The Office of General Counsel issued the following opinion on January 28, 2005, representing the position of the New York State Insurance Department.
Re: Credit insurance sales and marketing by bank
Is a licensed insurance agency, which is a subsidiary of a bank that is not licensed as an insurance agent or broker, required to sell, market or service credit insurance to the banks loan customers, or may the bank do so directly?
No. Insofar as the banks loan customers are offered the option to join as members of an existing group credit insurance policy, the bank may make the credit insurance coverage available to the customers. However, if the policy being offered is an individual policy, a licensed insurance agent or broker is required to sell the credit insurance to the banks customers.
A bank offers credit insurance to its loan customers. The bank completes its customers application and sends it to a trust created by New York Bankers Association (NYBA), of which the bank is a member. A policy is issued by an authorized insurer, and the bank receives a "service fee," for processing the application from the NYBA. Recently, the bank created a subsidiary insurance agency, which is an authorized insurance agent in New York. The inquirer would like to know whether the authorized agent should now offer and market the credit service instead of the bank.
N.Y. Comp. Codes R. & Regs. tit. 11, § 185.4 (Regulation 27A) (2004) provides in part:
(a) Credit life insurance and credit accident and health insurance policies which provide benefits differing in kind or character from those set forth in paragraphs (1) through (3) of this subdivision shall be deemed not to conform with section 3201(b) of the Insurance Law:
(1) individual policies of credit life insurance issued to debtors on the term plan;
(2) group policies of credit life insurance issued to creditors providing insurance upon the lives of debtors on the term plan which may include disability benefits commonly described as waiver of premiums, extended death benefit or total and permanent disability benefits, provided such additional disability and death benefits are provided at no additional charge to the debtor.
There are two ways in which policies for credit life insurance may be issued: on an individual basis or as a group policy. If the bank is soliciting for an individual policy for its customer, the bank would be acting as an insurance agent or broker, as defined in N.Y. Insurance Law § 2101(a) and (c) (McKinney Supp. 2005), and would be prohibited under N.Y. Ins. Law § 2102(a) (McKinney Supp. 2005) from acting as an insurance agent or broker without a license.
Credit insurance may also be offered on a group basis, as is the case here. The bank is a member of New York Bankers Association (NYBA). NYBA has established a trust, which is the group policyholder of various credit insurance policies. Participating banks make available credit insurance to some of their loan customers under the group polices issued for the benefit of the members of the NYBA.
N.Y. Comp. Codes R. & Regs. tit. 11, § 185.9 (Regulation 27A) (2004) provides:
(a) An insurer issuing group credit life and group credit accident and health insurance policies may pay commissions on said business only to the insurance agent or broker who solicits the master group policy and/or is designated the agent or broker of record. The general agent or agent or broker of record may not be:
(1) the policyholder or any of its employees, officers or directors;
(2) a trustee, trustees or agent or any of their employees, officers or directors, in the event that a group credit insurance policy is issued to a trustee, trustees or agent designated by two or more creditors or vendors; or
(3) the creditor or vendor member of a trust or agency or any of its employees, officers or directors.
The aforesaid general agent or agent or broker of record may share commissions only with another agent or broker who aids in the solicitation of the master policy but in no event, either directly or indirectly, with any of the above enumerated parties.
(b) The agent or broker of record and/or any agent or broker sharing commissions for solicitation of the master policy of credit insurance, as authorized by subdivision (a) of this section, shall be licensed in accordance with Insurance Law, section 2103 or section 2104.
(c) Fees or other allowances shall include administration fees, service fees or any other payment of a similar nature payable by an insurer to an insurance agent or broker or to any other person, firm, association or corporation. Fees may be paid only for such services as are performed on behalf of the insurer and only in such amounts as would reflect the reasonable cost of performing such services. Fees may only be paid to such party or parties, including the policyholder or creditor, who perform the services. The amount of service fees must be justified by the insurer and, at least initially, stated as a dollar amount per transaction that may then be related as a percentage of premium to approximate the aggregate service fee. Other approximations may be used subject to the approval of the superintendent. Services for which fees may be payable include but are not limited to, the following: computation of premium, collection of premiums, issuance of certificates, making refunds and processing claims.
Where the bank offers its customers credit insurance under a group policy issued to a trust of which the bank is a member, the bank is not acting as an insurance agent or broker, but merely offering their customers the option to join the group under an already existing group policy. Only the group policy agent of record may collect a commission on the business, as long as the trustee or the policyholder is not the agent of record. In addition, the agent must be duly licensed in accordance with the Insurance Law. However, under § 185.9(c), the trustee may be paid a "service fee," for some of its services. There is no requirement that the trustee or bank be licensed in order to receive the service fee, or a preclusion of the trustee or policyholder from giving a portion of this service fee to the member bank. However, such fees are intended to cover the actual costs of the bank in providing the administrative services on behalf of the insurer and may not be a source profit to the bank.
For further information one may contact Principal Attorney Paul A. Zuckerman at the New York City Office.