OGC Opinion No. 10-12-12

The Office of General Counsel issued the following opinion on December 15, 2010 representing the position of the New York State Insurance Department.

RE: Application of Regulation 194

Questions Presented:

1) Does Regulation 194, which requires an insurance producer to disclose compensation, apply under the following circumstances?

a) If a policy renews with the same insurer, limits, and coverage during the first year in which the regulation is in effect?

b) If a producer procures insurance for identical coverage and limits with a different insurer?

c) If an insurer re-tiers a property/casualty insurance policy?

d) If a policy is renewed based on underwriting factors by an affiliate of the initial insurer?

e) If an insurance producer licensed in both New York and another state receives a telephone call in New York from an insured who is purchasing an automobile in the other state and seeking an auto insurance policy?

2) May an insurer delegate to a broker the insurer’s obligation to maintain records pertaining to the producers" compensation?

3) May an insurance agent, to whom an insurer has delegated its obligation to maintain producer compensation records, in turn delegate that responsibility to an insurance broker?

4) Must a wholesale broker or managing general agent that has no direct sales or solicitation contact with a purchaser maintain producer disclosure records?

Conclusions:

1a) No. Regulation 194 does not apply to renewals, even for policies renewing during the first year in which the regulation is in effect, unless the purchaser makes a request for more information about the producer’s compensation within the requisite time frames set forth in § 30.5(e).

1b) Yes. Regulation 194 applies if a producer procures insurance for identical coverage and limits with a different insurer.

1c) No. When an insurer re-tiers a property/casualty policy upon renewal, the producer need not disclose compensation unless the purchaser makes a request for more information about the producer’s compensation within the requisite time frames set forth in § 30.5(e).

1d) In general, an insurer may not simply move an insured into an affiliated company at the end of the required policy period. However, with respect to commercial lines insurance, if an insurer issues or offers to issue a superseding policy previously issued by another insurer under common control, then the policy is considered a “renewal,” and the producer need not disclose compensation unless the purchaser makes a request for more information about the producer’s compensation within the requisite time frames set forth in § 30.5(e).

1e) Yes. If an insurance producer that is licensed in both New York and Pennsylvania receives a telephone call in New York from an insured who is purchasing an automobile in another state and seeking an automobile insurance policy, then the producer must provide compensation disclosure as long as the producer solicits, negotiates, or sells insurance in this state. In general, if an insurance producer is required to have a New York license to make the sale, then Regulation 194 applies.

2) Yes. An insurer may delegate, by contract or other means to a person authorized to act on its behalf, the insurer’s obligation to maintain the records that an insurer must retain under Regulation 152. However, the insurer remains primarily responsible if the agent fails to maintain the records properly.

3) Yes. An insurance agent, to whom an insurer has delegated its obligation to maintain producer compensation records, may in turn delegate that responsibility to an insurance broker, provided that the insurance broker is authorized—by contract or other means—to do so on behalf of the insurer.

4) No. Section 30.5(d) of Regulation 194 states that the regulation does not apply to an insurance producer that has no direct sales or solicitation contact with the purchaser, which may include a wholesale broker or a managing general agent. Therefore, such a producer has no obligation to maintain records pertaining to producer compensation, unless the insurer has specifically contracted with the producer to maintain the records pursuant to Regulation 152. Of course, it is always prudent for a producer to maintain such records.

Facts:

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

Analysis:

Background

Regulation 194 was promulgated on January 25, 2010 and takes effect on January 1, 2011. Regulation 194 addresses the potential conflicts of interest that may arise due to the incentive-based compensation an insurer pays to its producers by requiring that an insurance producer make certain disclosures to an insurance customer about the producer’s role in the insurance transaction and its compensation arrangements with insurers. Specifically, the regulation requires an insurance producer to disclose the producer’s role in the insurance transaction, that the producer will receive compensation from the insurer based upon the sale of the policy, that the compensation paid by insurers may vary, and that the purchaser may obtain from the producer, upon request, information about the compensation the producer expects to receive from the sale of the policy. The regulation also requires that, upon the customer’s request, the producer disclose the amount of compensation for the policy selected and any alternative quotes presented.

1a) Applicability of Regulation 194 During the First Year After the Effective Date.

The inquirer’s first question asks whether Regulation 194, which clearly states that it does not apply to renewals, nevertheless does apply if a policy renews with the same insurer, limits, and coverage during the first year in which the regulation is in effect.

Subsection 30.5 of Regulation 194 states that:

This Part shall not apply:

* * *

(e) to renewals, except that if the purchaser requests more information about the producer’s compensation less than 30 days prior to a renewal or less than 30 days after a renewal, the insurance producer shall disclose to the purchaser in a prominent writing the information required by subsection 30.3(b) of this Part within 5 business days.

Therefore, unless a purchaser requests more information about the producer’s compensation less than 30 days prior to the renewal of a policy, or less than 30 days after the renewal of the policy, Regulation 194 does not apply to renewals, including those policies renewed during the first year that Regulation 194 is in effect.

1b) Insurance with a Different Insurer

The inquirer’s second question asks whether Regulation 194 applies if a producer procures insurance for identical coverage and limits with a different insurer.

Section 30.3 of Regulation 194 states that “an insurance producer selling an insurance contract” must disclose producer compensation to an insured. The exceptions to disclosure only apply: (1) to the placement of reinsurance; (2) to the placement of insurance with a captive insurer; (3) if there is no direct sales or solicitation contact with the purchaser; (4) if the person does not need to be licensed for the purposes of that sale; or (5) to renewals. When a producer procures a new insurance contract with a new insurer, regardless of coverage and limits, that producer is “selling an insurance contract,” and no other exception in the regulation applies.

Moreover, the core purpose of Regulation 194, as stated above, is to provide a means to address the potential conflict that arises due to the differences in the amount of compensation an insurer pays to its producers. Even if the coverage and limits are identical, a producer’s role in an insurance transaction and the producer’s compensation with a new insurer may differ from that of an insured’s existing insurer. Providing producer compensation disclosure in the instance where the producer procures insurance for identical coverage and limits with a different insurer fulfills the regulatory purpose of Regulation 194.

1c).Re-tiering or Re-classification Within the Same Property/Casualty Insurer

The inquirer’s third question asks whether a producer must disclose compensation when an insurer re-tiers or re-classifies a property/casualty insurance policy. An insurer may re-tier or re-classify an insured based on the insurer’s approved tier movement rules or rating classifications, or both.

An insurer that re-tiers or re-classifies an insured does so at the time of renewal, and does not issue a new policy. Accordingly, a producer need not disclose compensation unless the purchaser makes a request for more information about the producer’s compensation within the requisite time frames set forth in § 30.5(e).

1d) Changing Insurers Upon the Expiration of a Current Policy

The inquirer’s fourth question asks whether a producer must disclose compensation if a policy is renewed by an affiliate of the original insurer. In general, an insurer may not simply move an insured into an affiliated company at the end of the required policy period; rather, the insurer must non-renew an insured in accordance with N.Y. Insurance Law § 3425 (McKinney 2007 & Supp. 2010), and the affiliated insurer must appropriately solicit insurance. However, Insurance Law § 3426, which governs non-renewals of commercial lines insurance, provides an exception to the general rule, and specifically defines the term “renewal” to include the issuance of a policy with another insurer within the same holding company system. Insurance Law ¹ § 3426(a)(4) states:

“Renewal” or “to renew” means the issuance or offer to issue by an insurer of a policy superseding a policy previously issued and delivered by the same insurer, or another insurer under common control, or the issuance or delivery of a certificate or notice extending the term of a policy beyond its policy period or term; provided, however, that any policy with a policy period or term of less than one year shall, for the purpose of this section, be considered as if written for a policy period or term of one year, and any policy with no fixed expiration date shall, for the purpose of this section, be considered as if written for successive policy periods or terms of one year.

Thus, an insurer that moves a commercial lines insurance policyholder to another insurer may do so without first non-renewing the policyholder. ²

Accordingly, if an insurer non-renews an insured, and that insured opts to obtain coverage with an affiliated insurer, then the producer must disclose compensation pursuant to Regulation 194. However, with respect to commercial lines insurance, if an insurer issues or offers to issue a superseding policy previously issued by another insurer under common control, then the policy is considered a “renewal,” and the producer need not disclose compensation unless the purchaser makes a request for more information about the producer’s compensation within the requisite time frames set forth in § 30.5(e).

1e) Sale of Policy from New York for Out-of-State Risk

The inquirer’s fifth question asks whether an insurance producer that is licensed in both New York and another state must provide producer compensation disclosure if he receives a telephone call in New York from an insured who is purchasing a car in another state and seeking an auto insurance policy.

Insurance Law § 2101, which defines an insurance agent and insurance broker, is relevant to your inquiry. Insurance Law § 2101(a) defines an insurance agent in relevant part as “any authorized or acknowledged agent of an insurer...who acts as such in the solicitation of, negotiation for, or sale of, an insurance, health maintenance organization or annuity contract…”. In turn, Insurance Law § 2101(c) defines an insurance broker in relevant part as “any person, firm, association or corporation who or which for any compensation, commission or other thing of value acts or aids in any manner in soliciting, negotiating or selling, any insurance or annuity contract…” None of the exceptions to those two provisions applies to this inquiry. Finally, Insurance Law § 2102 prohibits any person, firm, association or corporation from acting as an insurance agent or insurance broker (collectively, “insurance producers”) in this state without a license.

Taken together, Insurance Law §§ 2101 and 2102 apply to solicitations, negotiations, and sales in this state. Thus, to the extent that the insurance producer is soliciting, negotiating, or selling insurance in this state, via telephone or otherwise, that insurance producer performed those acts using the producer’s New York license. In general, if an insurance producer is required to have a New York license to make the sale, then Regulation 194 applies. The fact that the risk is located in another state has no bearing on the applicability of Insurance Law § 2102; rather the acts that require a license took place in New York. Accordingly, if an insurance producer that is licensed in both New York and another state receives a telephone call in New York from an insured who is purchasing a car in the other state and seeking an auto insurance policy, then the producer must provide compensation disclosure as long as the producer is soliciting, negotiating, or selling insurance in this state.

2) Delegation of Insurer’s Obligation to Maintain Records

The inquirer’s sixth question asks whether an insurer may delegate to a broker the insurer’s obligation to maintain records pertaining to the producer’s compensation. Section 30.6 of Regulation 194 states that “[t]he amount of any compensation that an authorized insurer or its agent pays to an insurance producer shall be maintained by the insurer in accordance with [11 NYCRR Part 243 (Regulation 152)].”

Regulation 152 governs standards of records retention by insurance companies, and requires insurers to maintain claims, rating, underwriting, marketing, complaint, financial, and producer licensing records, and other records subject to examination by the Superintendent in accordance with the provisions set forth in Regulation 152. Section 243.2(d) of Regulation 152 permits an insurer to delegate its records retention obligations. That provision states that:

(d) An insurer shall require, by contract or other means, that a person authorized to act on its behalf in connection with the doing of an insurance business, including a managing general agent, an administrator, or other person or entity, shall comply with the provisions of this Part in maintaining records that the insurer would otherwise be required to maintain. Notwithstanding the above, the insurer shall be responsible if the person or entity fails to maintain the records in the required manner.

Accordingly, an insurer may delegate by contract or other means to a person authorized to act on its behalf, the insurer’s obligation to maintain the records that the insurer would have to retain under Regulation 152. However, the insurer remains primarily responsible if the agent fails to maintain the records properly.

3) Agent Delegating to a Broker the Insurer’s Obligation to Maintain Records

The inquirer’s seventh question asks whether an insurance agent, to whom an insurer has delegated its obligation to maintain producer compensation records, in turn may delegate that responsibility to an insurance broker.

As set forth in Section 243.2(d) of Regulation 152, an insurer may require that a person authorized to act on its behalf maintain the records that the insurer would otherwise be required to maintain. Thus, an insurance agent, to whom an insurer has delegated its obligations to maintain producer compensation records, in turn may delegate that responsibility to an insurance broker, if the broker is authorized—by contract or other means—to do so on behalf of the insurer. Furthermore, the insurer must also consent expressly or otherwise.

4) Wholesale and Managing General Agents’ Obligation

The inquirer’s eighth and last question asks whether a wholesale broker or managing general agent that has no direct sales or solicitation contact with a purchaser must maintain producer compensation records. Section 30.5(d) of Regulation 194 states that the regulation does not apply to an insurance producer that has no direct sales or solicitation contact with the purchaser, which may include wholesale brokers or managing general agents. Therefore, those entities have no obligation to maintain records pertaining to producer compensation when such producer has no direct sales or solicitation contact with the purchaser, unless the insurer has specifically contracted with one of those entities to maintain the records pursuant to Regulation 152.

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

¹ Insurance Law Article 15 governs holding companies, and defines a “holding company” as “any person who directly or indirectly controls any authorized insurer.” In turn, a “controlled insurer” means “an authorized insurer controlled directly or indirectly by a holding company,” and a “controlled person” means any person other than a controlled insurer, who is controlled directly or indirectly by a holding company.” Accordingly, a “holding company system” is a “holding company together with its controlled insurers and controlled persons.” N.Y. Ins. Law § 1501(a).

² While a commercial lines policy may be "renewed" by another insurer under common control, it may be subject to conditional renewal notice requirements set forth in Insurance Law § 3426(e).