OGC Opinion No. 08-09-07
The Office of General Counsel issued the following opinion on September 22, 2008, representing the position of the New York State Insurance Department.
Re: Insurance broker charging a flat fee in lieu of receiving a commission
Questions Presented:
1. May an insurance broker charge an insured a flat fee in lieu of accepting a commission, which causes a reduction in the quoted premium, for the procurement of insurance for five hospitals in any of the following instances:
(a) the insured changes the insurer;
(b) the insured retains the existing policy of one of the hospitals, with all the hospitals being enrolled under this plan; or
(c) the hospitals change to a partially self-funded plan?
2. May a payroll company offer to a potential client a discount in its payroll services if the client agrees to designate as ‘broker of record” of the client’s health and pension plans a broker that may be affiliated with the payroll services company?
Conclusions:
1. No. Although an insurance broker is not required to collect its duly earned commissions from an insurer, the broker may not charge a flat fee in lieu of commissions, which in turn causes a reduction in the quoted premium, in any of the scenarios described above.1 To do so constitutes unlawful rebating pursuant to N.Y. Ins. Law § 4224(c) (McKinney 2006).
2. No. Pursuant to Insurance Law § 4224(c), a payroll company may not offer a potential client a discount on payroll services as an inducement for the client to designate as “broker of record” of the client’s health and pension plans a broker with whom the payroll services company has a relationship.
Facts:
The inquirer is an insurance broker who was invited by a prospective client to discuss the management of the client’s pre-existing “medical and ancillary insurance plans”2 for five veterinary hospitals, all of which will be merged into a single entity. A current broker of record for the insurance plan at one of the hospitals has offered the client to charge a flat fee in lieu of commission, which will be less than the commission rate. The inquirer made a counter-offer whereby the inquirer would provide “value added services that are permissible under the present anti-rebating regulations,” which the incumbent broker does not provide. However, the inquirer does not specify what additional services would be provided.
The inquirer asks whether the incumbent broker may offer to charge a flat fixed fee in lieu of accepting a commission if: the client changes to a new insurer; the client retains the existing insurance plan under which all the hospitals will be covered; or the client changes to a “partially self-funded plan.”
The inquirer also reports that the client has decided to retain, as broker of record of its health and pension plans, an insurance broker recommended by a payroll services company, because that company has offered to discount its payroll services if the client selects the broker with whom the payroll services company presumably has a relationship. The inquirer asks whether it is permissible for the payroll services company to offer a discount in its payroll services in this case.
Analysis:
Insurance Law § 4224 prohibits rebating and inducements by life, accident and health insurers, agents and brokers. Insurance Law § 4224(c) reads as follows:
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.3
Insurance Law § 4224(c) unequivocally prohibits the giving of any valuable consideration as an inducement, directly or indirectly, in connection with the sale of insurance. See Office of General Counsel (“OGC”) Opinion No. 06-12-07 (Dec. 8, 2006).4 Thus, an insurance broker may not charge, under any of the circumstances described above, a flat fee in lieu of commissions, which would result in decreasing the premium – a valuable consideration to the insured.
Moreover, a payroll services company5 may not offer to discount its payroll services fees as an inducement for the client to select, as its broker of record, a broker with whom the payroll services company presumably has a relationship. The payroll services company would be impermissibly acting on behalf of the broker in offering an inducement or valuable consideration that is not specified in the insurance policy. See OGC Opinion No. 04-12-14 (Dec. 13, 2004). Further, by providing indirectly the discounted payroll services, the broker would be inducing the insured to purchase insurance from the broker and to continuously renew its policy with the insurer in order to retain the discount. Id. Such an inducement or valuable consideration runs afoul of Insurance law § 4224(c).
Please be advised that this opinion addresses the alleged behavior of an unnamed competitor, and is based solely upon the information supplied to the Department by the inquirer in this inquiry. Moreover, the conclusions reached in this opinion are limited only to the facts presented, and shall not have any other precedential value. Further, should the facts presented differ from those described above, the Department’s analysis could be subject to change. Finally, should the inquirer wish to file a complaint against a specific broker, the inquirer may submit a complaint, including the broker’s name and address, to the Department’s Consumer Services Bureau for investigation.
For further information you may contact Senior Attorney Camielle A. Campbell at the New York City office.
1 Pursuant to 2119(c)(1), an insurance broker (but not an insurance agent) may receive compensation, other than commissions deductible from premiums, in connection with the negotiation, solicitation or sale of insurance, provided that compensation is set forth in a written memorandum, signed by the party to be charged, and that the memorandum clearly defines the amount or extent of such compensation.
2 In subsequent correspondence to the Insurance Department, the inquirer states that “medical and ancillary insurance” means group life, medical and disability insurance.
3 Insurance Law § 2324, which governs property/casualty insurance, contains a similar provision, except that an insurer, insurance broker or agent may offer or give a “keepsake” item not exceeding fifteen dollars in value.
4 However, an insurance broker may charge the insured a service fee in connection with the placement of insurance, in addition to receiving commissions from the insurer, provided that the requirements of Insurance Law § 2119(c) and (d) are satisfied. See OGC Opinion No. 01-02-08 (Feb. 12, 2001).
5 Although the inquirer refers to the payroll services company XYZ Company, there is insufficient information before the Department at this time to make a determination with respect to XYZ’s conduct in this case. However, this matter will be referred to the Department’s Consumer Services Bureau for further investigation.