OGC Op. No. 10-09-13

The Office of General Counsel issued the following opinion on September 29, 2010 representing the position of the New York State Insurance Department.

Re: Rebates

Question Presented:

Under the facts presented, may a broker pay any part of his insurance commissions to an employer client?

Conclusion:

No. The broker may not pay any part of his insurance commissions to the employer. To do so would constitute unlawful rebating pursuant to N.Y. Ins. Law § 4224(c) (McKinney 2007).

Facts:

Broker presented quotes to Employer for health insurance for Employer’s employees, from which Employer selected the least expensive policy. Employer subsequently claimed that Employer’s decision was based upon information from the respective insurer that was “incorrect and/or didn’t fully explain some plan details.” Thereafter, employer changed its selection to a more expensive insurance policy. Employer asked Broker to pay Employer some or all of Broker’s commissions from the sale of the insurance for the purpose of offsetting Employer’s increased cost of insurance as between the original policy the Employer selected and the policy upon which Employer finally settled. At issue here is a community rated health insurance policy.

Analysis:

Insurance Law § 4224 prohibits rebating of premium and inducements by insurers, insurance agents and insurance brokers with respect to life insurance, annuity contract or accident and health insurance. Insurance Law § 4224(c) reads as follows:

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.

Insurance Law § 4224(c) unequivocally prohibits the giving of any rebate of premium or valuable consideration as an inducement, directly or indirectly, in connection with the sale of insurance, where the inducement is not specified in the policy. See Office of General Counsel (“OGC”) Opinion No. 08-09-07 (September 22, 2008) (a broker may not charge a flat fee in lieu of commissions, that would result in decreasing the premium). Here, for the broker to pay to the employer all or part of the broker’s commission on the policy clearly constitutes either a rebate of premium or an inducement not specified in the policy, which runs afoul of Insurance Law § 4224(c). ¹ See OGC Opinion No. 07-07-25 (July 26, 2007) (an insurance agent may not share with an employer the commissions the agent earns on life and accident and health policies purchased by the employer for the benefit of its employees). It is irrelevant that the rebate occurs after the policy is issued. The broker’s payment of the commissions effectively reduces the premium paid by the employer (the stated goal) and, as such, may be considered a return (rebate) of premium, or at the very least may be considered a valuable consideration to induce the employer to retain its insurance.

For further information you may contact Senior Attorney Brenda M. Gibbs at the Albany Office.

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¹ To be sure, the Department would not approve a policy form allowing an insurance agent or broker to pay any part of his or her commission to an insured or purchaser of a health insurance policy, nor have you alleged any such term in the employer’s health insurance policy.