The Office of General Counsel issued the following opinion on February 12, 2004, representing the position of the New York State Insurance Department.
Re: Sale of Insurance to Association Members and Rebating N.Y. Ins. Law § 4224
1. May an insurer that is directly or indirectly wholly owned by an association directly market personal lines insurance to members of the association without violating the anti-rebating provisions of N.Y. Ins. Law § 2324 (McKinney Supp. 2004)?
2. May an authorized insurer issue directly written personal lines insurance solely to members of an association?
1. Yes, an indeterminate and nonquantifiable benefit that may inure to the entire membership of the association would not constitute an impermissible rebate or incentive under N.Y. Ins. Law § 2324 (McKinney Supp. 2004), subject to the standards enunciated herein.
2. Yes, provided that the underwriting requirement is included in the insurers underwriting guidelines; the provisions in the New York Insurance Law (McKinney 2000) pertaining to protected classes are complied with and the proposal is in accordance with a mass merchandising plan that has been filed and approved by the Department.
The inquirer represents a not-for-profit automobile association (the "Association") that does business in six states, but not in New York. It may merge with an existing New York not-for profit automobile association with the Association being the surviving entity. Pursuant to the proposed business plan, following the merger, an authorized insurer that will be either directly or indirectly wholly-owned by the Association will directly market personal lines insurance to New York members of the Association.1 Association membership or membership status will not be contingent upon the purchase of insurance, nor will membership benefits be affected by the purchase or non-purchase of insurance from the affiliated insurer. The inquirer asks whether this would constitute an impermissible rebate or incentive under N.Y. Ins. Law § 2324 (McKinney Supp. 2004).
N.Y. Ins. Law § 2324(a) (McKinney Supp. 2004) provides:
No authorized insurer, no licensed insurance agent, no licensed insurance broker, and no employee or other representative of any such insurer, agent or broker shall make, procure or negotiate any contract of insurance other than as plainly expressed in the policy or other 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 or to any employee of the insured, either 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, directly or indirectly, which is not specified in such policy or contract, other than any article of merchandise not exceeding fifteen dollars in value which shall have conspicuously stamped or printed thereon the advertisement of the insurer, agent or broker, or shall give, sell or purchase, or offer to give, sell or purchase, as an inducement to the making of such insurance or in connection therewith, any stock, bond or other securities or any dividends or profits accrued thereon, nor shall the insured, his agent or representative knowingly receive directly or indirectly, any such rebate or special favor or advantage, provided, however, a licensed insurance agent or a licensed insurance broker may retain the usual commission or underwriting fee on insurance placed on his own property or risks, if the aggregate of such commissions or underwriting fees will not exceed five percent of the total net commissions or underwriting fees received by such licensed insurance agent or insurance broker during the calendar year.
In an opinion dated February 26, 2001, the Office of General Counsel stated that in a rebate scenario an identifiable quid pro quo exists. The opinion identified three relevant standards that should be applied to evaluate whether there is rebating. Those standards are:
1. whether there is any readily identifiable or quantifiable benefit possibly gained by the members;
2. whether any such benefits inure in a manner that is related to the purchase of insurance by any given member, i. e., whether there is proportionality or relationship between the amount of insurance purchased by an individual member and the degree of benefit enjoyed by that member; and
3. whether any benefit derived functions as an inducement to purchase or retain the insurance."
The Department concluded that an indeterminate and nonquantifiable benefit that may inure to the entire membership of a credit union would not constitute an impermissible rebate or incentive under N.Y. Ins. Law § 2324. In an opinion dated November 13, 2002, the Department stated that the principles enunciated in the February 26, 2001 opinion would apply to all membership organizations. Accordingly, those principles apply to the proposal outlined above. If the answer to each of the above is no, then the proposed business plan would not be objectionable to the Department.
Also at issue is whether the insurer, by offering to voluntarily insure only members of the Association, would be in violation of the anti-discrimination provisions of the New York Insurance Law, which protects certain classes of persons from discrimination by prohibiting insurers from refusing to issue policies to or renew policies of persons included in certain protected classes. Among the protected classes are:
race, color, creed, national origin or disability - N.Y. Ins. Law § 2606 (McKinney 2000);
sex or marital status - N.Y. Ins. Law § 2607 (McKinney 2000);
treatment for a mental disability, - N.Y. Ins. Law § 2608 (McKinney 2000);
victims of domestic violence - N.Y. Ins. § 2612 (McKinney 2000);
geographical location of the risk - N.Y. Ins. Law § 3429 (McKinney 2000);
refusal to issue a motor vehicle policy to a person with a disability - N.Y. Ins. Law § 3434 (McKinney 2000); and
refusal to issue a motor vehicle policy to a person with a New York State license for 39 months - N.Y. Ins. Law § 3435-a (McKinney 2000).
The proposed underwriting restriction would not come within any of the protected classes and, thus, would not be objectionable. Accordingly, provided that the underwriting requirement is included in the insurers underwriting guidelines, and the proposal is in accordance with a mass merchandising plan that had been filed and approved by the Department, the Department would have no objection.2
For further information you may contact Supervisory Attorney Joan Siegel at the New York City Office.
1 Although it will only market to members of the Association, it will participate in the New York Automobile Insurance Plan (NYAIP) and any other joint underwriting association that may be activated.
2 See N.Y. Comp. Codes R. & Regs. tit.11, Part 13 (Reg. 58) and N.Y. Comp. Codes R. & Regs. tit. 11, Part 153 (Reg. 135).