OGC Op. No. 04-02-04
The Office of General Counsel issued the following information on February 9, 2004, representing the position of the New York State Insurance Department.
Re: Key Man Insurance - N.Y. Ins. Law § 3205(a)(1)(B)
1) Is the consent of the insured required if the insurable interest arises under either N.Y. Ins. Law § 3205(a)(1)(B) (McKinney Supp. 2004) or N.Y. Ins. Law § 3205(d) (McKinney Supp. 2004)?
2) Does an insured under a key man policy have the right to withdraw consent to be an insured?
1)Yes. N.Y. Ins. Law § 3205(c) (McKinney Supp. 2004) requires, with limited exceptions, the consent of the proposed insured.
2) No. That right is applicable only to insureds where the insurable interest arises under N.Y. Ins. Law § 3205(d) (McKinney Supp. 2004).
No facts were presented. The inquiry is general in nature.
N.Y. Ins. Law § 3205(a)(1)(B) (McKinney Supp. 2004) provides:
In this section: (1) The term, "insurable interest" means:
(B) in the case of other persons, a lawful and substantial economic interest in the continued life, health or bodily safety of the person insured, as distinguished from an interest which would arise only by, or would be enhanced in value by, the death, disablement or injury of the insured.
It has long been recognized that, pursuant to the above, an employer may have an insurable interest in an employee if the employment is for a definite period and if the death or disability of the employee would cause a specific economic damage to the employer. Similarly, a partner may have an insurable interest in another partner and a corporation may have an insurable interest in an officer or director.1 See Donald S. DiBenedetto, Basic Concepts of Insurance Law, in 2 New York Insurance Law 26.01(3) (Wolcott B. Dunham ed., 2001). Accordingly, for many years, individual policies of insurance have been used in New York to fund a product commonly known as Corporate Owned Life Insurance ("COLI") and often referred to as "key man" insurance. This is life insurance on employees that is owned by and payable to a corporate employer or a trust. Id. at 32.05(4). Its purpose is to indemnify the employer against a potential loss of net income that may result from the untimely death of the insured employee. See OCC Bulletin 2000-23 (bank-owned life insurance guidance for national banks), Appendix, p. 4.
N.Y. Ins. Law § 3205(d) (McKinney Supp. 2004) provides:
(d) In addition to any other basis under which either an employer, or an irrevocable trust established by one or more employers or one or more employers and one or more labor unions, have an insurable interest in the lives of any of its employees or retirees or those of its subsidiaries or affiliated companies, an employer or such a trust shall have an insurable interest in the lives of any such employees or retirees who are participants or who are eligible to participate, upon the satisfaction of age, service or similar eligibility criteria, in an employee benefit plan, established or maintained by an employer as defined by the federal Employee Retirement Income Security Act of 1974, 29 U.S.C. § 1001 et seq., provided that:
(1) The employer providing for insurance coverage or causing such coverage to be issued under this subsection: (A) prior to or at the commencement of any such coverage notifies prospective insureds in writing that coverage is being obtained on their lives, requires that prospective insureds consent in writing to such coverage, provides each consenting insured the right to have any coverage on his/her life issued under the authority of this subsection discontinued at any time and describes in the notice the method the insured may use to terminate coverage; (B) at the time any insured employee's employment terminates, notifies the employee of the right to discontinue such coverage, provided, however, that no such notification shall be required if the insured employee possesses a present or prospective right to receive any of the benefits under an employee benefit plan being financed, in whole or in part, by such life insurance coverage; and (C) at any time after the termination of an insured employees employment and upon the termination of an employee benefit plan being financed, in whole or in part, by such life insurance coverage or a reduction of the benefits provided thereunder, notifies the employee of the right to discontinue such coverage.
(2) At the time coverage is issued, the total amount of insurance coverage issued to date to the employer or trust under authority of this subsection shall not exceed the costs of employee and/or retiree benefits already incurred in connection with such employee benefit plan since the earliest date coverage on an employee or retiree was issued under this subsection, plus the projected future cost of such benefits as established by the employer.
(3) The amount of coverage insuring the life of each such employee or retiree and the selection of the employees or retirees to be insured is based purely on nondiscriminatory factors such as age, premium amount or some other nondiscriminatory factor, and not on conditions or terms of employment other than participation in an employee benefit plan described herein.
(4) If subsequent to issuance of the policy or policies providing life insurance coverage pursuant to this subsection, the insurer providing the coverage is replaced by another insurer, the employer shall notify each insured employee or retiree of such replacement.
(5) During the first five years subsequent to issuance of the policy or policies providing life insurance pursuant to this subsection, the policyholder does not undertake a pattern of borrowing likely to require all or a substantial part of the cash values of the policies to be pledged as security against repayment of such loans, unless such borrowing was incurred because of an unforeseen substantial loss of income or unforeseen increase in financial obligations.
Since 1996, when N.Y. Ins. Law § 3205(d) was added, it has been recognized that an employer may have an insurable interest in the lives of any employees or retirees who are participating or eligible to participate in an employee benefit plan, established or maintained by an employer as defined by the federal Employee Retirement Income Security Act of 1974.
N.Y. Ins. Law § 3205(c) (McKinney Supp. 2004) provides:
(c) No contract of insurance upon the person, except a policy of group life insurance, group or blanket accident and health insurance, or family insurance, as defined in this chapter, shall be made or effectuated unless at or before the making of such contract the person insured, being of lawful age or competent to contract therefor, applies for or consents in writing to the making of the contract, except in the following cases:
(1) A wife or a husband may effectuate insurance upon the person of the other.
(2) Any person having an insurable interest in the life of a minor under the age of fourteen years and six months or any person upon whom such minor is dependent for support and maintenance, may effectuate a contract of insurance upon the life of such minor, in an amount which shall not exceed the limits specified in section three thousand two hundred seven of this article.
This section requires, with very limited exceptions, the consent of the proposed insured. None of the exceptions are applicable to insurance written pursuant to either N.Y. Ins. Law § 3205(a)(1)(B) (McKinney Supp. 2004) or N.Y. Ins. Law § 3205(d) (McKinney Supp. 2004). Accordingly, in either case, the consent of the insured would be required. Moreover, N.Y. Ins. Law § 3205(d)(1) contains an independent consent requirement for coverage written pursuant to that subsection.
Insofar as an insureds right to withdraw his or her consent, that right is afforded only to insureds where the insurable interest arises under N.Y. Ins. Law § 3205(d) (McKinney 2004) and only in accordance with that subsection.
For further information you may contact Supervisory Attorney Joan Siegel at the New York City Office.
1 See Wagner v. e. Gaudig & Blum Corp., 233 A.D. 254, 228 N.Y.S. 139 (1st Dept. 1928); Theater Guild Prods. v. Insurance Co. of Ireland, 25 A.D.2d 109, 267 N.Y.S.2d 297 (1st Dept. 1966), affd, 19 N.Y.2d 656, 278 N.Y.S.2d 625 (1967); In re Eljay Jrs., Inc., 106 B.R. 775 S.D.N.Y. 1989; Hubbard v. Millard, 156 A.D.2d 233, 548 N.Y.S.2d 495 (1st Dept. 1989)