The Office of General Counsel has issued the following informal opinion on March 10, 2000, representing the position of the New York State Insurance Department.
Rebating and illegal inducement by agent
Question Presented:
1. Does an attorney violate the Insurance Law when he waives legal fees for attorney work in exchange for a clients life insurance business and, in lieu of these fees, accepts the commission from the sale of such life insurance?
2. Does the policyholder violate the Insurance Law when he accepts an inducement on the purchase of a life insurance policy that is not specified in the policy?
Conclusion:
1. Yes, an attorney violates the Insurance Law when she waives legal fees for attorney work in exchange for a clients life insurance business and receives a commission from the sale of such life insurance in lieu of a commission.
2. Yes, a policyholder violates the Insurance Law when he accepts an inducement on the purchase of a life insurance policy that is not specified in the policy.
Facts:
A licensed insurance agent lost a life insurance account to an attorney under circumstances which he believed to be illegal. Their client was working with an attorney and had approximately $3,000.00 worth of legal services performed. The client showed the agents insurance quotes to his attorney. In response, the attorney offered to waive her legal costs for the attorney work in exchange for commissions earned from the clients life insurance business. The client agreed, and the attorney is now receiving a commission in lieu of legal fees.
Analysis:
This opinion is written with the assumption that the attorney is also a licensed agent.
N.Y. Ins. Law Section 4224(c)(McKinney 1985) provides:
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. (emphasis added). Id.
According to the express language of the statute, insurance agents and brokers are prohibited from offering rebates or other inducements in connection with the sale of life insurance, health insurance or annuities, when such rebates or inducements are not specified in the policy or contract of insurance. The purpose of the statute is to prohibit agents and brokers from offering a contract other than what is expressly stated in the policy. Therefore, if it is not in the contract, it cannot be used as an inducement to purchase the policy.
It is clear that in this instance, the attorneys offer of free legal service was an inducement for the client to purchase life insurance through her. The attorneys actions are in violation of N.Y. Ins. Law Section 4224(c)(McKinney 1985).
Additionally, any insured who knowingly receives any such inducement, premium rebate, policy fee, special favor or advantage in the dividends or benefits that accrue under a life insurance policy or annuity contract, is in violation of the Insurance Law.
For further information you may contact Attorney Meredith S. Katz at the New York City office.