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

David A. Paterson
Governor

James J. Wrynn
Superintendent

OGC Op. No. 09-09-05

The Office of General Counsel issued the following opinion on September 23, 2009, representing the position of the New York State Insurance Department.

Re: Proposed Discount Dental Service Plan

Question Presented:

Does ABC, Inc.’s (“ABC”) proposed discount dental service plan constitute the doing of an insurance business in violation of N.Y. Ins. Law § 1102 (McKinney 2006)?

Conclusion:

So long as the fees charged for services dependent upon the happening of a fortuitous event cover the cost of rendition, including reasonable overhead, ABC’s proposed discount dental service plan does not constitute the doing of an insurance business, and therefore does not violate Insurance Law § 1102.

Facts:

The inquirer reports that ABC wishes to provide discount dental services through licensed dentists by establishing a prepaid membership plan. The inquirer states that services provided by the licensed dentists to plan members may consist of routine examinations or may result from a fortuitous event, such as illness or injury. The inquirer further avers that a dentist may charge the member any fee the dentist wishes, so long as the fees are equal to, or lower than, the cost guidelines promulgated by ABC, but higher than the actual cost of providing the service. The inquirer also states that the fees charged for the services will cover the dentist’s labor, materials and reasonable overhead expenses, and that each dentist must promise that he or she will not charge fees that are lower than the actual cost of providing the services. Further, the inquirer notes that the dentists will charge fees for all services, regardless of fortuity.

The inquirer states that dentists will not receive any compensation from ABC for participating in the plan, but rather will only receive the opportunity to be placed on ABC’s subscriber list. In addition, the inquirer indicates that the only consideration that ABC will receive from dentists is their promise to adhere strictly and absolutely to the guidelines of the plan. Moreover, the inquirer avers that ABC will explicitly state in all advertisements directed to the general public and on all member application forms or other agreements that: the plan is not an insurance plan; the subscription fee is not a premium; there is no deductible for any service; there is no waiting period for receipt of services; members need not obtain prior approval before obtaining any dental service; and there is no limit on a member’s use of the plan.

In light of the foregoing, the inquirer asks whether ABC’s proposed discount dental service plan constitutes the doing of an insurance business in violation of Insurance Law § 1102.

Analysis:

Insurance Law § 1102(a) prohibits any person, firm, association, corporation or joint-stock company from doing an insurance business in New York unless authorized by a license or exempted from licensure by the Insurance Law. Insurance Law § 1101(b)(1) is relevant here, and states in pertinent part that:

(b)(1) Except as provided in paragraph two, three or three-a of this subsection, any of the following acts in this state, effected by mail from outside this state or otherwise, by any person, firm, association, corporation or joint-stock company shall constitute doing an insurance business in this state and shall constitute doing business in the state within the meaning of section three hundred two of the civil practice law and rules:

(A) making, or proposing to make, as insurer, any insurance contract, including either issuance or delivery of a policy or contract of insurance to a resident of this state or to any firm, association, or corporation authorized to do business herein, or solicitation of applications for any such policies or contracts….

Further, Insurance Law § 1101(a)(1) defines “insurance contract” as:

any agreement or other transaction whereby one party, the “insurer”, is obligated to confer benefit of pecuniary value upon another party, the “insured” or “beneficiary”, dependent upon the happening of a fortuitous event in which the insured or beneficiary has, or is expected to have at the time of such happening, a material interest which will be adversely affected by the happening of such event.

Insurance Law § 1101(a)(2) defines “fortuitous event” as “any occurrence or failure to occur which is, or is assumed by the parties to be, to a substantial extent beyond the control of either party.”

The Department’s Office of General Counsel (“OGC”) previously has opined that the making of a service plan, which for a prepaid fee provides unlimited services dependent upon the happening of a fortuitous event, constitutes the doing of an insurance business in violation of Insurance Law § 1102. See OGC Opinion 08-02-05 (Feb. 8, 2008); OGC Opinion 05-05-01 (May 2, 2005). However, if the services occasioned by the happening of a fortuitous event are offered for an additional discounted fee per service, then the making of the service plan does not constitute the doing of an insurance business, so long as the fees cover the cost rendition, including reasonable overhead. See id. In such instances, the arrangement does not involve risk transfer – the hallmark of insurance.

Additionally, the Department has opined that a plan with a prepaid membership fee may offer services for no charge or a nominal separate charge, so long as the services are not dependent upon the happening of a fortuitous event. See OGC Opinion 08-02-05; OGC Opinion 05-05-01. For example, a routine annual examination at no additional charge is permissible, because the examination is not dependent upon the happening of a fortuitous event. See id.

In the situation presented here, ABC wishes to offer through licensed dentists and for a prepaid fee, a plan that provides unlimited discount dental services that in some instances may be dependent upon the happening of a fortuitous event. So long as the fees charged for services dependent upon the happening of a fortuitous event cover the cost of rendition, including reasonable overhead, ABC’s proposed discount dental service plan does not constitute the doing of an insurance business, and therefore does not violate Insurance Law § 1102.

For further information, you may contact Senior Attorney Joana Lucashuk at the New York City office.