Insurance Circular Letter No. 1 (2018)
January 3, 2018
All Property/Casualty Insurers, Registered Service Contract Providers and Licensed Insurance Producers
|Sale of wireless communications equipment insurance and service contracts|
STATUTORY REFERENCES: Insurance Law §§ 1102, 2102, 2114, 2115, 2122, 2131, 2303, 2307, 2310, 2314, 2324(a), 3425, 3426 and 3449 and Articles 23, 24 and 79; 11 NYCRR 30 (Insurance Regulation 194) and 11 NYCRR 390 (Insurance Regulation 155)
The purpose of this circular letter is to identify and provide guidance with respect to certain improper practices occurring in connection with the sale in New York of wireless communications equipment insurance and service contracts. These improper practices include:
(1) the tying of wireless communications equipment insurance with the sale of a service contract or other non-insurance benefit;
(2) deviation by wireless communications equipment insurers from filed rates;
(3) compensating unlicensed employees of an insurance agent licensed under Insurance Law § 2131 (“limited licensee”) based upon the sale of insurance;
(4) the failure of insurers to comply with Insurance Law § 3425 or 3426, for individual policies, and § 3449, for group policies;
(5) the failure of limited licensees to give all the notices required by Insurance § 2131 and other applicable notices, including the producer compensation disclosure notice under 11 NYCRR 30 (Insurance Regulation 194); and
(6) the use of unfiled trade or assumed names by insurers or limited licensees.
As the use of wireless communications equipment1 has grown since the start of the 21st century, the availability of insurance and service contracts for such equipment has significantly increased. Over the past few years, the Department of Financial Services (“DFS”) has identified certain improper practices, including providing inadequate or insufficient notices to consumers, occurring in connection with the sale in New York of wireless communications equipment insurance and service contracts. These practices, which have resulted in evasion of the Insurance Law, have negatively impacted consumers.
Insurance Law § 2131 authorizes a limited license for a wireless communications equipment vendor to act as agent for a New York-authorized insurer in the selling of wireless communications equipment insurance. The limited licensee may obtain the insurance directly from the insurer, but typically uses a licensed insurance agent or broker to package the program, place the insurance, and/or perform administrative functions. The insurer may offer the insurance on either a group or individual basis. The insurance may cover loss, theft, mechanical failure, or malfunction of, or damage to, wireless communications equipment. However, the insurance need not provide all the coverages, and typically does not include coverage for malfunction or mechanical failure. Section 2131 requires the limited licensee to make readily available to a prospective consumer brochures or other written materials that contain certain disclosures, as more fully discussed below.
Wireless communication equipment service contracts may be made only by a registered service contract provider (“SCP”) that complies with Insurance Law Article 79. A service contract may provide coverage for the repair, replacement, or maintenance of the equipment, or indemnification for such repair, replacement, or maintenance, due to a defect in materials or workmanship or wear and tear. In addition, a service contract may also provide coverage for damage from power surges and incidental damage from handling. The Insurance Law does not require a wireless communications equipment vendor that sells a service contract on behalf of a registered SCP to be licensed by or registered with the Superintendent of Financial Services (“Superintendent”). Often, the SCP is an affiliate of the insurer or other licensee.
DFS has become aware of several improper practices occurring in connection with the sale in New York of wireless communications equipment insurance and service contracts. This circular letter addresses the following six improper practices: (1) tying insurance with non-insurance; (2) deviations from filed rates and improper rating features; (3) the payment of compensation to unlicensed employees; (4) non-compliance with cancellation and nonrenewal requirements; (5) failure to provide required notices and disclosures; and (6) using unfiled trade or assumed names. This circular letter provides guidance to ensure compliance with the law.
A. Inducements, tie-ins and rebates
Insurers, limited licensees, and other insurance producers are improperly tying wireless communications equipment insurance with service contracts and other non-insurance benefits.
Insurance Law § 2324(a) generally prohibits any authorized insurer, licensed insurance producer, or any employee or other representative thereof from directly or indirectly paying or offering to pay any rebate from the insurance premium that is not specified in the insurance policy or contract. Section 2324 also prohibits the foregoing from directly or indirectly giving or offering to give any valuable consideration or inducement that exceeds $25 that is not specified in the policy or contract.
An insurer, limited licensee, other insurance producer, or SCP, or any person acting on their behalf, violates § 2324(a) if it “ties” the sale of insurance to non-insurance, such as a service contract. In other words, insurance must always be offered for sale on a stand-alone basis. As a corollary, there can be no difference in insurance benefits or costs when insurance is sold on a stand-alone basis or together with a service contract or other non-insurance benefit.
For example, an insurer or limited licensee may not market wireless communications equipment insurance with a service contract or extended warranty as a package for less than the cost of the insurance if the insurance is bought without the service contract or extended warranty. Nor may an insurer or limited licensee make a service contract available only if the customer buys a wireless communications equipment insurance policy and vice versa.
An insurer also may not offer wireless communications equipment insurance coverage to wireless carriers and retailers who will in turn offer the coverage “free-of-charge” to consumers who purchase the wireless carrier’s or retailer’s extended warranty2 or service contract. See OGC Opinion No. 08-05-15 (May 30, 2008). A consumer must pay the premium for the insurance. See id.
Subject to any restriction or limitation in any other law, an SCP or wireless communications equipment vendor may offer non-insurance services or products in conjunction with the service contract, such as access to specialists who can help a consumer connect with and manage the consumer’s other wireless devices or a service that remotely locates, locks, and wipes a consumer’s wireless communications equipment.
Insurers, limited licensees, and other insurance producers are impermissibly deviating from the insurer’s filed rates or including improper rating features in wireless communication equipment insurance.
Insurers are not permitted to round the wireless communications equipment insurance premium up or down to achieve a “marketable price” such as by rounding an approved monthly premium of $7.52 to $8.00. Rounding the premium for market reasons does not comply with Insurance Law § 2303, which provides that rates may not be excessive, inadequate, unfairly discriminatory, destructive of competition, or detrimental to the solvency of insurers. An insignificant rounding that would still remain within the above criteria, however, may be acceptable. The insurer must demonstrate that the rates that it intends to charge meet the statutory standards.
Many insurers providing wireless communications equipment insurance have sought approval to provide a discount on the insurance premium if the insured has purchased an extended warranty or service contract and the insurance policy does not itself provide coverage for malfunction or mechanical failure. According to these insurers, where wireless communications equipment insurance does not include coverage for malfunction or mechanical failure, an insured is likely to file a fraudulent claim under the wireless communications equipment insurance policy that alleges that equipment that malfunctioned or had a mechanical failure were lost or stolen or otherwise sustained damage for which there is insurance coverage. The insurers claim that discounting the wireless communications equipment insurance when the insured has an extended warranty or service contract providing coverage for malfunction or mechanism is appropriate because such insureds are likely to file fewer fraudulent claims under the insurance policy when the insured has other coverage under a service contract or extended warranty. DFS will approve such a discount if the insurer can provide sufficient actuarial support for the discount, including considering the existence of the standard warranty that comes with the product, which will overlap with the extended warranty or service contract for a period of time. However, to avoid a violation of Insurance Law § 2324, the discount must apply on the same terms and conditions to any extended warranty or service contract that provides coverage against defects in materials or workmanship, or malfunction or mechanical failure. The discount may not be limited to when the insured has a specific extended warranty or service contract. Moreover, if the insurer has rates on file for coverage for malfunction or mechanical failure, then the discount should not be greater than the rate for those specific coverages. Finally, the discount must be a fixed amount, either a percentage or dollar amount, and may not vary at the insurer’s discretion.
A limited licensee may be compensated for the sale of insurance. However, an employee of the limited licensee may not receive any compensation, directly or indirectly, based upon the sale of insurance, unless the employee is individually licensed as an insurance agent or broker. This is because the employee would be acting as an insurance producer without a license in violation of Insurance Law § 2102, and the insurer would be compensating a non-licensee in violation of Insurance Law §§ 2115 and 2116. Insurance Law Article 79 does not prohibit a service contract provider from compensating the wireless communications equipment vendor or the vendor from compensating its employees for the sale of a service contract. However, any compensation should be reasonable.
D. Policy term
Some insurers, limited licensees, and other insurance producers are not complying with minimum cancellation and non-renewal requirements. DFS has recently reviewed wireless communications equipment insurance brochures that state that the insurance policy is issued on a monthly renewal basis and that the insurer will terminate the insurance upon non-payment. Although an insurer may bill an insured for a wireless communications equipment policy monthly, an individual wireless communications equipment insurance policy is subject to the cancellation and non-renewal requirements of Insurance Law § 3425, if the insured is a natural person and the equipment is not principally used in the conduct of a business, or Insurance Law § 3426, in all other circumstances. Under both Section 3425 and 3426, the policy term is one year, unless a longer term is specified. During that time, a policy may not be cancelled or non-renewed except for certain limited circumstances, including non-payment of premium, but only after notice and opportunity to pay the premium. In addition, if the policy is subject to Insurance Law § 3425, then the insured may renew the policy for a total of three years, unless cancelled or non-renewed for one of the limited reasons set forth in Section 3425.
If the policy is written on a group basis, then the insurer must comply with the cancellation and nonrenewal requirements in Insurance Law § 3449, including 15 days’ notice to the insured for non-payment of premium.
While an insurer may advance the due date of the premium, it may not issue a notice of cancellation for non-payment until after the due date for the premium.
E. Assumed or trade names
Insurers, limited licensees, and other producers are impermissibly using unfiled trade or assumed names in brochures and other written materials. If the brochure required by Insurance Law § 2131(e) uses a group or brand name instead of the insurer’s, limited licensee’s, or other insurance producer’s full name to market the insurance or other non-insurance services or products, then the insurer, limited licensee, or other producer must file that group or brand name as an assumed or trade name with the Superintendent for approval. Otherwise the insurer will be in violation of Insurance Law § 1102 and the limited licensee or other producer will be in violation of Insurance Law §§ 2102 and 2122 and may violate Insurance Law Article 24. See OGC Opinion No. 08-09-09 (Sept. 24, 2008) and OGC Opinion No. 02-04-05 (April 3, 2002).
Pursuant to Insurance Law § 2122(b), all brochures must include the full name of the insurer and the name of the city, town or village in which it has its principal office. If the brochure uses a group or brand name to represent an insurer and its insurer affiliates or subsidiaries, then the brochures also must list the full names of the affiliate or subsidiary insurers and the names of the cities, towns or villages in which they have their principal offices.
F. Notices to the consumer
Limited licensees, SCPs, and other insurance producers are not providing all the required notices and disclosures to consumers and are thus violating the Insurance Law. Insurance Law § 2131(e)(2) requires a limited licensee to make readily available to a prospective consumer at each location where wireless communications equipment agreements are executed, brochures or other written materials that: (1) summarize, clearly and correctly, the material terms of insurance coverage, including the identity of the insurer and the insurance agent through which the limited licensee places business; (2) disclose that these policies may provide a duplication of coverage already provided by a homeowners’ or other insurance policy; (3) state that the consumer is not required to purchase the insurance in order to purchase or lease wireless communications equipment; (4) describe the process for filing a claim in the event the consumer elects to purchase coverage; (5) set forth the price, deductible, benefits, exclusions and conditions or other limitations of the policies; (6) disclose that the employee of the licensee is not qualified or authorized to evaluate the adequacy of the consumer’s existing coverages, unless otherwise licensed; and (7) state that the consumer may cancel the insurance at any time and any unearned premium will be refunded in accordance with applicable law.
Pursuant to Insurance Law § 2131(f), any brochures or other written materials used in connection with the wireless communications equipment insurance must include disclosure of the claims filing process, premium, deductible amounts and limits and must be prominently displayed in the brochure with at least 12-point type bold headings. The brochure must be written in a clear and coherent manner and, whenever practicable, must use words with common and everyday meaning.
In addition, limited licensees must comply with Insurance Regulation 194. As an insurance producer, this regulation requires the limited licensee to disclosure to the consumer a description of the limited licensee’s role in the sale, whether the limited licensee will receive compensation from the selling insurer or other third party based in whole or in part on the insurance policy the limited licensee sells, and such other information as specified in § 30.3 of Insurance Regulation 194. Although the Insurance Regulation 194 disclosures do not need to be included in the brochure required by Section 2131, DFS encourages limited licensees to include the disclosures in the brochure.
If a limited licensee uses an insurance agent or broker to package the program, place the coverage, or provide other services, then that agent or broker must make the Insurance Regulation 194 disclosures if it has direct sales or solicitation contact with the consumer. For an individual policy, the consumer is the customer who purchases the insurance for his or her wireless communications equipment. If a group policy is obtained using an agent or broker, then that agent or broker must provide the disclosure information to the group policyholder and to any certificate holder if it has had direct sales or solicitation contact with the certificate holder, and the certificate holder pays all the premium.
Pursuant to Insurance Law § 2131(e)(3), the insurer should promptly deliver to the insured a copy of the policy, if an individual policy, or a certificate, if a group policy. The certificate should contain all the material terms and conditions relevant to the insured.
Insurance Law § 7903(b)(1) requires a SCP to provide a copy of the terms and conditions of the service contract to the service contract holder where the sale takes place in a retail store or other place of business and Insurance Law § 7905(a) requires a service contract to be written in clear, understandable language. Sometimes the service contract terms and conditions are placed in a brochure or other literature that is distributed at the retail store or other place of business. In such case, Insurance Law § 7905(d) requires that the brochure identify the SCP, service contract seller, and any administrator, if different from the SCP or seller. Insurance Law § 7906(b) prohibits service contract literature, including a brochure, from making any false or misleading statement or deliberately omitting any material statement that would make the literature misleading if omitted. Section 390.3 of 11 NYCRR 390 (Insurance Regulation 155) requires that the copy of the service contract be clearly identifiable as such and be a separate document from any other document given to the service contract holder. In addition, Insurance Law § 7903(b)(1) requires the SCP to provide a receipt for or other written evidence of the purchase of the contract, and Insurance Law § 7905(e) requires a service contract to state the total purchase price. If the service contract is not delivered to the holder at the time of the contract’s purchase, then it must be provided to the holder within a reasonable period of time after date of purchase under Insurance Law § 7903(b)(1).
DFS does not object to non-insurance information being included in the brochures required by Insurance Law § 2131(e), such as information regarding a service contract. However, in order not to violate Insurance Law § 2324(a), the brochure must clearly and prominently indicate that the availability of the insurance is not dependent upon the purchase of the non-insurance services or products, and vice versa, and that no special advantage is available for purchasing the insurance in conjunction with the non-insurance services or products. The brochure should clearly indicate when the limited licensee is acting as such in the sale of insurance and its role with respect to the non-insurance products or services, including a service contract. The brochure also must clearly indicate which benefits are provided by the insurer, which benefits are provided by the SCP, and which benefits are provided by other parties.
Insurers, SCPs, and insurance producers must comply with the Insurance Law and regulations promulgated thereunder and should adhere to the guidance set forth in this circular letter. Anyone deviating from filed rates and including improper rating features; tying insurance to non-insurance; paying compensation to unlicensed employees; not complying with cancellation and nonrenewal requirements; not providing required notices and disclosures; and using unfiled trade or assumed names, is violating the Insurance Law or regulations promulgated thereunder, and should promptly take all necessary steps to come into compliance.
Please direct any questions regarding this circular letter to General Counsel Nathaniel Dorfman by email at [email protected] or by telephone at (518) 473-4824.
1 Insurance Law § 2131(l) defines “wireless communications equipment” as wireless handsets, pagers, personal digital assistants, wireless telephones or wireless telephone batteries and other wireless devices and accessories related to such devices that are used to access wireless communications services and includes wireless services.
2 An extended warranty is a contract made by the seller, manufacturer, or other person in the chain of sale that covers defects in materials or workmanship. See OGC Opinion No. 07-09-15 (Sept. 17, 2007).