OGC Opinion No. 07-06-15
The Office of General Counsel issued the following opinion on June 15, 2007, representing the position of the New York State Insurance Department.
RE: Hospital Subsidiary Seeking to Act as Insurance Broker
Questions Presented:
1). May a hospital form a subsidiary or an affiliate entity to act as an insurance broker in insuring the risks and property of the hospital?
2). May the hospital’s broker, which is also the hospital’s subsidiary or affiliate, procure group accident and health insurance for the hospital employees?
3). May the aforementioned subsidiary or affiliate share the commissions it earns with the hospital?
Conclusions:
1). Yes. The New York Insurance Law does not prohibit a hospital from forming a broker that is a subsidiary or affiliate; however, the commissions that the broker may earn on policies insuring the risks of the hospital are subject to statutory limitations.
2). Yes. The hospital’s broker, which is the hospital’s subsidiary or affiliate, may procure group accident and health insurance for the hospital’s employees; however, the commissions that the subsidiary or affiliate may earn on the policy are subject to statutory limitations.
3). No. A subsidiary or affiliate may never share the commissions it generates with the hospital; however, the hospital may share in the profits and losses of its subsidiary or affiliate, based on the hospital’s ownership interest.
Facts:
The inquirer reports that he is counsel to a not-for-profit hospital, established under Article 28 of the Public Health Law, which seeks to form a wholly-owned subsidiary or affiliate to become a licensed insurance broker. The subsidiary or affiliate entity would act as a broker in the purchase by the hospital of insurance for its employees, including health insurance, dental insurance, life insurance, disability insurance, and vision insurance. In addition, the subsidiary or affiliate would act as a broker for the purchase by the hospital of insurance for its own risks, including property and liability insurance, as well as medical malpractice insurance for its doctors. The inquirer expects that any commissions earned by the subsidiary or affiliate would be used to fund, either directly or indirectly, activities of the hospital, including payment to third parties who provide medical equipment, recruitment services, clerical and custodial services, food services, advertising, technology services and equipment, ambulance services, and general compliance services. The inquirer further expects the commissions to pay for the following on behalf of the hospital: employees’ salaries, hospital supplies, hospital medical equipment, insurance premiums, hospital or operational expenses, and contractor fees.
Analysis:
Statutory Definitions
New York Insurance Law § 107(40) (McKinney 2006) is relevant to the queries. It defines “subsidiary” and “parent corporation” as follows:
"Subsidiary" means an institution controlled, directly or indirectly, by another institution or by a retirement system. "Parent corporation" means an institution or a retirement system that, directly or indirectly, controls another institution. For the purposes of the definitions in this subsection:
(A) an institution is conclusively presumed to be controlled by an institution or retirement system that, directly or indirectly, with power to vote, owns, controls or holds a majority of the outstanding voting securities of such institution;
(B) no presumption, either of control or of absence of control, arises if such ownership, control or holding of voting securities is less than a majority but more than five percent;
(C) absence of control is presumed if such ownership, control or holding of voting securities is five percent or less; and
(D) in determining control, voting securities held in separate accounts of an institution or retirement system shall be deemed to be owned by the institution or retirement system, but voting securities in an investment advisory account that are not owned by an institution but are held in an account as to which the institution is an investment adviser shall not be deemed to be controlled or held by such institution.
In turn, an “affiliate” means a corporation whose majority of shares is owned or controlled by shareholders, directors, or officers of another corporation, who own or control a majority of the shares of the other corporation. See Insurance Law § 107(a)(4). “Control,” including the terms “controlling,” “controlled by,” and “under common control with,” means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of an institution, whether through the ownership of voting securities, by contract or otherwise. See Insurance Law § 107(a)(16).
Licensing and Limitations on Commissions
The Department cannot advise the inquirer categorically as to whether a not-for-profit hospital has the legal authority, outside of the Insurance Law, to form a subsidiary or an affiliate to act as an insurance broker. In the absence of any legal impediment to forming the subsidiary or affiliate, Insurance Law § 2104 (McKinney 2006), which applies to insurance brokers, is relevant to the inquiry (Insurance Law § 2103 applies to insurance agents). Under Insurance Law § 2104(a)(1), which addresses licensing of insurance brokers, “any individual, firm, association or corporation,” may become licensed as a broker, if otherwise qualified. However, Insurance Law § 2104(d)(3) sets forth the following restriction:
The superintendent may refuse to issue a license or renewal license, as the case may be, to any applicant if he finds that such applicant has been or will be, as aforesaid, receiving any benefit or advantage in violation of section two thousand three hundred twenty-four of this chapter, or if he finds that more than ten percent of the aggregate net commissions, received during the term of the existing license, if any, or to be received during the term of the license applied for, by the applicant, resulted or will result from insurance on the property and risks set forth in subparagraphs (A), (B) and (C) of paragraph one of subsection (i) of section two thousand one hundred three of this article.
Because the inquirer states that the hospital’s broker would be a subsidiary or an affiliate, subparagraph (C) of Insurance Law § 2103(i)(1) (McKinney 2006) would apply. That provision establishes the class of property and risks so limited to include those:
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.
The 10% limitation contained in Insurance Law §§ 2103 and 2104 applies to a wide array of related parties. Therefore, a subsidiary or affiliate broker is limited to earning 10% of its net aggregate commissions from insuring the risks of all of the parties specified in § 2103(i)(1)(A), (B) and (C). However, the facts that the inquirer has provided do not indicate that there would be business written on the property or risks of any person specified in subsections (A) and (B).
In addition to the 10% limitation on these risks, Insurance Law § 2324 (McKinney 2006) provides a further 5% limitation on the aggregate commissions a broker may earn from placing property/casualty insurance on certain risks, including the risk of its parent or affiliate. Insurance Law § 2324 states, in pertinent part, that:
(a) No authorized insurer, no licensed insurance agent, no licensed insurance broker, and no employee or other representative of any such insurer, agent or broker shall make, procure or negotiate any contract of insurance other than as plainly expressed in the policy or other written contract issued or to be issued as evidence thereof, or shall directly or indirectly, by giving or sharing a commission or in any manner whatsoever, pay or allow or offer to pay or allow to the insured or to any employee of the insured, either as an inducement to the making of insurance or after insurance has been effected, any rebate from the premium which is specified in the policy, or any special favor or advantage in the dividends or other benefit to accrue thereon, or shall give or offer to give any valuable consideration or inducement of any kind, directly or indirectly, which is not specified in such policy or contract, other than any article of merchandise not exceeding fifteen dollars in value which shall have conspicuously stamped or printed thereon the advertisement of the insurer, agent or broker, or shall give, sell or purchase, or offer to give, sell or purchase, as an inducement to the making of such insurance or in connection therewith, any stock, bond or other securities or any dividends or profits accrued thereon, nor shall the insured, his agent or representative knowingly receive directly or indirectly, any such rebate or special favor or advantage, provided, however, a licensed insurance agent or a licensed insurance broker may retain the usual commission or underwriting fee on insurance placed on his own property or risks, if the aggregate of such commissions or underwriting fees will not exceed five percent of the total net commissions or underwriting fees received by such licensed insurance agent or insurance broker during the calendar year.
(b) Within the meaning of subsection (a) hereof, the sharing of a commission with the insured shall be deemed to include any case in which a licensed insurance agent or a licensed insurance broker which is a subsidiary corporation of, or a corporation affiliated with, any corporation insured, received commissions for the negotiation or procurement of any policy or contract of insurance for the insured. [Emphasis supplied.]
Therefore, under Insurance Law § 2104(d)(3), where a subsidiary or affiliate broker places insurance on the property and risks set forth under Insurance Law § 2103(i)(1)(A)(B) and (C)—which includes the risks of the parent corporation—the aggregate net commissions for all kinds of insurance that it earns from placing such business may not exceed 10% of its aggregate net commissions. Furthermore, under Insurance Law § 2324, the aggregate net commissions that the subsidiary or affiliate broker earns on the property and risks under insurance subject to such section (property/casualty insurance), of its parent, affiliates, and itself may not exceed 5% of its aggregate net commissions when it places insurance.
In the scenario that the inquirer presents—assuming that there are no other entities involved other than the hospital and its subsidiary or affiliate, and that no insurance is placed on the property, and no other risks of any other party specified in Insurance Law § 2104 or 2324 except the hospital—the aggregate net property/casualty commissions on the hospital’s property and risks that the broker earns may not exceed 5% of its aggregate net commissions, and the aggregate net commissions on the property and risks of the hospital may not exceed 10% of its aggregate net commissions.
Group Life, Accident and Health Insurance
With regard to group insurance policies, the Office of General Counsel opinion dated October 24, 2001 to which the inquirer refers, and an opinion dated April 5, 2001 (hereinafter, the “2001 opinions”), overturned a February 21, 1979 opinion, which held that a subsidiary providing group insurance for the employees of a parent corporation comes within the scope of Insurance Law § 114(4) (now Insurance Law § 2103(i)). The 2001 opinions stated that because the group policies covered the risk of the employees of the corporation, and not the corporation itself, those policies were not subject to the limitations of Insurance Law § 2103(i). However, that analysis, upon further reflection, is incorrect because it renders meaningless the 10% limitation set forth in Insurance Law § 2103(i)(1) (A), (B), and (C) as applied to life insurance agents or brokers, inasmuch as a corporation does not itself have any exposure to life or accident and health risks. See New York Statutes § 98 (McKinney 2006) (“All parts of a statute must be harmonized with each other as well as with the general intent of the whole statute, and effect and meaning must, if possible, be given to the entire statute and every part and word thereof”). Moreover, most group insurance policy premium rates are based on the experience of the employer/corporation as a group, not the individual members. In addition, the employer often pays the insurance premiums. Thus, it is erroneous to say that the risk insured under a group policy is not that of the group policyholder.
To the extent that this opinion is inconsistent with the 2001 opinions, the 2001 opinions are hereby overruled. If, however, the subsidiary or affiliate places insurance on the individual risk of the hospital’s employees (such as an individual life insurance policy), the aforementioned limitations set forth in Insurance Law §§ 2103, 2104, and 2324 would not apply.
Individual Insurance Policies
Where the risk insured is on an individual policyholder, the transaction that inquirer proposes may still violate other provisions of the Insurance Law, including § 2324, which applies to property/casualty insurance, and § 4224, which applies to life insurance, accident and health insurance, and annuities (and contain similar restrictions). These anti-rebating statutes have been a part of the Insurance Law since the late 1800’s, and were enacted to prevent abusive practices in the insurance industry whereby some insureds would pay a lesser rate for insurance than others because agents were refunding a portion of their commissions to those insureds. Insurance Law § 4224(c) 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.
Thus, in the facts the inquirer presents, Insurance Law §§ 2324 and 4224 prohibit the subsidiary or affiliate from sharing commissions with the hospital, either directly or indirectly, where the hospital’s risk and property are being insured.
In addition to rebating, Insurance Law §§ 2324 and 4224 prohibit inducements to the insured in the making of insurance, or after it has been effected. The subsidiary or affiliate, in this instance, would violate these provisions if it intends to use the commissions to fund the various activities of the parent that have a direct or indirect benefit to the hospital or its employees (such as paying employees’ salaries and insurance premiums), thereby inducing the hospital or the employees to place business with the subsidiary or affiliate.
Solicitation and Referral Fees
The facts that the inquirer provides state that the hospital will obtain insurance for its employees through the subsidiary or affiliate. However, the extent to which the hospital will be involved in the acquisition is unclear. If the hospital were to solicit insurance on behalf of its employees or others, the hospital would run afoul of Insurance Law § 2102 (McKinney 2006), which prohibits it from acting as an insurance agent or broker without a license. However, with respect to the hospital’s role in enrolling its own employees in its group insurance policies, Insurance Law § 2101(k)(6) (McKinney 2006) exempts persons who perform administrative duties and enroll individuals from the definition of insurance producer, as long as they do not get paid a commission.
Insurance Law § 2116 also exempts an unlicensed entity from Insurance Law § 2102 if it makes a referral under certain circumstances. That provision states:
No insurer authorized to do business in this state, and no officer, agent or other representative thereof, shall pay any money or give any other thing 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 so 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 insurance broker" 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.1 1[Emphasis supplied.]
In addition, the Superintendent may refuse to renew, revoke, or suspend for a period of time the license of any insurance producer whom the Superintendent determines has acted in an untrustworthy manner. See Insurance Law § 2110(a)(4) (McKinney 2006). The Superintendent also may determine that a licensed entity has violated Insurance Law § 2110(a)(12) by knowingly accepting insurance business from unlicensed individuals. In turn, the unlicensed entity may violate Insurance Law § 2102 by acting as a broker without a license. However, nothing precludes a parent from sharing the profits and losses of a subsidiary or affiliate broker based on ownership interest or other methodology specified in the contract between the parent and its subsidiary or affiliate, as long as such methodology is not based upon the sale of insurance.
For further information you may contact Assistant Attorney Sapna S. Maloor at the New York City Office.
1 Insurance Law §§ 2114 and 2115 contain similar provisions relating to life, accident and health insurance agents, and property/casualty insurance agents, respectively. The exception of certain referrals from the definition of “acting as an insurance broker” will expire on September 10, 2007, unless extended by the Legislature.