The Office of General Counsel issued the following informal opinion on March 22, 2005 representing the position of the New York State Insurance Department.
Re: Incentives for Gap Insurance Sales
Question Presented:
May an insurer or insurance agent award cash, prizes, free tuition or other such incentives to a gap insurance policyholder or any employee of the policyholder to encourage sales of gap waivers that would be insured under the insurance policy?
Conclusion:
No, such activities constitute violations of N.Y. Ins. Law § 2324.
Facts:
The inquirer stated that banks and credit unions would be gap insurance policyholders and would sell gap waivers to debtors. The banks and credit unions would not sell gap insurance to debtors.
The intent of the rewards would be to provide incentive to the bank and credit union policyholders and their employees to encourage the sale of gap waivers to debtors. The inquirer also asked whether these activities could be included as part of a formalized marketing agreement.
Analysis:
Pursuant to N.Y. Ins. Law § 1113(a)(26) (McKinney Supp. 2005) "gap insurance" means "insurance covering the gap amount which is payable upon the total loss of personal property, which is the subject of a lease or loan or other credit transaction occasioned by its theft or physical damage."
As provided for in N.Y. Ins. Law § 1113(a)(26) (McKinney Supp. 2005), lessor/creditor gap insurance may be issued to the lessor or the creditor, or assignee thereof, (hereinafter "lessor/creditor") for the purposes of compensating the lessor, creditor, or assignee for waiving the gap amount. Alternatively, the lessee or the debtor may directly purchase lessee/debtor gap insurance, which covers the lessees or the debtors obligation where the lessor or creditor, or assignee thereof, has not waived the gap amount. See N.Y. Ins. Law § 1113(a)(26) (McKinney Supp. 2005). In the former case, the insured is the lessor/creditor while in the latter case, the lessee or debtor is the insured.
According to the facts provided, banks and credit unions will be the insureds and will offer gap waivers to their debtors. The incentive program would encourage banks and credit unions and their employees to sell more gap waivers to debtors. Since the gap waivers will be insured by the insurer under a policy of gap insurance and the premiums for the policy are based upon the number of gap waivers insured, the greater the number of waivers, the larger the premium to the insurer.
Since the banks and credit unions are the insureds and the incentive plan would make payments to the insureds and/or employees of the insured, N.Y. Ins. Law § 2324 is relevant to the inquiry. N.Y. Ins. Law § 2324 (McKinney Supp. 2005), entitled "Rebating and discrimination," is applicable to property or casualty insurance, including gap insurance, and provides, in pertinent part, as follows:
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 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 . . . nor shall the insured, his agent or representative knowingly receive directly or indirectly, any such rebate or special favor or advantage . . . (emphasis added)
Thus, according to the express language of N.Y. Ins. Law § 2324 (McKinney Supp. 2005), insurers, brokers, agents and their employees and representatives are prohibited from directly or indirectly offering inducements or valuable consideration, other than an article of merchandise not exceeding $15 in value, in connection with the sale of insurance, when such inducements or valuable consideration are not specified in the insurance policy. As previously discussed, a reward program to encourage sales of gap waivers, if successful, leads to higher premiums to the insurer. Therefore, such rewards are inducements or valuable consideration in connection with the sale of insurance and are prohibited by N.Y. Ins. Law § 2324.
In addition, among other things, N.Y. Ins. Law § 1101(b)(3), which provides a limited exemption for the sale of gap waivers from the definition of doing an insurance business, limits the charge to the debtor/lessee by a creditor/lessor for a gap waiver to no more than the cost of any corresponding gap insurance. By compensating a bank, credit union or employee, the insurer would essentially be reducing the cost of the insurance. Therefore, if the banks, credit unions and their employees were to participate in such a reward program, they would be acting outside the limitations of N.Y. Ins. Law § 1101(b)(iii) and would be engaging in an insurance business without a license in violation of N.Y. Ins. Law § 1102.
Therefore, the law prohibits any program that would provide incentives to a creditor or lessor or their employees to sell gap waivers.
In answer to the inquirer's question about whether the incentives could be provided as part of a formalized marketing agreement, please note that N.Y. Ins. Law § 2324 does not permit any agreement other than the policy itself to provide for inducements. However, for the reasons stated previously, no such policy provisions would be appropriate.
For further information you may contact Assistant Counsel Brenda M. Gibbs at the Albany Office.