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 January 24, 2006 representing the position of the New York State Insurance Department.

RE: Health Insurance, Broker’s Services

Question Presented:

May an insurance broker receiving commissions from a Health Maintenance Organization based on contracts previously issued render services related to other employee benefits with no additional compensation?

Conclusion:

Such a practice would constitute a violation of New York Insurance Law § 4224(c) (McKinney 2000 and 2006 Supplement).

Facts:

The inquirer’s client, a large employer in New York, has purchased several contracts from an HMO in New York to cover its employees. The contracts in question were purchased directly from the HMO without the involvement of an insurance producer. The client understands that the HMO has, as part of its rate filing with the Insurance Department concerning these contract forms, indicated that it will pay commissions to insurance producers when contracts based on some contract forms are entered into with the assistance of an insurance producer. As to other contract forms, also issued to the client, the HMO has indicated that no commissions are payable on contracts issued on those forms.

The client contemplates designating an insurance broker who is licensed in accordance with New York Insurance Law § 2104(b)(1)(A) (McKinney 2000 and 2006 Supplement) as "broker of record" for the contracts in question. The client understands that the HMO will commence paying commissions on the existing contracts where the rate filing indicates that commissions are payable to the insurance broker. The payment of commissions to the insurance broker will not affect the premiums payable by the client.

Prior to considering the designation of the insurance broker as "broker of record", the client had retained the insurance broker to provide training on the health privacy rules, 45 C.F.R. § 160.101 et seq. (2002), promulgated by the United States Department of Health & Human Services. The insurance broker was compensated by the client for this training on a flat fee for service basis.

It is contemplated by the client that, in exchange for the commissions paid by the HMO on the commissionable contracts, the insurance broker will: (1) provide customized benefit statements to participants for all employee benefits provided by the client, (2) provide administrative assistance to the employer on eligibility and claims issues, excluding services that might constitute adjusting, (3) and make periodic recommendations to the employer on benefit programs. These services would be provided with respect to both the commissionable and non-commissionable contracts. The insurance broker would utilize existing resources, including employees, to provide these services.

Analysis:

With respect to the provision of insurance benefit statements to employees, administrative services regarding eligibility and claims payments, and advising on insurance products, they are ancillary to the existing insurance policies and contracts issued to the client. Accordingly, with respect to the commissionable contracts, they would be encompassed within the services usually provided by an insurance broker.

The question that arises is whether such services are validly performed by the broker with respect to the non-commissionable HMO contracts and other employee benefits. New York Insurance Law § 4224(c) provides:

No . . . insurer doing in this state the business of accident and health insurance and . . . no licensed insurance broker and no employee or other representative of any such insurer . . . or broker, shall pay, allow or give, or offer to pay, allow or give, directly or indirectly, as an inducement to any person to insure, or shall give, sell or purchase, or offer to give, sell or purchase, as such inducement, or interdependent with any . . . policy of accident and health insurance, any . . . any valuable consideration or inducement whatever not specified in such policy or contract; nor shall any person in this state knowingly receive as such inducement, any rebate of premium or policy fee or . . . any valuable consideration or inducement whatever which is not specified in such policy or contract

It has been the consistent position of the Insurance Department that it would constitute an improper inducement in violation of New York Insurance Law § 4224(c) for an insurance broker to utilize the provision of additional services to secure business as an insurance broker. In the situation postulated the client would be utilizing its economic power to negotiate the charge for the administrative services, which would be covered by the commissions paid to the insurance broker by the HMO.

Accordingly, with respect to the services as described above it would be a violation of New York Insurance Law § 4224(c) for the insurance broker to provide such administrative services with respect to the non-commissionable HMO contracts, any other insurance contract for which the insurance broker is not receiving a commission, or other employee benefit without receiving additional compensation from the client, commensurate with its usual fees, pursuant to a written agreement in accordance with New York Insurance Law § 2119(a)(1) (McKinney 2000 and 2006 Supplement):

No person licensed as an insurance agent, broker or consultant may receive any fee, commission or thing of value for examining, appraising, reviewing or evaluating any insurance policy, bond, annuity or pension or profit-sharing contract, plan or program or for making recommendations or giving advice with regard to any of the above, unless such compensation is based upon a written memorandum signed by the party to be charged and specifying or clearly defining the amount or extent of such compensation.

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