OGC Opinion No. 07-02-18

The Office of General Counsel issued the following opinion on February 20, 2007, representing the position of the New York State Insurance Department.

Re: Insurance Broker's Employees/Related Entity Offering COBRA and Flexible Spending Administration Services to its Insureds/Prospective Insureds for a Fee

Question Presented:

May an insurance broker provide, for a fee, services to insureds or prospective insureds pertaining to the Comprehensive Omnibus Budget Reconciliation Act of 1986 (“COBRA”), 29 U.S.C.A. § 1161 et seq. (West 2001) or Flexible Spending Administration, if such services are provided by the broker's staff or an affiliate of the broker?

Conclusion:

Under the circumstances described, an insurance broker may offer COBRA or Flexible Spending Administration services for a fee, provided that such services are not offered as an inducement in violation of N.Y. Insurance Law § 4224 (McKinney Supp. 2006), and such insureds or prospective insureds are not charged different amounts for the same services. In addition, the insurance broker must comply with the requirements in Insurance Law § 2119(c)(1) (McKinney 2006), which prohibits a broker from receiving compensation, other than commissions, in the absence of a written memorandum that is signed by the party to be charged.

Facts:

As a follow-up to the opinion of September 21, 2006 that the Department issued, the inquirer asks whether an insurance broker's in-house staff or a related entity/affiliate of a broker may provide COBRA and Flexible Spending Administration services for a fee to insureds or prospective insureds when such services are provided as part of the overall insurance services provided by the broker. The COBRA administrative services in question will involve the distribution, by an insurance broker, of notices, and the collection of premiums for all COBRA beneficiaries. Specifically, the inquirer states that the broker will mail out election notices to beneficiaries upon occurrence of a qualifying event. The broker will monitor the election period and, upon election of coverage, the broker will collect the monthly premiums and monitor the due dates and grace periods to ensure payments are timely and to remit the premiums to the insurance company. In some cases, the broker will process eligibility changes with the appropriate insurance companies.

The inquirer reports that Flexible Spending Administration services will involve the monitoring of employee elections, substantiating claims and processing reimbursements under the Healthcare and Dependent Care Flexible Spending Account. They also will involve keeping a record of all enrollees in the Flexible Spending Account, along with the enrollees plan elections and payroll contribution accounts. As each claim is submitted for reimbursement, the services will involve the reviewing of the claim to ensure that it qualifies, and processing or denying payment accordingly. The broker will then supply the enrollees, as well as the insureds/prospective insureds, with periodic reporting on the status of the accounts.

Analysis:

The inquirer asks whether the employees of a licensed insurance broker or an affiliated/related entity of the broker may provide COBRA and Flexible Spending Administration services for a fee.

In-office delegation by a licensed broker of certain activities to officers, directors or employees is within the discretion of the licensee, who must exercise reasonable judgment based upon considerations such as (1) the nature and complexity of the task being delegated; (2) the education, training, experience and other personal qualifications of the person who will be performing the task; and (3) the type and extent of supervision and internal controls that will be in place. See Opinion of General Counsel No. 04-12-03 (December 1, 2004). Such delegation also hinges on whether the insurer or some other principal prohibits or restricts the delegation, and whether the Insurance Law otherwise prohibits the activity. Id.

Moreover, N.Y. Insurance Law § 2101(c)(2)(A) (McKinney 2006) exempts from the definition of an insurance broker:

(2) an officer, director or employee of a licensed insurance producer, provided that the officer, director or employee does not receive any commission on policies written or sold to insure risks residing, located or to be performed in this state and:

(A) the officer, director or employee's activities are executive, administrative, managerial, clerical or a combination of these, and are only indirectly related to the sale, solicitation or negotiation of insurance....

Thus, an officer, director or employee of a licensed broker who merely engages in administrative activities is not required to obtain a broker's license provided that the officer, director or employee does not receive any commission on policies written, sold, or located or to be performed in New York, and does not otherwise engage in activities that require licensing, such as soliciting, negotiating or sale of insurance.

Insurance Law § 2102(a)(1) (McKinney 2006) is also relevant to your inquiry. It states:

(a)(1) No person, firm, association or corporation shall act as an insurance producer or insurance adjuster in this state without having authority to do so by virtue of a license issued and in force pursuant to the provisions of this chapter.

Pursuant to Insurance Law § 2102, an unlicensed affiliated/related entity may not engage in insurance activities, such as the sale, solicitation or negotiation of an insurance policy, that constitute acting as an insurance broker, without being licensed. In addition, the affiliated/related entity may not receive commission from policies written or sold.

COBRA and Flexible Spending Administration services are administrative in nature and are not normally provided by an insurance company, its agent or a broker. If an insurance broker or its representatives (i.e., its employees or affiliates) opt to provide COBRA and Flexible Administration Services without a fee to insureds or prospective insureds, the provision of such services would constitute an unlawful inducement that is not specified in the policy. Indeed, Insurance Law § 4224(c) (McKinney Supp. 2006) states as follows:

(c) 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. ¹

Thus, unlicensed employees or affiliates, as representatives of the broker, may not, directly or indirectly, provide unlawful inducements. However, the circumstances that the inquirer presents, which involve the provision of COBRA and Flexible Spending Administration services for a fee, do not run afoul of the prohibition set forth in Insurance Law § 4224(c).

With respect to compensation for the provision of COBRA and Flexible Spending Administration services, Insurance Law § 2119(c)(1) (McKinney 2006) states as follows:

(c)(1) No insurance broker may receive any compensation, other than commissions deductible from premiums on insurance policies or contracts from any insured or prospective insured for or on account of the sale, solicitation or negotiation of, or other services in connection with, any contract of insurance made or negotiated in this state or for any services on account of such insurance policies or contracts, including adjustment of claims arising therefrom, unless such compensation is based upon a written memorandum, signed by the party to be charged, and specifying or clearly defining the amount or extent of such compensation.

Insurance Law § 2119(c)(1) prohibits a broker from receiving from insureds or prospective insureds any additional compensation, other than commissions, for the sale, solicitation or negotiation of any contract of insurance, as well as for any services provided in connection with any such contract of insurance made or negotiated, or for any services on account of such insurance policies or contracts, unless such compensation is based on a written memorandum, signed by the party to be charged, that specifies or clearly defines the amount or extent of such compensation.

Under the circumstances that the inquirer presents, the broker proposes to provide services in connection with insurance contracts sold to the clients. COBRA services, for example, arise from an underlying health insurance contract, and the recipient of these services will be insureds or prospective insureds. Therefore, Insurance Law § 2119(c)(1) applies, and the broker must comply with the requirements set forth in that statute.

Finally, please be advised that Insurance Law § 2119(c)(2) provides that “[a] copy of every such memorandum shall be retained by the broker for not less than three years after such services have been fully performed.” Moreover, any service fees should be reasonable, and insureds or prospective insureds should not be charged different amounts for the same services. See Circular Letter No. 9 (2006).

For further information you may contact Associate Attorney D. Monica Marsh at the New York City Office.

¹ Insurance Law § 2324 contains a similar prohibition with respect to property/casualty insurance.