The Office of General Counsel issued the following informal opinion dated February 26, 2001 reflecting the position of the Department.
Re: Insurance Agency/Brokerage Subsidiaries of Credit Unions
What effect does the repeal of Insurance Law § 2501 have upon the validity of the Office of General Counsel ("OGC") Opinion dated June 26, 1991?
The legislation repealing § 2501 of the Insurance Law, along with other legislation enacted last year, supersedes several, but not all, of the conclusions set forth in the referenced OGC Opinion. For the reasons discussed below, however, the referenced OGC Opinion no longer reflects the Departments position on certain of the issues addressed therein.
OGC issued an opinion dated June 27, 1991 in response to an inquiry that addressed the applicability of § 2501 of the Insurance Law to a fact pattern involving an unlicensed entity acting as an insurance broker that was wholly owned by a credit union. The inquiry focused on the ability of a licensed employee of the wholly owned subsidiary to sell insurance to the customers of the credit union in connection with loans made by the credit union to those customers. In response to the inquiry, this office opined that the conduct in question would violate N.Y. Ins. Law § 2501. In addition, the author of that opinion noted that the activities described would violate other Insurance Law provisions as well, specifically, § 2113 (prohibition against negotiation of insurance policy in violation of Ins. Law § 2501 by insurance agent or broker who is owned or controlled by a bank); § 2102 (prohibition against acting as a broker without a license), and § 2324 (improper rebating).
The conclusions reached in the OGC opinion of June 27, 1991 (hereinafter, the 1991 Opinion) are significantly impacted by the recent legislation repealing N.Y. Ins. Law § 2501 and other recently enacted legislation which affects several other provisions of the Insurance Law and the Banking Law. These bills were S.4540-A (enacted as Ch. 493, L. 2000) and S. 8090 (enacted as Ch. 418, L. 2000), which were enacted to bring New York Law into conformance with the financial modernization reform enacted into federal law by the Gramm-Leach-Bliley Act. Ch. 493, L. 2000, in part, repealed N.Y. Ins. Law § 2113 and § 2501.
Ch. 418, L. 2000 amended §2114(a), § 2115(a)(1), § 2116, § 2123, and § 2502 of the Insurance Law.
Violation of N.Y. Ins. Law § 2501 and § 2113 (both now repealed)
The outright repeal of N.Y. Ins. Law § 2501 and § 2113 clearly invalidates the 1991 Opinion insofar as its conclusions related to those sections.
The balance of the assertions made in the 1991 Opinion, however, require further analysis, and are addressed below.
Violation of N. Y. Ins. Law § 2102
The 1991 Opinion asserts that the proposed practice of allowing employees of the credit union to refer the applicants for insurance to "Corporation A", a non-licensed subsidiary of the credit union, would constitute the unlicensed solicitation of insurance in violation of N.Y. Ins. Law § 2102, and this continues to be the case. In the case of a licensed subsidiary, this conclusion is no longer accurate in light of the above-quoted amendments made to N.Y. Ins. Law § 2114, § 2115, and § 2116. Those sections were amended to expressly exclude such referrals from being characterized as "acting as an insurance agent" or "acting as an insurance broker", so long as there is no discussion of specific insurance policy terms and conditions and compensation for the provision of such referrals is not in any way based upon the purchase of insurance by the individual referred. However, in one of the fact patterns presented, it was stated that there may be a discussion of the policy by an unlicensed employee of a Credit Union Service Organization ("CUSO") or its subsidiary. This would not be permissible.
Violation of N.Y. Ins. Law § 2324
The 1991 Opinion further asserts that the sale of insurance by a subsidiary of a credit union would constitute a violation of N.Y. Ins. Law § 2324, which disallows the provision of rebates by agents, brokers or insurers to the purchasers of insurance. The rationale for applying N.Y. Ins. Law § 2324 in this context was that because a credit unions borrowers are also member/owners of the credit union, any commissions earned by the agency subsidiary of the credit union from the sale of insurance to a credit union borrower could ultimately inure to the benefit of the members of the credit union.
This position is apparently rooted in two Opinions of the Attorney General (1912 Op. N.Y. Atty. Gen. 535 and 1955 Op. N.Y. Atty. Gen. 200). And it has been consistently followed by the Department. However, both the facts and the context make these Opinions distinguishable from the instant case. The 1912 Opinion involved a situation in which The Fidelity and Casualty Company of New York City paid an "overriding commission" directly to the New York State Bankers Association each time a member bank thereof purchased insurance or a bond. These "overriding commissions" were accumulated by the Association and applied toward its protective fund, which was used for the benefit of the member banks. In that case, the payment of the "overriding commission" constituted an improper rebate directly related to the purchase of insurance from a given company. In fact this benefit could be identified and determined with respect to each member bank. The 1955 Opinion involved a situation in which the stockholders of an insurance agency, the Musicians Service Corporation, agreed that any profits derived from commissions on policies sold to members of a musicians union would be used to "provide the public with musical performances". The musicians that would be hired to give the performances in question would, presumably, be members of the union in question. Although the Attorney General opined generally that a transaction in which insurance is placed by or for the benefit of individuals and a portion of the cost thereof is to be returned to those persons individually or to an association whose main concern is the protection of their interests would violate the intent of the statute, he did not conclude that the plan presented would in itself violate the statute. In fact, in so holding, the Attorney General implicitly recognized that the absence of a known and quantifiable benefit, or quid pro quo, presented no identifiable benefit.
There is little case law on this subject. It is clear that this position needs to be reevaluated and, in the context of credit unions presented herein, changed. This conclusion is warranted on the basis of a review of the history of N.Y. Ins. Law § 2324.
The original predecessor section to N.Y. Ins. Law § 2324 was N.Y. Ins. Law § 65, which was first enacted in 1911 as a result of the findings of the Merritt Legislative Investigating Committee (the "Merritt Committee"). The Merritt Committee was formed to study fraudulent and abusive practices in the fire and casualty insurance fields. One perceived abuse was the practice of rebating whereby agents, eager to secure business, would arrange to refund to certain insureds a portion of the commission to which the agent would otherwise be entitled. This practice led to a situation where bigger customers would receive, in effect, a lower total price for insurance to that of smaller customers, yet no such differential would be evidenced on the face of the policy or contract. A letter dated June 16, 1911 from the Superintendent of Insurance to William Church Osborn, Counsel to the Governor, expressing the Departments support of the legislation enacting Section 65, stated as follows:
Rebating is an existing evil in the Fire and Casualty fields, particularly where the risk is large. Thus, a large insurer gets a benefit; in other words, in effect a lower rate than is possible to a small insurer. This bill is intended to reach such evil.
Nowhere in the report of the Merritt Committee nor in any of the legislative materials available regarding Section 65 (or the subsequent amendments thereof) is there any discussion or consideration of any purpose for the statute beyond the prevention of the practice whereby a broker or agent (either directly or indirectly) arranges to obtain business through the refund or rebating to a customer of a portion of its commission. The conclusion that the statute (or its successors) was also intended to apply to a situation such as that presented by the instant inquiries is unsupported by the legislative history.
In view of the historical justification and impetus for Section 2324, it should not be applied in the instant inquiries. First, any benefit possibly gained by the members of the credit union cannot be readily identified or quantified. Second, any such benefits inure in a manner wholly unrelated to the purchase of insurance by any given member, i.e., there is no proportionality or relationship between the amount of insurance purchased by an individual member of the credit union and the degree of benefit (such as it may be) enjoyed by the member. Finally, any benefit derived simply does not, as a practical matter, function as an inducement to purchase or retain insurance. In the true rebate scenario, an identifiable quid pro quo exists, and it is that evil which the statute was intended to prevent. This concern is simply not present in the credit union/CUSO scenario presented by the inquiries herein.
The Department, therefore, does not view the indeterminate and nonquantifiable benefit that may inure to the entire membership of a credit union as a result of the receipt of commissions by the agency subsidiary thereof as constituting an impermissible rebate or incentive under N.Y. Ins. Law § 2324. Therefore, § 2324 should not be viewed as an obstacle to the sale of insurance by a CUSO subsidiary of a credit union.
Implications of N.Y. Ins. Law. § 2103(i) & 2104(d)(3)
These sections are also relevant to the issue at hand. These sections authorize the Superintendent to deny an agents or brokers license in the event that more than 10% of the aggregate net commissions of the applicant received during a twelve month period resulted or will result from insurance on the property and risks of affiliated corporations of the applicant and of any affiliated or subsidiary corporations of a corporation owning a controlling interest in the applicant or of the owners of such a corporation. In the case of an insurance agency or brokerage owned by a credit union (either directly or through a CUSO), the above-referenced statutes are broad in application, and, absent any compelling rationale to the contrary, would remain applicable.
However, N.Y. Ins. Law §§ 2103(i) and 2104(d)(3), if applied to the proposed scenario, would greatly inhibit the credit union or its affiliate from engaging in what is, under federal law, a permitted insurance activity. It is a general rule that where an area is governed by federal law, a state or local statute that purports to address the same area will be preempted by the federal law. See, Hines v. Davidowitz, 312 U.S. 52 (1941); Rice v. Norman Williams Co. (1982). One exception to this is the McCarran-Ferguson Act, 15 U.S.C. § 1012, which expressly provides that a federal statute will not preempt a state statute enacted for the purpose of regulating the business of insurance, unless the federal statute itself specifically relates to the business of insurance. The federal rule applicable herein [12 C.F.R. 712.5(g) (2000)], does specifically relate to the business of insurance.
A further principle is that where an activity is expressly permitted under federal law, a state statute that prohibits or stands in the way of the federally permitted activity will be preempted. See, Hines v. Davidowitz, supra. In a more recent case, Barnett Bank v. Nelson, 517 U.S. 25 (1996), a state statute aimed at national banks was held preempted because it "significantly interfered" with the national banks exercise of its powers.
In the instant case, the credit unions are expressly permitted under federal regulation [12 C.F.R. 712.5(g) (2000)] to own a CUSO that operates as an insurance agency or brokerage. Under the doctrine of federal preemption, a state statute that interferes with the accomplishment of the purposes of a federal law will be preempted. The above-referenced state statutes, if applied to the credit unions, effectively render meaningless their federally granted authority to own an insurance agency. Such being the case, these state statutes are preempted in their application in this instance.
In light of the above, the holding of the 1991 Opinion, to the extent it is inconsistent with the conclusions herein, is withdrawn.
For further information, you may contact Supervising Attorney Michael Campanelli of the Departments New York Office.