OGC Opinion No. 07-04-14

The Office of General Counsel issued the following opinion on April 27, 2007, representing the position of the New York State Insurance Department.

RE: Payment of Referral Fees to Non-Licensees; Transfer of Self-Insured Workers’ Compensation Program to Insurer; Retroactive Liability Insurance.

Questions Presented:

1. May a licensed insurance producer pay a referral fee to a non-licensed party that refers persons to the producer for the purpose of buying insurance?

2. If a referral fee may be paid, must it be paid each time a referral is made by the same person, or may it be paid to such person only once a year?

3. Currently an employer does not have workers’ compensation insurance to cover its workers’ compensation liabilities but wishes to purchase such coverage. What steps must it follow to effect this transition?

4. If a business entity currently assumes the risk for its own liability, is there insurance it can buy to protect itself against future claims based on events that occurred before an insurance policy was purchased? Such events may or may not be known to the company.

Conclusions:

1. Yes. N.Y. Ins. Law §§ 2114, 2115 and 2116 (McKinney 2006) permit compensation of a non-licensed person or entity for a referral to a licensed insurance producer, as long as the referral does not include a discussion of the specific insurance policy terms and conditions, and the compensation is not dependent upon the sale of insurance.

2. The referral fee may be paid each time a referral is made or at intervals to which the parties agree, as long as the referral complies with the above conditions.

3. The employer should contact Mariella Brutus of the Department’s Property Bureau (212-480-5511) for assistance with certain forms required by the Workers’ Compensation Law, and contact the Workers’ Compensation Board for assistance on compliance with any other requirements imposed by the Workers’ Compensation Law.

4. An insurance company may choose to issue coverage for a previously uninsured period on a “claims-made” basis at a premium commensurate with the possible greater risk, but only with respect to unknown and unreported claims, and such coverage must comply with N.Y. Comp. Codes R. & Regs. tit. 11, Part 73 (2006) (Regulation 121).

Facts:

An insurance producer inquired about two different situations. First, he stated that he would like to sell property/casualty insurance to the members of an association that was organized similarly to an association of hospitals.

He explained that he planned to ask the association to invite him to its membership meetings and place him on its meeting agenda so that he could provide the members with information about the insurance products he wished to sell. He would also ask the associations to mail informational flyers to the members. In exchange for this access, he would offer to pay the association. He wished to know whether he could pay the membership organization for allowing him access to its membership for the purpose of selling insurance.

During a telephone conversation, he reported that, with this access, he expected to sell “massive” amounts of insurance, and hoped that his sales volume would permit him to negotiate discounts that he hoped to pass on to his clients.

The second situation was unrelated and involved what the inquirer characterized as involving a loss portfolio transfer. Specifically, he described a business entity that currently lacks liability or workers’ compensation insurance and assumes the risk for its own liability, but now wishes to purchase coverage. The company wants to know how to transform its workers compensation program from one that it self-insures to one where losses will be covered by workers’ compensation insurance. The company also wants to know whether it can buy insurance to protect itself against future claims based on events that occurred before the insurance policy was purchased. Such events may or may not be known to the company.

Analysis:

Questions 1 and 2: Payment of Referral Fees to Non-Licensees and Timing of Payments

Insurance Law § 2102 generally prohibits the sale of insurance without a license. According to Insurance Law § 2102(a)(1):

No person, firm, association or corporation shall act as an insurance producer or insurance adjuster in this state without having authority to do so by virtue of a license issued and in force pursuant to the provisions of this chapter.

Insurance Law § 2115(a)(1), in turn, limits payments made to any person or entity for acting as an insurance agent:

No insurer doing business in this state, and no agent or other representative thereof, except as provided in subsection (b) hereof, shall pay any commission or other compensation to any person, firm, association or corporation for acting as insurance agent in this state, except to a licensed insurance agent of such insurer or to a person described in paragraph two or four of subsection (a) of section two thousand one hundred one of this article or except as provided in subsection (c) of this section.

Insurance Law § 2115(a)(1) further provides, however, that:

For purposes of this section, “acting as insurance agent” shall not include the referral of a person to a licensed insurance agent or broker that does not include a discussion of specific insurance policy terms and conditions and where the compensation for referral is not based upon the purchase of insurance by such person.¹

Insurance Law § 2115(a)(1) therefore permits a licensed insurance agent or broker to pay a non-licensee for a referral as long as the referral does not include a discussion of the specific insurance policy terms and conditions, and payment is not dependent upon the sale of insurance.

The producer stated that he wished to ask the associations to mail their members information about the insurance policies that he wished to sell. The association may distribute a brochure describing the coverage that he is offering for sale; however, the association may not itself discuss the terms and conditions of the coverage. The referral fee may be paid each time a referral is made, or at intervals to which the parties agree, as long as the referral complies with the above conditions.²

While the referral might meet the above requirements, payment for the referral may, nonetheless, constitute a rebate in violation of Insurance Law § 2324. That provision states, in pertinent part:

No authorized insurer, no licensed insurance agent, no licensed insurance broker, and no employee or other representative of any such insurer, agent or broker shall make, procure or negotiate any contract of insurance other than as plainly expressed in the policy or other written contract issued or to be issued as evidence thereof, or shall directly or indirectly, by giving or sharing a commission or in any manner whatsoever, pay or allow or offer to pay or allow to the insured or to any employee of the insured, either as an inducement to the making of insurance or after insurance has been effected, any rebate from the premium which is specified in the policy, or any special favor or advantage in the dividends or other benefit to accrue thereon, or shall give or offer to give any valuable consideration or inducement of any kind, directly or indirectly, which is not specified in such policy or contract, other than any article of merchandise not exceeding fifteen dollars in value which shall have conspicuously stamped or printed thereon the advertisement of the insurer, agent or broker, or shall give, sell or purchase, or offer to give, sell or purchase, as an inducement to the making of such insurance or in connection therewith, any stock, bond or other securities or any dividends or profits accrued thereon, nor shall the insured, his agent or representative knowingly receive directly or indirectly, any such rebate or special favor or advantage, provided, however, a licensed insurance agent or a licensed insurance broker may retain the usual commission or underwriting fee on insurance placed on his own property or risks, if the aggregate of such commissions or underwriting fees will not exceed five percent of the total net commissions or underwriting fees received by such licensed insurance agent or insurance broker during the calendar year.

Ins. Law § 2324(a).

The Department currently lacks sufficient information to determine whether the proposed course of action would violate the statutory prohibition against rebates. The Department would need to know such details as the composition of the association; how the association is structured; who would actually benefit from the paying of a referral fee (the individual members of the association, the association itself, or the insureds); and how the benefit would be distributed.

In addition, the producer’s intention to “negotiate” for discounts on insurance might raise rebate concerns. Without knowing the details, the Department cannot analyze this issue further.

Question 3: Transferring Self-Insured Workers’ Compensation Program to Insurer

The Workers’ Compensation Board has a specific procedure to be followed where a previously self-insured business wishes to acquire workers’ compensation insurance. First, N.Y. Workers’ Comp. Law § 50(3) (McKinney 2006) provides that, if a self-insured employer wishes to end its self-insured status, the security deposit required of it pursuant to Workers’ Compensation Law § 50(3) must be retained by the Workers’ Compensation Board for at least 26 months. After 26 months, the employer may apply to the Workers’ Compensation Board for return of the deposit as follows:

At the expiration of such time or such further period as the chairman may deem proper and warranted under the circumstances, and so designates, the chairman may accept in lieu thereof, and for the additional purpose of securing such further and future contingent liability as may arise from prior injuries to workers and be incurred by reason of any change in condition of such workers warranting the board making subsequent awards for payment of additional compensation, a policy of insurance furnished by the employer, his heirs or assigns or others carrying on or liquidating such business. Such policy shall be in a form approved by the superintendent of insurance and issued by the state fund or any insurance company licensed to issue this class of insurance in this state. It shall only be issued for a single complete premium payment in advance by the employer. It shall be given in an amount to be determined by the chairman and when issued shall be non-cancellable for any cause during the continuance of the liability secured and so covered.

Workers’ Comp. Law § 50(3).

The Department has approved workers’ compensation insurance policy forms that satisfy the Workers’ Compensation Board’s requirements. The employer may contact Mariella Brutus of the Department’s Property Bureau (212-480-5511) for assistance with procedures relating to such forms. As for compliance with any other requirements imposed by the Workers’ Compensation Law, the employer should contact the Workers’ Compensation Board for further assistance.

Question 4: Retroactive Liability Insurance

The broker also asked whether an insurance company can choose to issue liability insurance to a previously uninsured entity to cover future claims arising from past events that may or may not be known to the entity.³ In New York, liability insurance may be written on either a “claims-made” basis or an “occurrence” basis. Section 73.0(a) of 11 NYCRR § 73 (Regulation 121) explains the distinction between “claims-made” and “occurrence” policies:

Traditionally, most liability insurance policies protect against injury or damage that occurs during the policy period. Such “occurrence” policies generally provide coverage, even though an actual claim is made or suit is filed, arising from that occurrence, subsequent to the policy period. In contrast, “claims-made” policies generally provide coverage only when a claim is made during the policy period with regard to injury or damage that has taken place during that time.

11 NYCRR § 73.1 defines “claims-made” insurance as follows:

(a) Claims-made policy means an insurance policy that covers liability for injury or damage that the insured is legally obligated to pay (including injury or damage occurring prior to the effective date of the policy, but subsequent to the retroactive date, if any), arising out of incidents, acts or omissions, as long as the claim is first made during the policy period or any extended reporting period.

In connection with a “claims-made” policy, prior acts coverage is defined in 11 NYCRR § 73.1 as follows:

(c) Prior acts coverage, nose or nose coverage means coverage under the policy for injury or damage that occurs on or after the retroactive date and prior to the effective date of the policy.

Retroactive date, in turn, is defined in 11 NYCRR § 73.1, which states:

(b) Retroactive date means a date concurrent with the effective date of the policy or a particular date prior to the effective date of the policy upon which the insurer and insured agree in the policy that policy coverage will be applicable.

Prior acts coverage is available under a claims-made policy to provide retroactive coverage whether the insured previously had claims-made coverage or no coverage at all. Under such coverage, an insurance company may be willing to cover a previously uninsured period at a premium commensurate with the possible greater risk that such exposure presents, where the applicant states that it is unaware of any circumstances that have occurred that may reasonably result in a claim, and that it is also aware that any claims resulting from prior known events are excluded under the policy. The goal of such a statement is to prevent or reduce adverse selection.⁴

Claims-made coverage is available only with respect to the coverages and risks specified in 11 NYCRR § 73. Subject to the above limitations, the insurance company’s underwriter has discretion to decide whether to cover a previously uninsured exposure. In actual practice, however, it is unlikely that an insurer would cover a previously uninsured exposure on a claims-made basis because of the risk of adverse selection.

As for occurrence coverage, an occurrence policy may only cover a period of time prior to the effective date of the insurance policy if: (1) the insured is switching from an expiring claims-made policy to occurrence coverage; and (2) the insurance does not cover any existing claims or known occurrences. The Department allows this only for the purpose of helping an insured transition from claims-made insurance to occurrence policy coverage because of the substantially greater risk exposure and adverse selection concerns.

Accordingly, coverage for events that occurred during a contractually specified period of time that is prior to the effective date of the occurrence policy may not be issued to a person who was previously self-insured and thus has uninsured exposure for prior acts or occurrences. Since the business about which the broker inquired had no insurance previously, it may not purchase an occurrence policy that covers events that occurred prior to the effective date of the policy.

For further information you may contact Senior Attorney Susan A. Dess, at the New York City Office.

¹ Insurance Law § 2116 applies to insurance brokers.  Insurance Law § 2114 applies to life and accident and health insurance agents.  The referral provisions of these three sections are due to expire on September 10, 2007, unless the Legislature extends these provisions, as it has in the past.

² It is not clear from your inquiry how much assistance the inquirer wished to get from the association, and whether the association’s activities on his behalf would meet the exception to the license requirement set forth in Insurance Law § 2101(k)(6).

³ The broker framed the company’s transition from self-insured to insured as involving loss portfolio transfers under 11 NYCRR § 112 (Regulation 108).  However, Regulation 108 only applies to transfers of risk between insurers and not to a situation, as here, where a non-insurance company is self-insured and wishes to obtain liability and workers’ compensation coverage. The situation that the broker presented does not involve a loss portfolio transfer.

⁴ Adverse selection is defined as the “[t]endency of persons with a higher-than-average chance of loss to seek insurance at standard (average) rates, which, if not controlled by underwriting, results in higher-than-expected loss levels.”  George E. Rejda, PRINCIPLES OF RISK MANAGEMENT AND INSURANCE G-1 (5th ed., 1995).