OGC Op. No. 10-12-09

The Office of General Counsel issued the following informal opinion on December 8, 2010, representing the position of the New York State Insurance Department.

Re: Permissibility of Proposed Discount Dental Program

Question Presented:

Would the proposed discount dental program (the “Program”) constitute the doing of an insurance business, as defined in N.Y. Ins. Law § 1101 (McKinney 2006), where the Program would provide certain specialty dental services at a discounted rate to employees of businesses who do not have dental insurance coverage?

Conclusion:

No, the Program would not constitute doing an insurance business within the meaning of Insurance Law § 1101, provided that the Program charges employees a fee for each specialty dental service to cover the cost of rendering the service, including reasonable overhead, and the Program includes the disclosure notices discussed below.

Facts:

The inquirer reports that he represents two dental offices that would like to offer discount specialty dental services to employees of businesses who do not have dental insurance coverage. Those persons who have dental coverage would not be eligible to receive the discounted fees.

Under the proposed Program, area employers would be eligible to sign up for the Program for the benefit of their employees who do not have dental insurance coverage. The employer would issue program cards to each of its uninsured employees who, in turn, would be entitled to be charged a discounted fee for certain specified dental services, such as periodontal services, implants, and oral surgery from participating dental specialty practices (initially this would be limited to his client’s specialty dental services). General dentistry services (other than initial oral hygiene checkups) would not be covered under the Program, and patients would be referred to area dentists for those dental services. No fees or imputed costs would be charged to the participating employers or participating employees for participation in the Program and there would be no sign up or referral fees.

The inquirer states that the dental services offered under the Program would not be so heavily discounted that the dental practices incur a loss. The inquirer avers that the discounted rates would provide credible savings for participants, and participating dentists and specialists should be able to cover their costs while making a profit for their services.

Analysis:

Insurance Law § 1102(a) is relevant to the inquiry. That section prohibits any person, firm, association, corporation or joint-stock company from doing an insurance business in this state, unless licensed as an insurer or exempted from licensing.

Insurance Law § 1101(b)(1) defines the term “doing an insurance business”, in pertinent part, as follows:

(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;

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(E) doing or proposing to do any business in substance equivalent to any of the foregoing in a manner designed to evade the provisions of this chapter.

Insurance Law § 1101(a)(1) defines the term “insurance contract” as follows:

[A]ny 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), in turn, defines the term “fortuitous event” as:

[A]ny 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 Insurance Department’s Office of General Counsel (“OGC”) has consistently opined that if an entity agrees to provide unlimited services that are based upon the happening of a fortuitous event (such as illness or injury) on a prepaid fee basis or similar arrangement, the agreement constitutes an insurance contract and the entity is doing the business of insurance within the meaning of Insurance Law § 1101, which requires a license duly issued in accordance with Insurance Law § 1102. In that circumstance, the entity bears the risk of incurring a loss if the cost of the services exceeds the paid fees. See, e.g., OGC Opinion No. 09-11-01 (Nov. 2, 2009); OGC Opinion No. 09-02-02 (Feb. 2, 2009); OGC Opinion No. 07-03-11 (Mar.15, 2007); OGC Opinion No. 03-10-02 (October 2, 2003).

However, where an entity agrees, for a prepaid fee, to provide services that are not dependent upon the happening of a fortuitous event (e.g., routine annual examinations), the entity is not doing an insurance business. OGC Opinion No. 09-11-01; OGC Opinion No. 09-02-02; OGC Opinion No. 03-10-02.

Additionally, the Department has long held that Insurance Law § 1101(a)(1) does not encompass an agreement (which still could be technically construed as an insurance contract) in which there is a separate charge for services dependent upon the happening of fortuitous events (e.g., sick visit to the doctor) provided that the charge covers the actual cost of rendering the service, including reasonable overhead expenses. See, e.g., OGC Op. No. 09-11-01; OGC Opinion No. 09-02-02; OGC Opinion No. 03-10-02.

Nonetheless, the analysis does not end there. As noted above, Insurance Law § 1101(b)(1)(E) provides that doing an insurance business includes “doing or proposing to do any business in substance equivalent to any of the foregoing in a manner designed to evade the provisions of this chapter.” The superintendent may deem as insurance any agreement that is marketed in a manner that could lead the public to believe that the program is a substitute for insurance. See OGC Opinion No. 10-03-03 (March 16, 2010).

In order to avoid consumer confusion, and for the Superintendent to construe a program in a manner that would not run afoul of the Insurance Law, advertising and contractual materials must clearly, conspicuously and unambiguously state that the program is not insurance and, in the case of agreements pertaining to health care, note that such program does not serve as a substitute for comprehensive dental insurance coverage. Id. The Superintendent may well consider the amount of the charges for the program in its totality, as well as specific services provided, in evaluating whether the program constitutes the doing of an insurance business. Id. Further, all of the Program’s marketing, advertising and contractual materials must clearly, conspicuously and unambiguously state that the Program is not insurance and does not serve as a substitute for comprehensive dental insurance coverage. Id.

Here, visits for specialty dental services, such as periodontal services or oral surgery, are clearly occasioned by the happening of a fortuitous event because they are triggered by the patient’s need for the service. However, the inquirer stated that the Program would not be so heavily discounted that the dental practices incur a loss. Provided that the Program charges employees a fee for each specialty dental service to cover the cost of rendering the service, including reasonable overhead, and further provided that the Program includes the disclosure notices mentioned above, the Program would not constitute doing an insurance business within the meaning of Insurance Law § 1101.

Please note that the conclusions expressed in this opinion are strictly limited to the New York Insurance Law. The Department offers no opinion regarding any other laws that may apply to the Program.

For further information you may contact Associate Attorney Pascale Jean-Baptiste at the New York City Office.