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

George E. Pataki
Governor

Howard Mills
Superintendent

The Office of General Counsel issued the following opinion on June 23, 2005 representing the position of the New York State Insurance Department.

Re: Group Life Insurance, Union as Policyholder

Issue

May a union purchase life insurance on its members without their knowledge or consent and make part of the proceeds payable to the union?

Conclusion

No, the transaction as contemplated would be in violation of the New York Insurance Law (McKinney 2000 and 2005 Supplement).

Facts

The inquirer’s client is a labor union that desires to purchase and pay the premium on a group life insurance policy insuring the lives of its members. While the union member could designate any beneficiary for the bulk of the death benefit, the union, as policy owner, would, without knowledge or permission of the member, designate itself as beneficiary of a portion of the death benefit.

The inquirer questions the legality of such a transaction.

Analysis

New York Insurance Law § 4216(b)(2) (McKinney 2000 and 2005 Supplement), dealing with group life insurance, allows issuance of:

A policy issued to a labor union, which shall be deemed the policyholder insuring, with or without evidence of individual insurability satisfactory to the insurer, not less than twenty-five members of such union, and insuring, except as hereinafter provided all of the members of such union or all of any class or classes thereof determined by conditions pertaining to their employment or membership in the union, or both, and who are actively engaged in their occupations, for amounts of insurance on each person insured based upon some plan which will preclude individual selection. . . . The premium on such policy may be paid by the union, by the members, or by the union and its members jointly. If the premium is paid by the members or by the union and its members jointly such policy must insure not less than fifty percent of such eligible members or, if less, fifty or more of such members. Except as provided in paragraph five of subsection (a) of section three thousand two hundred twenty of this chapter, such policy shall provide for the payment of benefits to the person insured or to some beneficiary or beneficiaries, other than the union or any of its officials, representatives or agents, and shall provide for the issuance of a certificate to the union for delivery to the person insured or to such beneficiary, as evidence of such insurance. . . .

New York Insurance Law § 3220(a)(5) (McKinney 2000) provides:

That the benefits payable under any such policy shall be payable to the beneficiary or beneficiaries designated by the insured except, where the policy contains conditions pertaining to family status, the beneficiary may be the family member specified by the policy terms, but if there is no such designated or specified beneficiary as to all or any part of the insurance payable at the death of the insured, then the amount of insurance so payable for which there is no such designated or specified beneficiary shall be payable to the estate of the insured, except that the policy may provide that the insurer may in such case, at its option, pay such insurance to any one or more of the following surviving relatives: wife, husband, mother, father, child or children, brothers or sisters; and except that the policy may provide that the insurer may, in any case, deduct from the aggregate sum payable under such policy on account of the death of the insured, an amount not to exceed five hundred dollars to be paid to any person or persons appearing to the insurer to be equitably entitled to same by reason of having incurred expenses on behalf of the insured or for his or her burial. Payment in accordance with any of the foregoing provisions shall completely discharge the insurer's liability with respect to the amount of insurance so paid.

New York Insurance Law § 3205 (McKinney 2000 and 2005 Supplement) provides:

(a) In this section: (1) The term, ‘insurable interest’ means: (A) in the case of persons closely related by blood or by law, a substantial interest engendered by love and affection; B) in the case of other persons, a lawful and substantial economic interest in the continued life, health or bodily safety of the person insured, as distinguished from an interest which would arise only by, or would be enhanced in value by, the death, disablement or injury of the insured

. . .

(b)(2) No person shall procure or cause to be procured, directly or by assignment or otherwise any contract of insurance upon the person of another unless the benefits under such contract are payable to the person insured or his personal representatives, or to a person having, at the time when such contract is made, an insurable interest in the person insured.

. . .

(d) In addition to any other basis under which either an employer, or an irrevocable trust established by one or more employers or one or more employers and one or more labor unions, have an insurable interest in the lives of any of its employees or retirees or those of its subsidiaries or affiliated companies, an employer or such a trust shall have an insurable interest in the lives of any such employees or retirees who are participants or who are eligible to participate, upon the satisfaction of age, service or similar eligibility criteria, in an employee benefit plan, established or maintained by an employer as defined by the federal Employee Retirement Income Security Act of 1974, 29 U.S.C. § 1101 et seq., provided

that: (1) The employer providing for insurance coverage or causing such coverage to be issued under this subsection: (A) prior to or at the commencement of any such coverage notifies prospective insureds in writing that coverage is being obtained on their lives, requires that prospective insureds consent in writing to such coverage, provides each consenting insured the right to have any coverage on his/her life issued under the authority of this subsection discontinued at any time and describes in the notice the method the insured may use to terminate coverage . . .

Based upon the insurable interest limitation on payment of life insurance proceeds in New York Insurance Law § 3205(b)(2) and the limitation on beneficiaries in New York Insurance Law § 3220(a)(5), as well as the limited permission for payments to unions in New York Insurance Law § 3205(d), the insured union member would have to be notified that a portion of the death benefit would be payable to the union and, depending upon the circumstances, might have to consent to such coverage for the benefit of the union.

For further information one may contact Principal Attorney Alan Rachlin at the New York City office.