The Office of General Counsel issued the following opinion on May 12, 2005, representing the position of the New York State Insurance Department.
Re: Formation of a Title Insurance Company
Can four entities, including two law firms and another title insurance company, enter into an operating agreement to form a title insurance company and split the net revenues 25% each?
There is nothing in the Insurance Law that prohibits the ownership type of arrangement proposed. However, in terms of "net revenues" to co-owners, N.Y. Ins. Law § 6407 (McKinney 2000) provides, among other things, that no title insurance corporation shall declare or pay any cash or property dividend on its capital shares, or declare or distribute a stock dividend, except out of earned surplus. Therefore, under the operating agreement to which you refer, each co-owner may not receive 25% of the dividends unless the dividends come from earned surplus and not "net revenues". Such agreement must be in compliance with the requirements in Section 6407. In addition, there must be compliance with all other applicable sections of the Insurance Law, including Articles 11, 15, 16 and 64, which address, among other things, licensing, holding company systems, property/casualty subsidiaries and the payment of dividends respectively, as discussed below.
The inquiry is general in nature.
N.Y. Ins. Law 6407 (McKinney 2000), entitled Restrictions on dividends, provides as follows:
(a) No title insurance corporation shall declare or pay any cash or property dividend on its capital shares, or declare or distribute a stock dividend except out of earned surplus, meaning, for the purpose of this section, surplus not attributable to contributions made to surplus within five years next preceding or to appreciation in value of investments not sold or otherwise disposed of.
(b) No such corporation shall declare or pay any cash or property dividend to shareholders which, together with all such dividends declared or paid by it during the next preceding twelve months, exceeds ten percent of its then outstanding capital shares unless, after deducting such dividends, it has a surplus to policyholders at least equal to fifty percent of its reinsurance reserve or a surplus at least equal to fifty percent of the minimum capital required of such insurer to transact the business of title insurance, whichever shall be greater. For the purpose of this section, "surplus" means the amount of the insurers admitted assets in excess of (i) all of its liabilities, including its reinsurance reserve, and (ii) its outstanding capital shares.
(c) No such corporation shall declare or distribute any stock dividend which shall reduce surplus to an amount less than fifty percent of its then outstanding capital shares.
Additionally, 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.
The inquirer asks whether four entities, including two law firms and another title insurance company, may enter into an operating agreement to form a title insurance company and pay out revenues in the amount of 25% to each entity. This opinion assumes that the title insurance company involved will be a New York domestic title insurance company. While there is nothing in the Insurance Law that precludes such an ownership arrangement, as can be seen above in Section 6407, a title insurance company is permitted to pay dividends only out of its earned surplus, subject to limitations contained therein. Therefore, the title insurance company would not be in compliance with Section 6407 if it paid out dividends to its co-owners that did not come from its earned surplus.
Section 6409(d) contains the prohibition against, among other things, rebates or payments, directly or indirectly, of any remuneration to the persons listed therein if such remuneration constitutes, among other things, an inducement for, or as compensation for any title insurance business. Please see other opinions that address the rebating and discrimination prohibitions in Section 6409(d) on our website at http://www.ins.state.ny.us.
In addition, as a domestic title insurance corporation, the title insurer must comply with the licensing requirements contained in Article 11 of the Insurance Law, as well as the holding company provisions contained in Article 15 of the Insurance Law. Such title insurer must also comply with the provisions of Article 16 which address, among other things, property/ casualty subsidiaries and relationships and transactions between parents and subsidiaries.
This opinion is limited to an interpretation of the Insurance Law.
For further information please contact Associate Attorney D. Monica Marsh at the New York City Office.