asked us a hypothetical question involving a consulting agreement between an insurer ("Company A") and an unaffiliated entity ("Company B"). Pursuant to the agreement, the president of Company B will be the president of Company A, a property/casualty insurer. He/she will act in that capacity for valuable consideration. The inquirer states that Companies A and B are not affiliated. However, there is an issue as to whether "control", as defined in Section 1501 of the Insurance Law, exists.
N.Y. Ins. Law § 1501(a) (1) & (2) (McKinney 2000) provides, as follows:
In this article, unless the context shall otherwise require:
(1) "Person" means an individual, partnership, firm, association, corporation, joint-stock company, trust, any similar entity or any combination of the foregoing acting in concert.
(2) "Control", including the terms "controlling", "controlled by" and "under common control with", means the possession direct or indirect of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract (except a commercial contract for goods or non-management services) or otherwise; but no person shall be deemed to control another person solely by reason of his being an officer or director of such other person. Subject to subsection (c) hereof, control shall be presumed to exist if any person directly or indirectly owns, controls or holds with the power to vote ten percent or more of the voting securities of any other person.
Notwithstanding the provisions of paragraph two of subsection (a) of this section, the superintendent may determine, after notice and opportunity to be heard, that a person exercises directly or indirectly either alone or pursuant to an agreement with one or more other persons such a controlling influence over the management or policies of an authorized insurer as to make it necessary or appropriate in the public interest or for the protection of the insurers policyholders or shareholders that the person be deemed to control the insurer.
Section 1501(a)(2) defines control as involving a person who, directly or indirectly, possesses the ability to direct or cause the direction of the management and policies of another. While the inquirer states that Companies A and B are not affiliated, by virtue of the two companies having a president in common, such president may be deemed to have a controlling influence over the insurer as to be able to direct or cause the direction of the management and policies of the insurer. Although Section 1501(a)(2) states that a person shall not be deemed to control another solely by being an officer or director of another person, if the officer has the ability to direct or cause the direction of both the insurer and the entity, such control would exist. In addition, Section 1501(b) permits the superintendent to determine, after notice and opportunity to be heard, that a person exercises, directly or indirectly either alone or pursuant to an agreement with one or more other persons, such a controlling influence over the management or policies of an authorized insurer as to make it necessary or appropriate in the public interest or for the protection of the insurers policyholders or shareholders, that the person be deemed to control the insurer. It is unclear from the limited facts provided whether the president involved would, among other things, own voting securities or have other influence so that a determination can be made as to whether there is control or not. For these reasons, the agreement in question should be submitted to the Department for review and approval so that the Department can make such a determination.
In addition to the above, such agreement may create a conflict of interest. Pursuant to the consulting agreement, the individual who is being appointed to the post of president of Company A, the insurer, will continue to act as president of the consulting entity, Company B, who will continue to act in such consulting capacity for other licensed property/casualty insurers. This agreement may involve the president in situations where he/she would be serving conflicting interests in the performance of his/her duties as president of both companies. Such conflict of interest could constitute untrustworthiness within the purview of the Insurance Law. As a result, to determine whether any such conflict exists, the agreement must be examined to determine if it has the potential to create, among other things, divided loyalties, lack of good faith or preferential treatment.
Further, pursuant to the Superintendents statutory obligation to inquire into the trustworthiness of individuals, coupled with the Superintendents general authority under N.Y. Ins. Law § 201 (McKinney 2000),2 the Department requires that biographical information of personnel appointed as officers and directors of insurance companies be submitted to the Department so as to make a proper determination of trustworthiness and fulfill our regulatory responsibility under the Insurance Law.
Accordingly, the Department would require that any such agreement be submitted to the Department for approval.
For further information you may contact Associate Attorney D. Monica Marsh at the New York City Office.
1 Company B acts as a consultant for property/casualty and reinsurance companies due to its expertise in the administration of such companies.
2 That section states as follows: The superintendent shall possess the rights, powers, and duties, in connection with the business of insurance in this state, expressed or reasonably implied by this chapter or any other applicable law of this state. See also Circular Letter No. 6 (2001) which addresses biographic questionnaires and fingerprinting of officers and directors involved in, among other things, corporate changes.