OGC Op. No. 11-01-02

The Office of General Counsel issued the following opinion on January 5, 2011 representing the position of the New York State Insurance Department.

RE: Proposed Payment by an Insurance Agent to an Unlicensed Person

Questions Presented:

1. Under the facts described below, may an insurance producer pay a fee to an association for the association to provide access to the association’s employer members so that the agent can sell group policies of life and accident and health insurance to the employer members?

2. Under the facts described below, may an insurance producer provide the specified administrative services to the association and its employer members without running afoul of Insurance Law § 4224(c)?

Conclusions:

1. No. Under the facts described below, the insurance producer may not pay any compensation to the association for the association to provide access to the association’s employer members so that the agent can sell group policies of life and accident and health insurance to such employer members. Any such payment would constitute a rebate or inducement that runs afoul of Insurance Law § 4224(c), and an unlawful payment of commissions by a producer to an unlicensed person.

2. Yes. The insurance producer may provide the administrative services listed below to the association and its employer members without running afoul of the rebating and inducement prohibitions contained in Insurance Law § 4224(c), provided that the agent offers the services in a fair and nondiscriminatory manner to like insureds or potential insureds.

Facts:

The inquirer reports that he represents a licensed life, accident and health and property/casualty insurance agent (“producer”). The producer proposes to enter into an arrangement with an association comprised of employers within the construction industry that is a multiple employer welfare arrangement (“MEWA”) under ERISA and provides welfare benefits including health, dental and life insurance benefits to the employees of employers who make contributions to the association for the purpose of obtaining such benefits (“contributing employers”). The association currently provides health and life insurance benefits through group insurance policies under which the Association is the group policyholder. The association self-funds the dental benefits; it has no insurance policy for these benefits. The producer is the agent of record for the association’s group insurance policies.

The inquirer states that the association wishes to “unwind its health benefits program.” The inquirer informs us that this means that the producer will solicit the association’s contributing employers to purchase group insurance policies directly, not through the association as policyholder, but the association will continue to maintain its group health insurance policies until all contributing employers can obtain coverage through the producer independently of the association. To that end, the producer and the association propose to enter into an agreement under which the producer will compensate the association a stated amount for each employee currently covered under the association’s group insurance policy for providing the producer with “access” to the association’s contributing employers, including inviting the producer to meetings and placing the producer on association meeting agendas; permitting the producer to provide information to employers about various insurance coverages; mailing informational flyers to employers; and making phone calls on behalf of the producer.

Under the proposed agreement, the producer will pay the association a quarterly fee of $75 for each employee who is then insured under the association’s group health insurance. The inquirer states that the association will use these fees for its general purposes and the money will not be distributed to any of the contributing employers nor will it be used to reduce a contributing employer’s insurance premiums. The fee will not be payable as to those employees who are insured under a group policy under which the employer, not the association, is the group policyholder.

The producer will continue to provide administrative services to the association for the association’s group insurance policies. These administrative services include: providing information to contributing employers about the insurance policies, providing forms needed for plan administration, enrollment services, billing employers for group health insurance premiums on behalf of the association and forwarding the premiums to the insurer, Consolidated Omnibus Reconciliation Act (“COBRA”) administration services, insurance consulting services and providing other insurance-related advice, and insurance-related regulatory and legislative updates.

Analysis:

1. Access Fee

The inquirer asks whether the fee to be paid under the agreement that his client proposes to enter into constitutes a referral fee that may be paid to an unlicensed person pursuant to Insurance Law § 2114, and whether the producer’s payment of the fee to the association as proposed above constitutes an unlawful inducement or rebate in violation of Insurance Law § 4224(c). However, as discussed below, the threshold issue is whether and to what extent a producer may provide compensation to a group policyholder of a policy sold by the producer.

Insurance Law §§ 2114, 2115 and 2116, which proscribe the payment of commissions to unlicensed persons or entities, are relevant to the inquiry. Insurance Law § 2114, with respect to life, accident and health insurance, states as follows:

No insurer authorized to do business in this state, and no officer, agent or representative thereof, shall pay any money or give anything of value to any person, firm, association or corporation for or because of his or its acting in this state as an insurance broker, unless such person, firm, association or corporation is authorized to act by virtue of a license issued or renewed pursuant to the provisions of section two thousand one hundred four of this article. For the purposes of this section, “acting as an insurance broker” shall not include the referral of a person to a licensed insurance agent or broker that does not include a discussion of the specific insurance policy terms and conditions and where the compensation for referral is not based upon the purchase of insurance by such person.

Insurance Law § 2115 contains similar language with respect to property/casualty insurance agents. Further, a licensed insurance broker who shares commissions with an unlicensed person may be found by the Superintendent to be acting in an “untrustworthy” manner pursuant to Insurance Law § 2110(a)(4)(C).

Insurance Law § 2102 prohibits any person from acting as an insurance producer without a license. Insurance Law § 2102(a)(1) states as follows:

No person, firm, association or corporation shall act as an insurance producer or insurance adjuster in this state without having authority to do so by virtue of a license issued and in force pursuant to the provisions of this chapter.

Insurance Law § 2101(k), in turn, defines an “insurance producer” as “an insurance agent, insurance broker, reinsurance intermediary, excess line broker, or any other person required to be licensed under the laws of this state to sell, solicit or negotiate insurance.” Further, Insurance Law § 2101(a) defines “insurance agent” in pertinent part, as follows:

(a) In this article, “insurance agent” means any authorized or acknowledged agent of an insurer, fraternal benefit society or health maintenance organization issued a certificate of authority pursuant to article forty-four of the public health law, and any sub-agent or other representative of such an agent, who acts as such in the solicitation of, negotiation for, or sale of, an insurance, health maintenance organization or annuity contract, other than as a licensed insurance broker . . . . (Emphasis added.)

Thus, if a group policyholder engages in any activities that would constitute acting as an insurance producer without a license, the group policyholder is in violation of Insurance Law § 2102, unless an exception applies. Likewise, if the producer compensates the group policyholder for activities that would constitute acting as an insurance producer without a license, the producer runs afoul of the Insurance Law, unless an exception applies.

Two relevant exceptions that permit a group policyholder to assist in the administration of the group policy, such as assisting in the enrollment of new insureds under the group policy, are set forth in Insurance Law § 2101(k)(6) and (7). But those exceptions apply only when the group policyholder or its employees do not receive compensation. Specifically, the exceptions apply to the following persons:

(k)(6) a person who secures and furnishes information for the purpose of group life insurance, group property/casualty insurance, group annuities, group or blanket accident and health insurance; or for the purpose of enrolling individuals under plans, issuing certificates under plans or otherwise assisting in administering plans . . . , where no commission is paid to the person for the service…

(7) an employer or association or its officers, directors, employees, or the trustees of an employee trust plan, to the extent that the employers, officers, employees, directors or trustees are engaged in the administration or operation of a program of employee benefits for the employer’s or association’s own employees or the employees of its subsidiaries or affiliates, which program involves the use of insurance issued by an insurer, fraternal benefit society or health maintenance organization, as long as the employers, associations, officers, directors, employees or trustees are not in any manner compensated, directly or indirectly, by the company issuing the contracts…

Here, the group policyholder would receive compensation based upon the number of certificate holders under the group policy and thus the exceptions specified in Insurance Law § 2101(k)(6) and (7) do not apply.

The inquirer asserts that the referral exception in Insurance Law § 2114 applies to these facts and permits the payment that the inquirer’s client proposes. Insurance Law § 2114, which applies to life and accident and health insurance agents and proscribes such insurance agents from sharing commissions with non-licensees, sets forth a limited exception for referrals, which states as follows:

(4) Services of the kind specified in this subsection 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.

Insurance Law §§ 2115 and 2116 specify a similar limited exception for referrals to property/casualty insurance agents and to insurance brokers, respectively. Accordingly, pursuant to Insurance Law §§ 2114, 2115, and 2116, an insurance agent or broker may compensate an unlicensed person who makes a referral to the insurance agent or broker, but only if the referral does not include a discussion of specific insurance policy terms and conditions and the compensation for the referral is not based on the purchase of insurance by the person so referred. However, a group policyholder may not receive compensation for referrals from the producer of record on the group policy. Any such compensation would constitute an unlawful rebate or inducement in violation of Insurance Law § 4224(c) because the group policyholder is the insured under the group policy. See OGC Opinion No. 06-03-06 (March 9, 2006). ¹

In sum, under the facts described herein, the insurance producer may not pay any compensation to the association for the association providing access to the association’s employer members. Any such payment would constitute a rebate or inducement that runs afoul of Insurance Law § 4224(c), and an unlawful payment of commissions by a producer to an unlicensed person.

2. Administrative Services

The inquirer also asks whether the producer may provide administrative services to the association or whether such services would constitute an unlawful inducement or rebate in violation of Insurance Law § 4224(c).

An insurance producer may provide a service not specified in the insurance policy or contract to an insured without violating the anti-rebating and inducement provisions of the Insurance Law if 1) the service directly relates to the sale or servicing of the policy or provides general information about insurance or risk reduction, and 2) the insurance producer provides the service in a fair and nondiscriminatory manner to like insureds or potential insureds. See Circular Letter No. 9 (2009). The services that the inquirer has identified may be lawfully provided without running afoul of the rebating and inducement prohibitions contained in Insurance Law § 4224(c), provided that the producer offers the services in a fair and nondiscriminatory manner to like insureds or potential insureds. In fact, the following services that the inquirer listed are specifically referenced in the Circular Letter as services that would not constitute a rebate or inducement if provided in a fair and nondiscriminatory manner to like insureds or potential insureds: providing information to contributing employers about the association group insurance policies, forms needed for plan administration, enrollment services; COBRA administration services; insurance consulting services and other insurance-related advice; and insurance-related regulatory and legislative updates. The remaining service, billing employers for group health insurance premiums on behalf of the association and forwarding the premiums to the insurer, is also appropriate if the producer offers it in a fair and nondiscriminatory manner because it directly relates to the sale or servicing of the policy.

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

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¹ Notwithstanding the prohibition against receiving compensation, an association may be reimbursed by an insurer or insurance producer for actual expenses rendered in providing services on behalf of the insurer under a group insurance policy or mass merchandising plan. See OGC Opinion Nos. 06-03-06 (March 9, 2006); 03-10-09 (October 16, 2003) and 86-83 (September 17, 1987). Thus, although the inquirer has not raised this as an issue in the inquiry, the inquirer’s client may reimburse the association for certain administration services performed by the association up to the administration’s actual costs of providing such services.