OGC Op. No. 04-01-05

The Office of General Counsel issued the following informal opinion on January 6, 2004, representing the position of the New York State Insurance Department.

Re: Insurance as a Membership Benefit

QUESTION PRESENTED

May a reciprocal insurer that is licensed to sell medical malpractice insurance, provide to its members, group accidental death and dismemberment (hereinafter AD&D) insurance at no cost to the members?

Conclusion

No. The insurer would violate N.Y. Ins. Law § 2324(a) (McKinney Supp. 2003), which prohibits rebating in connection with the sale of property/casualty insurance.

Facts

The inquirer is an attorney representing a reciprocal insurance company that underwrites medical malpractice insurance for its membership, which is composed of dentists and doctors. Previously, the Department determined that the reciprocal insurer and its members are a "true group" for purposes of New York Insurance Law, Sections 4216(b)(10) and 4235(c)(1)(H).

The reciprocal insurance company would like to obtain, from an outside insurer, group AD&D insurance for the benefit of its members. The reciprocal insurer would like to provide the AD&D insurance to the members without a separate charge. The reciprocal insurer would pay for each member the annual premium, which is about $27.00 per member. The reciprocal insurer’s members would be offered enrollment in the group AD&D insurance program no earlier than four months after the member joins the reciprocal insurer, and continue to receive the AD&D insurance as long as the membership remains valid.

The inquirer wants to know if the reciprocal insurer would violate N.Y. Ins. Law § 2324(a) (McKinney Supp. 2003) by offering the AD&D insurance at no cost to the members. The inquirer set forth the following reasons why the inquirer believes there would be no violation of N.Y. Ins. Law § 2324(a) (McKinney Supp. 2003). First, the member would not be aware of the availability of the AD&D insurance coverage until after becoming a member of the reciprocal insurance company. Second, the cost of the premium for the AD&D insurance is negligible when compared to that of the medical malpractice insurance. Finally, the inquirer characterized the AD&D insurance as ". . . an expression of thanks to its membership, who do not receive any dividends, and not with a design to influence any member’s decision regarding the purchase or renewal of medical malpractice insurance."

The inquirer also states that there would be no violation of N.Y. Ins. Law § 4224 (McKinney Supp. 2003) for the same reasons that there would be no violation of N.Y. Ins. Law § 2324(a) (McKinney Supp. 2003).

Analysis

The inquirer is correct that there would be no violation N.Y. Ins. Law § 4224 (McKinney Supp. 2003); however not for the reasons set forth by the inquirer. There would be no violation of N.Y. Ins. Law § 4224 (McKinney Supp. 2003) because N.Y. Ins. Law § 4235(c)(1)(H) (McKinney Supp. 2003) states the following regarding a group that has been designated as such by the Department for purposes of purchasing group insurance coverage. "The premiums for the policy shall be paid from association or members’ funds, or partly from such funds and partly from funds contributed by the insured individuals, or from funds wholly contributed by the insured individuals." As the inquirer had pointed out in the inquirer’s letter, previously the Department determined that the inquirer’s client, the reciprocal insurer and its members are a "true group" for purposes of New York Insurance Law, Sections 4216(b)(10) and 4235(c)(1)(H). This enables the reciprocal insurer to pay the premium for the AD&D without violating N.Y. Ins. Law § 4224 (McKinney Supp. 2003). However, as discussed below, the proposed AD&D insurance would be a rebate that would violate N.Y. Ins. Law § 2324(a) (McKinney Supp. 2003).

With respect to property/casualty insurance, N.Y. Ins. Law § 2324(a) (McKinney Supp. 2003) states in the relevant part:

Section 2324 allows an insurance agent or broker subject to its provisions to distribute as a "keepsake" an item that does not exceed $15.00 in value, and is designed to keep the name of the insurer or producer before the customer by embossing the insurer’s or producer’s name on the item.

The inquirer cited two previous OGC opinions that contain decisions adverse to the inquirer’s position, and then distinguished the inquirer’s situation. In the first such opinion dated January 12, 2001, an insurance agency offered a $500 discount to existing customers on new vehicles purchased or leased from a particular car dealership and the Department concluded that this violated Sections 2324(a) and 4224 because the $500 discount constituted valuable consideration and was therefore an inducement to the insured. The Department so opined even though the insurance agency did not directly offer the discount, but referred the insured to a particular car dealership that did. The Department stated that Section 2324(a) prohibits both direct and indirect inducements that are not specified in the insurance contract. Moreover, the Department noted that the $500 discount is not an article of merchandise within the meaning of the Insurance Law. The Department opined that the article of merchandise that Section 2324(a) contemplated is a "keepsake" not exceeding $15 in value, which conspicuously bears the agency’s name and is designed to keep the insurer’s name before the customer.

The inquirer distinguished the inquirer’s factual situation from the facts of the January 12, 2001 letter above by stating that, since the prospective client is not aware of the availability of the AD&D insurance until well after becoming a member of the reciprocal, this eliminated the element of inducement that the Department addressed in the January 12, 2001 letter. The inquirer further wrote the AD&D insurance did not constitute valuable consideration since its value is negligible when compared to that of the medical malpractice insurance, the purchase of which would precipitate the AD&D coverage.

In the second opinion dated October 31, 2000, an insurance agent planned to give residents new to the area, a $5.00 gift certificate to be redeemed upon presentation to certain local businesses, if such residents first obtained a free insurance quote from the insurance agent. The Department opined that a $5.00 gift certificate, which is given to the resident after obtaining the free quote, is not equivalent to a pen or other item of merchandise, as contemplated by Section 2324(a) and therefore, providing the gift certificate is a violation of this section of the law.

The inquirer distinguished the inquirer’s factual situation from the facts of the October 31, 2000 opinion by stating that since the member is not required to do anything above and beyond buying the professional malpractice insurance, that the inquirer’s situation was different from the $5.00 gift certificate situation where the new resident must first come for a free quote.

Regarding the inquirer’s argument that the member need not "do anything" to receive the AD&D insurance, in fact the member must first buy professional malpractice insurance from the reciprocal to receive the AD&D insurance. Section 2324(a) prohibits "tie-in" sales. ("Tie-In Sales," The Bulletin - New York State Insurance Department, February 1987; OGC Opinion 87-2, February 1, 1987.) Regarding the inquirer’s argument that there is no inducement because the member is not aware of the AD&D insurance until months after executing the professional liability insurance contract, the Department has previously opined (May 14, 2002) that it is a violation to provide valuable consideration after the insurance policy has been in effect because it is an inducement to renew the customer relationship when the insurance policy ends. The inquirer further claims that the AD&D insurance does not constitute valuable consideration because its value is negligible when compared to that of the medical malpractice insurance. The Department has previously opined (July 18, 1997) that the Department does ". . . not believe that a de minimus standard is permissible under New York Law." The opinion stated that Section 2324 set a specific dollar amount, which is currently $15.00, and this clearly limits the permissible valuable consideration or inducement which may be provided, and precludes any other inducements.

Furthermore, as noted above, and consistently in previous Department opinions, pursuant to Section 2324, an insurance agent or broker subject to its provisions may only distribute as a "keepsake" an item which does not exceed $15.00 in value, and is designed to keep the name of the insurer or producer before the customer by embossing the insurer’s or producer’s name on the item. The proposed AD&D insurance is clearly not a "keepsake" within the plain language of the above cited section. Therefore, the proposed AD&D insurance would be a rebate that would violate N.Y. Ins. Law § 2324(a) (McKinney Supp. 2003).

For further information one may contact Senior Attorney Susan A. Dess at the New York City Office.