The Office of General Counsel issued the following informal opinion on February 28, 2000, representing the position of the New York State Insurance Department.
Rebating, Insurance Law Section 2324
Question presented:
May a licensed property and casualty agent reduce the amount of commission which it is willing to accept on a policy so as to reduce the premium payable by a prospective insured?
Conclusion:
The above arrangement would not be permissible under the New York Insurance Law. The "reduction" in commission would constitute either a rebate or an unlawful inducement to the making of insurance, which is prohibited by N.Y. Ins. Law § 2324(a) (McKinney 1985).
With regard to life or accident and health insurance, N.Y. Ins. Law § 4224(c)(McKinney 1985) similarly prohibits the use of inducements to foster the sale of insurance products.
Facts:
In New York if an agent reduces the amount of commission that it is willing to accept on a policy so as to reduce the premium is that considered rebating? Is it against the law for this to be done?
Analysis:
N.Y. Ins. Law § 2324(a) (McKinney 1985) reads, in relevant part, as follows:
" no licensed insurance agent, no licensed insurance broker, and no employee or other representative of any such broker shall make, procure or negotiate any contract of insurance other than as plainly expressed in the policy or written contract issued or to be issued as evidence thereof, or shall directly, or indirectly, by giving or sharing a commission or in any manner whatsoever, pay or allow or offer to pay or allow to the insured as an inducement to the making of insurance or after insurance has been effected, any rebate from the premium which is specified in the policy, or any special favor or advantage in the dividends or other benefit to accrue thereon, or shall give or offer to give, any valuable consideration or inducement of any kind which is not specified in such policy or contract, other than any article of merchandise not exceeding five dollars in value which shall have conspicuously stamped or printed thereon the advertisement of the insurer, agent or broker."
Section 4224(c) (McKinney 1985) contains similar provisions in regard to life and accident and health insurance.
The insurer and the agent have an agreement between themselves concerning the amount of commission that the insurer will pay the agent. This expense to the insurer is part of its projected expenses that are filed with the Department as part of the rate filing that is generally required. Even where the insurer is exempt from filing the rates, such as under Insurance Law Article 63 for Special Risk Insurance, the policies are still subject to § 2324 and the insurer may not deviate from its manual rates. Commissions are included in the premium charged the insured. The insured is not to be involved or consulted concerning the amount of commission.
The "negotiation" of the commission resulting in a deviation from the filed premium rate would clearly result in either a rebate or an unlawful inducement to the making of insurance, in violation of the Insurance Law.
For further information you may contact Associate Attorney Sam Wachtel at the New York City Office.