The Office of General Counsel issued the following opinion on March 15, 2007, representing the position of the New York State Insurance Department.
Re: Offering Free Administrative Services
In connection with the sale of group health insurance to employers, may an insurance broker hire a third party firm to establish and administer for those employers, at no additional cost to them, various health savings accounts that have income tax ramifications, without running afoul of the anti-rebating provision of the Insurance Law?
No. If an insurer, insurance agent or broker provides, at no additional fee, services that are not normally performed by an insurer, insurance agent or broker in connection with the sale of health insurance, and the services are not provided by the insurance contract, then the insurer, insurance agent or broker violates N.Y. Ins. Law § 4224(c) (McKinney Supp. 2007), which prohibits unlawful inducements or rebates.
The inquirer reports that the inquirer is an insurance broker who sells group health insurance policies to employers. The inquirer is considering hiring a third party provider that will establish and administer various health savings accounts for the inquirer’s clients who are employers. There would be no cost to the insured’s client insureds for these services.
N.Y. Ins. Law § 4224(c) (McKinney Supp. 2007) is relevant to your inquiry. It states:
No such life insurance company and no such savings and insurance bank and no officer, agent, solicitor or representative thereof and no such insurer doing in this state the business of accident and health insurance and no officer, agent, solicitor or representative thereof, and no licensed insurance broker and no employee or other representative of any such insurer, agent 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 life insurance or annuity contract or policy of accident and health insurance, any stocks, bonds or other securities, or any dividends or profits accruing or to accrue thereon, or 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 special favor or advantage in the dividends or other benefits to accrue on any such policy or contract, or knowingly receive any paid employment or contract for services of any kind, or any valuable consideration or inducement whatever which is not specified in such policy or contract. [Emphasis added.]
An insurance agent or broker subject to the provisions of N.Y. Ins. Law § 4224(c) (McKinney Supp. 2007) may not provide “an inducement to any person . . . or any valuable consideration or inducement whatever not specified in such policy or contract” in connection with the sale of health insurance. Given the plain language of this statute, an insurance agent or broker selling health insurance may not provide to an employer free administrative services with income tax ramifications -- services not normally performed in connection with the sale of insurance, and not provided for in the insurance contract here -- because such services constitute valuable consideration and an unlawful inducement or rebate in violation of N.Y. Ins. Law § 4224(c) (McKinney Supp. 2007). And for the same reasons, an insurance agent or broker may not hire an outside third party to provide free administrative services that the insurance agent or broker may not directly or personally provide.
However, pursuant to N.Y. Ins. Law § 2119(c)(1) (McKinney’s 2006), you could as a broker charge a fee for the proposed services under a separate written contract with your insureds. The separate written agreement must conform to N.Y. Ins. Law § 2119(c), which states:
(1) No insurance broker may receive any compensation, other than commissions deductible from premiums on insurance policies or contracts, from any insured or prospective insured for or on account of the sale, solicitation or negotiation of, or other services in connection with, any contract of insurance made or negotiated in this state or for any other services on account of such insurance policies or contracts, including adjustment of claims arising therefrom, 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.
(2) A copy of every such memorandum shall be retained by the broker for not less than three years after such services have been fully performed.
In addition to compliance with N.Y. Ins. Law § 2119(c), any fee charged must be reasonable in relation to the service provided, and you may not charge different insureds different fees for the same service. See OGC Opinion dated February 20, 2007, and Circular Letter No. 9 (2006).
For further information one may contact Senior Attorney Susan A. Dess, at the New York City Office.