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

Eliot Spitzer
Governor

Eric R. Dinallo
Superintendent

The Office of General Council issued the following opinion on October 31, 2007, representing the position of the New York State Insurance Department.

Re: Insurance Agent Offering Free Services in exchange for a Client’s Health Insurance Business

Question Presented:

May an insurer or insurance agent lawfully offer flexible spending administration services at no cost in order to obtain a prospective client’s health insurance business?

Conclusion:

No. It would violate N.Y. Ins. Law § 4224(c) (McKinney Supp. 2007) for an insurer or insurance agent to offer flexible spending administration services at no cost in order to get a prospective client’s health insurance business.

Facts:

It is reported that an insurance agent or insurer seeks to gain access to a prospective client’s employees in order to solicit and sell health insurance policies. For such access, the insurance agent proposes to pay the fees associated with providing flexible spending administration services to all the employees, regardless of their purchase of insurance. Alternatively, the insurer proposes to offer those services for free to such employees that want them by not imposing its standard fee to the employees. Choosing health insurance coverage would be voluntary, and the premiums would be paid entirely by those employees who purchase such coverage.

Analysis:

For an insurer or agent to offer flexible spending administration services at no cost in exchange for access to solicit or sell health insurance policies to a prospective client’s employees would constitute an unlawful inducement in violation of Insurance Law § 4224(c). Such conduct also would constitute unlawful rebating in violation of the same statute, where the insurance agent pays for those services, for the benefit of employees, out of the commissions from such sales.

With respect to life, accident and health insurance, and annuities, the prohibition against inducements and rebating is set forth in Insurance Law § 4224(c). That statute 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.

Thus, generally speaking, an insurance agent may provide or arrange to provide certain administrative services in connection with administering a purchased insurance policy, at no cost to an insurance client, without violating Insurance Law § 4224, if the services are normally provided or arranged by agents in connection with the sale of insurance, and the same services are provided to all similarly situated insureds. See, e.g., Office of General Counsel opinions dated September 21, 2006, and March 15, June 4, and July 23, 2007. Such “normally provided or arranged” services include only those that pertain to insurance, as opposed to ancillary or auxiliary services, such as offering flexible spending administration accounts that do not directly relate to the agent’s insurance activities. See Office of General Counsel opinions dated August 23, 2004 and March 15, 2007.

Nor may an insurance agent tie the solicitation of a non-insurance service or product to the sale of insurance. See Office of General Counsel opinion dated April 15, 2005.

For further information you may contact Associate Attorney Jeffrey A. Stonehill at the New York City Office.