The Office of General Counsel issued the following opinion on February 3, 2005, representing the position of the New York State Insurance Department.

Re: Monitoring and Limitation Expense Under N.Y. Ins. Law § 4228

Questions Presented:

1) Must a life insurer monitor payments made by its general agent to its sub-agents, in accordance with N.Y. Ins. Law § 4228 (McKinney Supp. 2005), where the general agent is an affiliate of the insurer in a holding company system, and the parent (holding) company administers and assumes the expenses of the non-qualified deferred compensation plan that benefits the general agent’s sub-agents?

2) The insurer formerly maintained individual contracts with each of the agents who are now employed by the general agent as its sub-agents. The insurer has assigned its obligations under such contracts to the general agent. Should the general agent fail to pay a sub-agent who is entitled to payment under such contract, the insurer may, under general principles of contract law, be required by a court to make payment. As part of the assignment agreement, the general agent contracted with the insurer that if such payment were required, the general agent would reimburse the insurer.

In this situation, is the exemption from the obligation to monitor the sub-agents under N.Y. Ins. Law § 4228(e)(11) (McKinney Supp. 2005) available to the insurer?

Conclusion:

1) If the parent company allocates all the expenses associated with the non-qualified deferred compensation plan back to the general agent, including a reasonable fee for the cost of administering the plan, the insurer will not be required to monitor the payments under N.Y. Ins. Law § 4228 (McKinney Supp. 2005).

2) In the situation described, the exemption from the obligation to monitor the sub-agents under N.Y. Ins. Law § 4228(e)(11) (McKinney Supp. 2005) is available to the insurer.

Facts:

The following facts were presented: ABC is a New York domestic life insurance company. It is affiliated with company DEF, which is ABC’s general agent. Both ABC and DEF are wholly-owned subsidiaries of XYZ, which was described as a holding company that is not a domestic life insurance company.

The following two scenarios were presented:

1) ABC is transferring the assets and liabilities of the non-qualified deferred compensation plan for agents to XYZ. (Presumably, the agents were once branch office agents of ABC, prior to the creation of DEF.) After the transfer is complete, XYZ will pay the plan benefits to the agents using the returns it earns on the underlying assets and investments of the plan, and in the absence of such returns, it will use its own funds. ABC will not make payments to XYZ in order for XYZ to make payments to the agents.

2) ABC currently retains contracts with its former branch office agents. ABC will assign its payment obligations under these contracts to DEF pursuant to a new general agency agreement, making DEF solely responsible for paying the agents. Should DEF fail to make payment, and ABC is contingently liable for such payment, DEF would reimburse ABC for payments it makes.

It was also stated that ABC will not pay any additional compensation to producers and will comply with all the requirements contained in N.Y. Ins. Law § 4228(e)(11)(A), (B), (C), and (D).

Analysis:

While an insurer in compliance with N.Y. Ins. Law § 4228(e)(11) (A), (B), (C) and (D) payment restrictions must monitor the payments it makes to its general agent, it is not required to monitor payments made to the sub-agents of its general agent. This statement remains true regardless that the general agent is an affiliated company of the insurer, provided that the general agent operates as an independent entity from the insurer, and the insurer is not in any manner financially responsible for the general agent. See OGC Opinions April 3, 2002 and June 8, 2000.

In the present situation, it was stated that the insurer is transferring the assets and liabilities of the non-qualified deferred compensation plan for agents to the parent company. After the transfer is completed, the parent company will pay the plan benefits to the agents. The insurer will not make payments to the parent company in order for the parent company to make payments to the agents. The parent company will make such payments using the returns it earns on the underlying assets and investments of the plan, and where the returns are deficient to cover the payments, it will use its own funds.

However, allowing the parent company to cover the general agency’s expenses essentially permits the parent company to do what the insurer itself is not permitted to do – to pay additional sums to the general agent beyond that which are permitted under N.Y. Ins. Law § 4228. This situation presents less than an arms-length transaction because the affiliated companies are not truly acting as independent entities.

The concerns presented by this situation are resolved by the general agent paying back to the parent company all the expenses associated with the non-qualified deferred compensation plan, including a reasonable fee for the cost of administering the plan within twelve months.1  By doing this, the insurer may avail itself of the N.Y. Ins. Law § 4228(e)(11) exemption from the obligation to monitor the payments made by the general agent to its subagents.

It was also stated that the insurer had formerly maintained individual contracts with each of the agents who are now employed by the general agent as its sub-agents. The insurer has assigned its obligations under such contracts to the general agent. Should the general agent fail to pay a sub-agent who is entitled to payment under such contract, the insurer may, under general principles of contract law, be required by a court to make payment. This situation was referred to as "contingent liability." As part of the assignment agreement, the general agent contracted with the insurer that if such payment were required, the general agent would reimburse the insurer. It was questioned whether this situation makes the insurer unable to avail itself of the monitoring exemption provided by N.Y. Ins. Law § 4228(e)(11).

The situation that was referred to as "contingent liability" was present in the facts contained in our April 3, 2002 opinion, although it was not specifically discussed. Such risk always exists during the transition phase when independent agents are made subagents of a newly appointed general agent. We do not consider the potentiality of a "contingent liability" situation to prevent an insurer from availing itself of the N.Y. Ins. Law § 4228(e)(11) monitoring exemption where, as here, the general agent will immediately reimburse the insurer for court-imposed payments. Such payment will not be deemed to be additional compensation to the subagents.

For further information you may contact Associate Attorney Sally Geisel at the New York City Office.

1  [1] N.Y. Ins. Law § 4228(b)(1) (McKinney Supp. 2005)