OGC Opinion No. 10-06-04

The Office of General Counsel issued the following opinion on June 4, 2010, representing the position of the New York State Insurance Department.

RE: Soliciting on behalf of charity and donating commissions

Questions Presented:

1) May a licensed life insurance agent who is a member of the board of directors of a not-for-profit charity solicit individual members of the charity to purchase a life insurance policy naming the charity as the beneficiary?

2) May that life insurance agent donate a portion or all of the commissions earned on the sale to the charity?

Conclusions:

1) Yes. A licensed life insurance agent who is a member of the board of directors of a not-for-profit charity may solicit individual members of the charity to purchase a life insurance policy naming the charity as the beneficiary, because New York Insurance Law § 3205(b)(3) (McKinney 2006) creates an insurable interest in a charitable organization with respect to its donors.

2) It depends. The agent may donate a portion or all of his commissions earned on the sale to the charity, so long as the advertising of a charitable contribution as an incentive for new insurance business does not constitute an improper inducement in violation of Insurance Law § 4224.

Facts:

The inquiry is of a general nature, without reference to specific facts.

Analysis:

Solicitation on behalf of a not-for-profit charity

The general rule for purchases of insurance on the life of another is set forth in Insurance Law § 3205(b)(2). That subsection prohibits any person from procuring or causing to be procured “insurance upon the person of another unless the benefits under such insurance are payable to the named insured, to a personal representative of the insured, or to a person having an insurable interest in the named insured.”

At its most basic, the insurable interest requirement is intended to ensure that an individual’s life may not be insured by someone who will benefit solely from that individual’s death, so as not to create motive for murder or harm. See Kenneth Black, Jr. & Harold D. Skipper, Jr., Life & Health Insurance 197-200 (13th ed. 2000). Stated differently, the person proposing to obtain insurance on another’s life must ordinarily expect to benefit financially from the insured’s continued survival or lose financially upon his or her death. Examples of situations generally understood to produce an insurable interest are: (1) family and marital relationships, (2) creditor-debtor relationships, and (3) business relationships based on a substantial pecuniary interest.

However, Insurance Law § 3205(b)(3) creates an insurable interest in a charitable organization with respect to its donors. ¹ The purpose of the statute is described in a letter dated July 1, 1996, from the Superintendent of Insurance to the Governor’s Counsel:

It appears that the intent of the bill is to permit donors to enter into long term gift giving arrangements which result in posthumous endowments to the religious charitable and educational organizations. In essence, the bill confers these charitable, religious and educational corporations with an insurable interest in the lives of their donors. This would expand the definition of insurable interest and presumably permit these organizations to solicit potential donors to enter into long term gift giving programs…The bill would permit direct solicitation by Department licensees. Thus, a licensed insurance agent can assist in the procurement of a new life insurance policy on the life of the donor, and the charitable organization would be the policyowner and beneficiary.

1995-1996 NYS Insurance Department Legislative Diary, Volume 5, Page 103.

This amendment to Insurance Law § 3205(b) enables charitable, educational or religious organizations formed pursuant to the New York Not-for-Profit Corporation Law (N-PCL) § 201(b) (McKinney 2005) to obtain life insurance policies on the lives of their donors more easily by simplifying the procurement process. The provision allows for the direct solicitation of these entities by licensees of the Insurance Department, and thereby eliminates, in the charitable donation context, the intervening step of requiring the donor to first purchase the policy and then transfer the policy to the organization.

Insurance Law § 3205(b)(3), as described above, presently reads:

Notwithstanding the provisions of paragraphs one and two of the subsection, a Type-B charitable, educational or religious corporation formed pursuant to paragraph (b) of section two hundred one of the not-for-profit corporation law, or its agent, may procure or cause to be procured, directly or by assignment or otherwise, a contract of life insurance upon the person of another and may designate itself or cause to have itself designated as the beneficiary of such contract.

Thus, a licensed life insurance agent may directly solicit potential donors to purchase life insurance policies on their lives and name as beneficiary a Type-B charitable, education or religious corporation formed pursuant to New York Not-for-Profit Corporation Law (N-PCL) § 201(b).

Donation of commission

The second question asks whether the licensed agent who is a member of the board of directors of the not-for-profit charity and who solicits a life insurance policy on behalf of the not-for-profit charity may donate its commissions to the charity.

Insurance Law § 4224 applies to life, and accident and health insurance, and prohibits rebating and inducements. ² That provision reads:

(c) Except as permitted by section three thousand two hundred thirty-nine of this chapter, ³ 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, Insurance Law § 4224(c) prohibits a life insurance agent from paying, allowing or giving, or offering to pay, allow or give, directly or indirectly, as an inducement to any person any valuable consideration or inducement not specified in the policy or contract.

In an Office of General Counsel (OGC) Opinion dated March 12, 2007, OGC addressed whether an insurance agent may advertise charitable contributions as an incentive for new insurance business. That opinion found that the very nature of the proposal to donate commission to a charity confers on a prospective insured an “indirect,” “intangible” benefit. Of course, nothing precludes the agent or broker from making charitable contributions so long as the advertising of a charitable contribution as an incentive for new insurance business does not constitute an improper inducement in violation of Insurance Law § 4224. However, without more facts, OGC cannot opine on the specific inquiry.

For further information, you may contact Senior Attorney Sapna Maloor at the New York City office.

¹ Insurance Law § 3205(b)(3) was enacted by N.Y. Laws of 1996, ch. 510, § 1, eff. Aug 8, 1996, and amended (to eliminate the five year “sunset” provision of the original) by N.Y. Laws of 2001, ch. 146

² Insurance Law § 2324 applies to property/casualty insurance, and contains similar prohibitions.

³ Insurance Law § 3239 applies to wellness programs, and is not relevant here.