The Office of General Counsel issued the following informal opinion on January 2, 2001, representing the position of the New York State Insurance Department.
RE: Permitted Compensation Arrangements, Long Term Care Insurance
Questions Presented:
1. Does Ins. Dept. Regulation 62, N.Y. Comp. R. & Regs. tit. 11, Sect. 52.25(e)(3) (1995) entitled "Permitted compensation arrangements" refer to renewal compensation of the replacing carrier in years two and later, or is this regulation supposed to mean that the first year commission of the replacing carrier cannot be higher than its subsequent years commission?
2. Is a policy that was issued by a carrier but refused by an applicant and never delivered considered to have been replaced if the applicant subsequently chooses a competing policy from another insurer, and if so, is that replacing insurer subject to N.Y. Comp. R. & Regs. tit. 11, Sect. 52.25(e)(3) (1995)?
Conclusions:
1. Section 52.25(e)(3) of Regulation 62 does not refer to either of the above interpretations. Rather, Section 52.25(e)(3) of Reg. 62 means that in a replacement situation, the replacing insurer may not provide to its agents and producers in the first year of the policy compensation greater than the amount of renewal compensation such insurer pays on renewal policies.
2. A policy that was issued but not delivered because the applicant refused to accept the policy and subsequently chose another insurers competing policy is not subject to N.Y. Comp. R. & Regs. tit. 11, Sect. 52.25(e)(3)(1995) because it is not a replacement situation.
Analysis:
1. N.Y. Ins. Dept. Regulation 62, N.Y. Comp. R. & Regs tit. 11, Part 52 (1995) provides rules that relate to the content and sale of forms for long term care insurance and nursing home and home care insurance. Ins. Dept. Regulation 62, N.Y. Comp. R & Regs tit. 11, Sect. 52(1995) provides:
(e) Permitted compensation arrangements.
(1) An insurer may provide commissions or other compensation to an agent or other representative for the sale of a long term care insurance, nursing home insurance only, home care insurance only, or nursing home and home care insurance policy or certificate at a higher level or amount during the first year the policy or certificate is in effect than is paid for selling or servicing the policy or certificate during the second year. However, all proposed first year commissions or compensation as well as renewal commissions or compensation shall be subject to review and approval to ensure that they are reasonable, not excessive, and not inconsistent with expected loss ratio requirements.
(2) The commission or other compensation provided in subsequent (renewal) years must be the same as that provided in the second year or period and must be provided for a reasonable number of renewal years.
(3) In a replacement situation no insurer shall provide compensation to its agents or other producers and no agent or producer shall receive compensation greater than the renewal compensation payable by the replacing insurer on renewal policies.
(4) For purposes of this section, compensation includes pecuniary or nonpecuniary remuneration of any kind relating to the sale or renewal of the policy or certificate including but not limited to bonuses, gifts, prizes, awards and finders fees.
The plain language of Subdivision (e)(3) and the Departments practice supports the conclusion that in a replacement situation, the replacing insurer may only pay its producers at renewal commission levels in the first, as well as in subsequent years of the renewal policy.
2. A policy issued by a carrier but never delivered because it was refused by the applicant may be assumed not to be in existence at the time of replacement. Accordingly, when the applicant subsequently purchases a policy from a competing insurer, it is an original transaction and not a replacement situation.
For further information, you may contact Associate Counsel Sidney B. Glaser at the New York City Office.