OGC Op. No. 10-01-03
The Office of General Counsel issued the following opinion on January 6, 2010, representing the position of the New York State Insurance Department.
RE: Partial Insurance Agency Ownership by Automobile Club Subsidiary
1. Does the New York Insurance Law and regulations promulgated thereunder permit a wholly-owned subsidiary of a not-for-profit automobile club to own fifty percent or less of the shares of an insurance agent that will receive more than ten percent of its aggregate net commissions from the placement of insurance with members of the automobile club?
2. May the automobile club, without running afoul of the anti-rebating prohibition contained in N.Y. Ins. Law § 2324 (McKinney 2006), receive the benefit from dividends paid by the insurance agent to the automobile club subsidiary as a shareholder, where the insurance agent markets and sells insurance only to members of the automobile club?
3. May the insurance agent sub-lease a mailing list, office space, staff and equipment from the wholly-owned subsidiary of the automobile club for a flat fee determined in advance without running afoul of Insurance Law § 2115, which prohibits the payment of commissions or other compensation to any person, firm, or association for acting as an insurance agent in the state who is not licensed as a property/casualty insurance agents?
1. Yes. Pursuant to Insurance Law § 2103(i)(1)(C), the Superintendent of Insurance may refuse to issue, suspend or revoke a license if the applicant will be receiving commissions that will amount to more than ten percent of its aggregate net commission for placement of insurance on property or risks for insureds who own more than fifty percent of the shares of the insurance agent. However, under the plan proposed here, the subsidiary of the automobile club would own only fifty percent of the shares of the agency. Further, the risks insured upon, on which commissions are earned, are of members of the club, not the club itself. Therefore, the ten percent limitation requirement does not apply to those commissions.
2. No. Although the automobile club may indirectly receive the benefit of dividends paid to its subsidiary by the insurance agency without contravening the anti-rebating provisions of Insurance Law § 2324, because any benefit that inures to the automobile club is indeterminate and non-quantifiable, the marketing and sale of insurance only to club members constitutes a benefit to members that is an inducement to purchase insurance, which is prohibited by Insurance Law § 2324. However, a mass merchandising plan policy marketed on a quasi-group basis may provide insurance only to members of the automobile club.
3. Yes. Insurance Law § 2115 does not prohibit the insurance agency from sub-leasing a mailing list, office space, staff and equipment for a flat fee, provided that unlicensed persons do not discuss specific insurance policy terms and conditions, or share commissions.
It is reported that XYZ, an automobile club incorporated under New York’s Not-for-Profit Corporation Law, proposes to form a for-profit wholly-owned subsidiary that would purchase a fifty percent interest in an insurance agency to be licensed in New York. The proposed agency would market and sell individual policies of property/casualty insurance exclusively to members of the automobile club. Members pay dues to the club and have voting rights but no financial interest in the club. Commissions earned by the agency would not be shared directly or indirectly with the automobile club or its members, nor would the club or its subsidiary discuss the terms of conditions of policies with club members. However, the agency may declare a dividend to its shareholders that would ultimately benefit the automobile club. Membership status and fees in the club would be unaffected by whether a person purchases insurance through the agency. The agency also would sub-lease a mailing list, office space, staff and equipment from the subsidiary for a flat fee determined in advance. The inquirer asks whether the proposed arrangement is lawful under the Insurance Law.
A. Ownership of the Proposed Agency
The first query asks whether a subsidiary of an automobile club may own fifty percent of the shares of an insurance agent that will receive more than ten percent of its aggregate net commissions from the placement of insurance with members of the automobile club.
Insurance Law § 2103(i)(1) is germane to the inquiry. That statute provides that the Superintendent may refuse to issue an agent’s license to any applicant under certain specified conditions. 1 Insurance Law § 2103(i)(1) reads, in pertinent part, as follows:
(1) The superintendent may require from every applicant and from every proposed sub-licensee, before or after issuing any such license, a statement subscribed and affirmed as true by the applicant under the penalties of perjury as to the ownership of any interest in an applicant firm, association or corporation and as to facts indicating whether any applicant has been by reason of an existing license, if any, or will be by reason of the license applied for, receiving any benefit or advantage in violation of section two thousand three hundred twenty-four of this chapter, and also as to such facts as he may deem pertinent to the requirements of this subsection. The superintendent may refuse to issue, suspend or revoke a license as the case may be, to or of any applicant if he finds that such applicant has been or will be, as aforesaid, receiving any benefit or advantage in violation of section two thousand three hundred twenty-four of this chapter, of if he finds that more than ten percent of the aggregate net commissions, received during the twelve month period immediately preceding, if any, or to be received during the ensuing twelve months, by the applicant, resulted or will result from insurance on the property and risks:
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(c) of the shareholders of an applicant corporation and their respective spouses, and of any affiliated and subsidiary corporations of such applicant corporation, and of any subsidiary and affiliated corporations of a corporation owning any interest in such applicant corporation, and of any firm or association and the members thereof and their respective spouses which either individually or collectively own more than fifty percent of the shares of the applicant corporation, and of any corporation of which such firm or association and its members and their respective spouses, either individually or in the aggregate, own more than fifty percent of the shares, and of any affiliated or subsidiary corporation of such corporation.
Under the facts presented, the subsidiary of the automobile club will own only fifty percent of the shares in the insurance agency, not “more than fifty percent of the shares” as specified in the statute. Therefore, the proposed agent does not fall within the prohibitions of Insurance Law § 2103(i)(1)(C). See Office of General Counsel (“O.G.C.”) Opinion No. 01-04-27 (April 5, 2001).
Further, the risks insured will be risks of the automobile club members, and not those of the automobile club itself. Therefore, the ten percent limitation on the receipt of commissions set forth in Insurance Law § 2103(i)(1) also does not apply. 2
B. The Proposed Agency and Anti-Rebating Laws
The second query asks whether the proposal runs afoul of the anti-rebating provisions in Insurance Law § 2324. The statute prohibits agents, brokers and insurers from making rebates, sharing commission or otherwise giving inducement to purchase insurance, and reads in relevant part as follows:
(a) 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, not 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.
(b) Within the meaning of subsection (a) hereof, the sharing of a commission with the insured shall be deemed to include any case in which a licensed insurance agent or licensed insurance broker which is a subsidiary corporation of, or a corporation affiliated with, any corporation insured, received commissions for the negotiation or procurement of any policy or contract of insurance for the insured. 3
The purpose of anti-rebating statutes, including Insurance Law § 2324, is to prevent abusive practices in the insurance industry, such as where some insureds pay a lesser rate for insurance than others because insurance agents or brokers refund a portion of their commissions to certain favored insureds. See O.G.C. Opinion No. 07-06-15 (June 15, 2007).
Because the proposed plan involves the sale of insurance exclusively to members of the automobile club by an agency that is owned by a subsidiary of the club, the question is whether the plan contravenes New York’s anti-rebating statute by conferring an impermissible benefit, monetary or otherwise, on members beyond simply the insurance that is purchased.
In 1912, the New York State Attorney General opined that an insurer that paid an “overriding commission” to a banking association that applied the commissions to a protective fund for the benefit of member banks constituted improper rebating, because each benefit could be identified with respect to each member bank. See Op. N.Y. Atty. Gen. 535 (1912).
However, in O.G.C. Opinion No. 01-02-16 (February 26, 2001), the Department opined that there is no violation of anti-rebating laws where a licensed employee of a wholly-owned subsidiary of a credit union sold insurance to customers of the credit union in connection with loans made by the credit union to those customers. The Department concluded, in reversing a June 26, 1991 opinion based on the same fact pattern, that the benefit to members of the credit union cannot be readily identified or quantified, and that any such benefits inure in a manner wholly unrelated to the purchase of insurance by any member of the union, because the amount of insurance purchased has no relation to the degree of benefit received by the insureds. Therefore, the benefit, O.G.C. concluded, is not an inducement to purchase or retain insurance and no quid pro quo exists.
Similarly, in O.G.C. Opinion No. 04-02-06 (February 12, 2004), the Department opined that an indeterminate and non-quantifiable benefit may lawfully inure to the entire membership of a not-for-profit automobile association, which would own an authorized insurer, either directly or indirectly, that would market insurance to its members, without constituting an impermissible rebate or incentive under Insurance Law § 2324.
Under the facts presented in the current proposed plan, membership in the automobile club would not be contingent on the purchase of insurance, nor would membership benefits for individual members be affected by the purchase or non-purchase of insurance by the members.
While 50% of the dividends, which will derive from the agency’s commissions earned on insurance obtained for automobile club members, may go to the automobile club’s subsidiary (reflecting the subsidiary’s ownership interest in the agency), and inure generally to the benefit of the club itself, those dividends would not directly benefit the members who individually purchase the insurance. The members may benefit indirectly from such dividends by the reduction of club dues or the enhancement of club benefits, which may result from the additional funds available to the club because of the dividend. However, such benefits are not quantifiable and certainly would not function as an inducement for members to purchase or retain insurance through the proposed agency. Even those members who did not purchase insurance through the agency could be affected by any such benefits that inure to the club. Therefore, no identifiable quid pro quo exists, and no violation of Insurance Law § 2324 occurs merely because the members receive such indirect benefits. 4
However, under the facts presented, the agency is to market and sell the insurance exclusively to the automobile club’s members. In other words, the agency would require a potential insured to purchase a membership in the automobile club before the agency would sell insurance to the person.
Insurance Law § 2324(a) prohibits the giving or offering to give “any valuable consideration or inducement of any kind…which is not specified in the policy or contract.” See also Ollendorff Watch Co., Inc. v. Pink, 279 N.Y.32, 37 (1938). Thus, an agent or broker generally may not condition the purchase of insurance upon the purchase of a non-insurance product, or vice versa, because conditioning such a purchase constitutes an impermissible inducement and tie-in in violation of Insurance Law § 2324(a). See O.G.C. Opinion No. 04-01-05 (January 6, 2004). 5
Under the proposed plan here, the availability of insurance through the agency is contingent on membership in the automobile club. Indeed, the proposed plan is the mirror image of the situation presented in O.G.C. Opinion No. 08-09-12 (September 26, 2008), in which a bail bond agent proposed to make certain services available only to someone who purchased a bail bond through the agent. The Department opined in O.G.C. Opinion No. 08-09-12 that if the service was available to everyone, and not tied to the purchase or solicitation of insurance, then it would likely not violate Insurance Law § 2324. Similarly, the availability of insurance through the agency here may not be limited only to members of the automobile club. Consequently, the plan as presented would violate Insurance Law § 2324 unless the agency would also sell the insurance to non-members of the automobile club.
However, the above analysis does not preclude a mass merchandising plan policy marketed on a “quasi-group” basis that provides insurance only to members of the automobile club. Section 153.1(q) of the New York Codes, Rules & Regulations (“NYCRR”), Tit. 11, Pt. 153 (Regulation 135) defines “quasi-group” as:
Any method of marketing individually underwritten and issued property/casualty or liability insurance policies in a group context to participants engaged in similar activities or organized in a common network, through a mass merchandising, safety group or similar program, in connection with State law or a Federal Purchasing group.
11 NYCRR § 153.1(j), in turn, defines “mass merchandising” as:
a method of marketing individually underwritten and issued property/casualty or liability insurance policies to participants that are employees of an employer, or members of an association or organization that has agreed to promote or otherwise facilitate such coverage from an insurer to such participants, with reasonably anticipated economies of acquisition or administration.
Pursuant to 11 NYCRR § 13 (Regulation 68) and 11 NYCRR § 153, the automobile club, as an association, could conceivably sponsor such a program.
C. Proposed Agency Pays Flat Fee to Subsidiary for Mailing List and Other Items
The third query asks whether the agency’s proposed fee arrangement with the subsidiary complies with Insurance Law § 2115. The proposed fee arrangement contemplates the agency sub-letting a mailing list, office space, staff and equipment from the subsidiary for a flat fee. Insurance Law § 2115 reads in relevant part as follows:
(a)(1) 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 an 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. For the purposes of this section, “acting as an 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. 6 (Emphasis added.)
Therefore, pursuant to Insurance Law § 2115(a)(1), an unlicensed entity may receive compensation for referring a prospective insured to an insurance agency provided that the referral does not include a discussion by the unlicensed entity with the prospective insured of specific policy terms and conditions, and the compensation is not based upon the purchase of insurance by such person. An unlicensed entity that is a shareholder of the agency, such as the automobile club, thus may make referrals subject to these conditions. See O.G.C. Opinion No. 01-02-16 (February 26, 2001). However, the fact pattern here does not contemplate that either the automobile club or the subsidiary would make referrals to the insurance agency.
It is reported that the agency is to sub-lease a mailing list, office space, staff and equipment from the subsidiary for a flat fee. The sub-letting of the mailing list does not constitute a referral under the Insurance Law. The Department opined in O.G.C. Opinion No. 03-03-11 (March 17, 2003) that Insurance Law § 2115 does not prohibit licensees from purchasing lists of customer names from non-licensees that will be used by the licensee for soliciting insurance, because the sale of the list does not constitute a referral or solicitation. See also Circular Letter No. 5 (2001). The mere sub-letting of office space, staff and equipment from the subsidiary does not run afoul of Insurance Law § 2115, provided that payment does not derive from commissions but from ordinary dividends declared in the ordinary course of business of the corporation. See O.G.C. Opinion No. 02-11-27 (November 26, 2002).
For further information you may contact Associate Counsel Alexander Tisch at the New York City Office.
1 Insurance Law § 2104(d)(3) makes this provision applicable to insurance brokers as well.
2 The fact pattern presented does not involve a group policy, and therefore is distinguishable from the facts presented in O.G.C. Opinion No. 07-06-15 (June 15, 2007), which held that a group policy, where a hospital is the policyholder and the policy is based on the hospital’s experience as employer of the group, is subject to the limitations of Insurance Law § 2103(i).
3 There are similar anti-rebating prohibitions for life, accident and health insurance, and annuities under Insurance Law § 4224; title insurance under Insurance Law § 6409; and mortgage guaranty insurance under Insurance Law § 6504.
4 In O.G.C. Opinion No. 07-06-15 (June 15, 2007), the Department opined that anti-rebating laws prohibit a subsidiary or affiliate broker, which is wholly-owned by a hospital, from sharing commissions with the hospital, either directly or indirectly, where the hospital’s risk and property are being insured. That fact pattern is distinguishable from the auto club because the hospital purchased insurance from the broker for both itself and its employees, and resultant commissions were used to fund payments for, among other items, salaries, supplies and equipment, insurance premiums, and operational expenses. Thus, in that scenario, there was a direct quid pro quo that is not present here. Also, the hospital there directly received the commissions that the broker received from the sale of the insurance to the hospital, instead of receiving dividends through a partly owned subsidiary.
5 That opinion held that an improper tie-in occurs when a reciprocal insurer that is licensed to sell medical malpractice insurance provides its members with other insurance at no cost even though the members were unaware of the existence of the additional insurance when they became members of the reciprocal. A continued relationship with the reciprocal is necessary to keep the other insurance.
6 There are similar provisions in Insurance Law § 2114 for life, accident and health insurance agents, and Insurance Law § 2116 for insurance brokers.