OGC Op. No. 11-02-08

The Office of General Counsel issued the following opinion on February 9, 2011, representing the position of the New York State Insurance Department.

Re: Chamber of Commerce Subsidiary Licensed as an Insurance Producer

Questions Presented:

1. May an insurer issue a group accident and health insurance policy to a chamber of commerce where the policy covers both employees of the chamber’s members and members who are individuals?

2. May a wholly-owned subsidiary of a chamber of commerce be licensed as a life and accident and health insurance agent or broker?

Conclusions:

1. Yes, an insurer may issue a group accident and health insurance policy to a chamber of commerce where the policy covers both employees of the chamber’s members and members who are individuals.

2. Yes, a wholly-owned subsidiary of a chamber of commerce may be licensed as a life and accident and health insurance agent or broker. However, the producer may not receive more than 10% of its aggregate net commissions from policies under which the chamber is the group policyholder and policies that insure risks and property of the chamber.

Facts:

The ABC Chamber of Commerce (“Chamber”) is a not-for-profit corporation that is a group policyholder under an accident and health insurance policy. Certificates under the policy are issued to employees of the Chamber’s members and members who are individuals and elect to become covered under the Chamber policy. The Chamber proposes to form a wholly-owned subsidiary that would become licensed as a life and accident and health insurance producer. Under the proposal, the insurance agent or broker would earn commissions from the sale of the group policy to the Chamber and certificates purchased thereunder. The Chamber is also considering a plan under which the Chamber would sell group and individual policies directly to Chamber members, thereby eliminating the parent Chamber as the group policyholder.

Analysis:

1. Chamber Group Policy

The inquiry raises the question as to whether the Chamber and its members constitute a permissible accident and health group. N.Y. Ins. Law § 4235(c)(1)(K) (McKinney 2007) is relevant to the question. It authorizes an association group under the following criteria:

(K) A policy issued to an association or the trustee or trustees of a trust established, or participated in, by one or more associations, to insure association members, subject to the following:

(i) Each association shall have:

(I) A minimum of two hundred insured members at the policy’s date of issue;

(II) Been organized and maintained in good faith for purposes principally other than
that of obtaining insurance;

(III) Been in active existence for at least two years; and

(IV) A constitution and bylaws which provide that:

(aa) The association hold regular meetings not less than annually to further the purposes of the association;

(bb) The association collect dues or solicit contributions from members; and

(cc) The members have voting privileges and representation on the governing board and committees.

By its terms, Insurance Law § 4235(c)(1)(K) does not make specific reference to group policies held by chambers of commerce. Although a chamber would fit within the context of being an “association,” the policies do not precisely fit the group criteria because the statute specifies the members as the certificate holders. For instance, under these facts, in some instances a member of the Chamber is the certificate holder (as in a sole proprietorship that does not provide any employee coverage), but in other cases an employee of a member is the certificate holder. Nevertheless, Insurance Law § 3231, relating to the rating of individual and small group health insurance policies, evidences legislative intent to include chambers among the “associations” defined in Insurance Law § 4235(c)(1)(K). Insurance Law § 3231(i)(1), which applies to rating of individual and small group ¹ health insurance, states:

(i)(1) If an insurer issues coverage to an association group (including chambers of commerce), as defined in subparagraph (K) of paragraph one of subsection (c) of section four thousand two hundred thirty-five of this chapter, the insurer must issue the same coverage to individual proprietors which purchase coverage through the association group as the insurer issues to groups which purchase coverage through the association group;…

The parenthetical reference to chambers of commerce in Insurance Law § 3231(i)(1) indicates the New York State Legislature’s intent to include the chambers among those “associations” that may come within the definition of a permissible group policy set forth in Insurance Law § 4235(c)(1)(K), provided that the chamber meets the criteria under the statute relating to the minimum number of insured members; duration of existence; and certain corporate constitution and bylaws provisions. Further, although the Office of General Counsel has not previously opined on this issue, the Department has long recognized chamber groups under the association provision. For the purpose of calculating the minimum number of insured members on the date of issuance of the policy, the Department takes the position that employees of chamber members are counted as “insured members” under Insurance Law §  4235(K)(i)(I).

2. Chamber-Owned Insurance Producer

With respect to the inquiry as to whether the Chamber may own a subsidiary that is licensed as an insurance producer in this state, the Insurance Law does not prohibit a not-for-profit organization from owning an entity that is licensed by the Department as an insurance producer. ² See, e.g., OGC Opinion No. 10-02-05 (February 12, 2010) and No. 07-06-15 (June 18, 2007). Such a subsidiary could become licensed as an insurance agent or broker in this State, provided that it otherwise meets the qualifications and requirements of licensure under Article 21 of the Insurance Law. In this connection, the commissions that the subsidiary may earn from certain policies as set forth below are subject to the statutory limitation set forth in Insurance Law § 2103(i), for insurance agents, and § 2104(d)(3), for insurance brokers. See OGC Opinion No. 07-06-15 (June 15, 2007).

Insurance Law § 2103(i)(1)(C), relating to the licensing of insurance agents that are formed as corporations, is germane to the inquiry, and provides in relevant part:

(i)(1)… 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 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 the sale of insurance on the property and risks:

* * *

(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.

Insurance Law § 2104(d)(3) incorporates the same provision for insurance brokers.

Thus, pursuant to Insurance Law §§ 2103(i)(1)(C) and 2104(d)(3), the Superintendent may refuse to issue or revoke an insurance agent license or insurance broker license of any applicant or licensee if the Superintendent finds that the applicant or licensee will receive commissions in an amount in excess of ten percent of its aggregate net commissions resulting from insurance on the property and risks of the parties set forth in § 2103(i)(1)(C). Under these facts, since the producer would be wholly- owned by the Chamber, the producer may earn no more than 10% of its commissions from policies insuring the property and risks of the Chamber as a shareholder of the producer, any affiliates or other subsidiaries of the Chamber, and any subsidiaries or affiliates of the producer. To the extent that any of these parties is a group policyholder, commissions on any such policies must be counted toward the 10% limit. See OGC Opinion No. 07-06-15 (June 15, 2007). However, the policies covering the members where the Chamber is not a group policyholder are not included within the 10% limit because the Chamber is a corporation (a not-for-profit) and neither Insurance Law § 2103(i)(1)(C) nor § 2104(d)(3) requires that policies covering members of a not-for-profit corporation be considered within the 10% limitation. ³

Where an unlicensed entity forms a corporation that will be licensed as an insurance producer, and the insurance producer sells insurance to members of the unlicensed entity, if the commissions earned by the corporation ultimately inure to the benefit of the insureds, this would constitute a violation of Insurance Law § 4224. However, such an arrangement would be permissible under Insurance Law § 4224 if the following elements are met:

1. The members of the organization do not receive a known and quantifiable benefit or quid pro quo from any insurance premium savings that may result from the formation of the new corporation.

2. The benefits inure in a manner that is wholly unrelated to the purchase of insurance by the members, i.e., there is no proportionality or relationship between the amount of insurance purchased by an individual member of the organization and the degree of benefit enjoyed by the member.

3. The benefits derived do not, as a practical matter, function as an inducement to purchase or retain insurance.

See OGC Opinion No. 02-11-07 (November 13, 2002). The rationale behind this is that in a true rebate scenario, an identifiable quid pro quo exists and this was the evil that the statute was intended to prevent. The producer also may not restrict the sale of insurance to only its parent’s members for that would constitute an impermissible tie-in or inducement in violation of Insurance Law § 4224. See OGC Opinion No. 10-01-03 (January 6, 2010).

Finally, the Department has opined that unlicensed persons or entities may not share in commissions earned by a licensed producer, but such persons or entities may share in the overall profits of the business. See OGC Opinion No. 08-05-03 (May 6, 2008). The sharing of such profits may be based upon the percentage of ownership interest in the producer, but may not in any way be based upon a percentage of the gross commissions earned by the producer. See OGC Opinion No. 07-07-25 (July 26, 2007). It should be noted, however, that the producer must be formed for the purpose of engaging in an insurance business as a going concern (i.e., with employees and other significant expenses), and not merely as a shell mechanism created for the purpose of sharing commissions with a non-licensee. For instance, a licensed subsidiary whose only source of income is from commissions generated from referrals of the non-licensee parent corporation, or that has few or no business expenses (such as salaries of employees or office rent) may be found to constitute a shell mechanism created for the purpose of illegally sharing commissions with a non-licensee. See OGC Opinion No. 09-02-08 (February 23, 2009).

For further information, you may communicate with Associate Counsel Bradley F. Rice at the Albany office.

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¹ Insurance Law § 3231(a) defines a small group policy as one “covering between two and fifty employees or members of the group exclusive of spouses and dependents . . . providing hospital and/or medical benefits, including medicare supplemental insurance.”

² The Department does not opine regarding any other laws or impediments that could be relevant to a not-for-profit organization’s ownership of an insurance producer.

³ If the Chamber were a firm or association, policies sold by the producer to the members would have to be counted towards the 10% limit on the producer’s aggregate commissions where the Chamber and its members collectively or individually owned more than 50% of the producer’s shares.