The Office of General Counsel issued the following opinion on October 25, 2005, representing the position of the New York State Insurance Department.
Re: Group Life Insurance, Assignment
May insureds under a group life insurance policy issued to an employer assign the policy benefits to the employer/policyholder?
While the distinction drawn by the employer between employees is valid, based upon the facts presented, the assignment would not be permitted.
A firm, of which the inquirer is a sub-license, is licensed as an insurance agent pursuant to New York Insurance Law § 2103(a) (McKinney 2000 and 2005 Supplement) and has proposed an insurance program to an employer. Under the program, a group life insurance policy would be issued by an insurer licensed to transact an insurance business in New York covering two classes of individuals: (1) The "Owners/Partners/Officers" of the policyholder and (2) All Other Employees. The full premium on the policy would be paid by the employer/policyholder, without any contribution by the insured individuals in either Class.
It is proposed that the Class 1 individuals would assign the policy proceeds to the employer/policyholder utilizing an assignment form developed by the insurer. The inquirer has indicated that the insurer involved has reviewed the proposal and has indicated that, because the assignors will be "Owners/Partners/Officers", rather than "Employees", the assignments would not be contrary to the New York Insurance Law or the regulations promulgated thereunder.
The insurance agent that developed the life insurance program presently in existence, which was presumably underwritten by a different insurer, has informed the inquirers potential client that the proposal would be contrary to the New York Insurance Law. In support of that contention, that insurance agent has cited a November 26, 2002 opinion of this Office holding, among other things, that an assignment of policy proceeds to a policyholder would be contrary to New York Insurance Law § 4216(b)(12)(D) (McKinney 2000 and 2005 Supplement)
The inquirer believes that the 2002 Opinion is inapposite since it references an "Association" group and seeks the Department's view as to the proposed transaction.
New York Insurance Law § 4216(b) sets forth those groups eligible for group life insurance policies. New York Insurance Law § 4216(b)(1) authorizes issuance of :
A policy issued to an employer or to a trustee or trustees of a fund established by an employer, which employer or trustees shall be deemed the policyholder, insuring with or without evidence of individual insurability satisfactory to the insurer, employees of such employer, and insuring, except as hereinafter provided, all of such employees or all of any class or classes thereof determined by conditions pertaining to the employment . . . for amounts of insurance on each person insured based upon some plan which will preclude individual selection. . . . The premium for the policy shall be paid by the policyholder, either wholly from the employer's funds or funds contributed by him or from funds contributed by the insured employees, or from funds contributed jointly by the employer and employees. . . . Except as provided in subsection (b) of section four thousand two hundred thirty-one of this article [apportionment of dividends] and in paragraph five of subsection (a) of section three thousand two hundred twenty of this chapter[facility of payment], such policy shall provide for payment of all benefits thereunder, to the person insured or to some beneficiary or beneficiaries other than the employer, and shall provide for the issuance of a certificate to the policyholder for delivery to the person insured or to such beneficiary, as evidence of such insurance. (emphasis added)
The two exceptions in New York Insurance Law § 4216(b)(1) to the prohibition of the employer/policyholder receiving a benefit under the policy would not be applicable to the inquirer's proposal. Accordingly, it has been the Department's position that assignment of a group insured's benefits to an employer.
New York Insurance Law § 3220(c) (McKinney 2000) provides:
(1) Notwithstanding any provision of law, a person whose life is insured under any policy of group life insurance, whether or not such policy is otherwise subject to this section, is permitted to make an assignment of all or any part of his incidents of ownership in such insurance, including, without limitation, any right to designate a beneficiary or beneficiaries thereunder and any right to have an individual policy issued upon termination either of employment or of said policy of group life insurance, provided that the insurer and the group policyholder may prohibit or restrict such assignment by appropriate policy provisions.
(2) This subsection shall be construed as declaring the law as it existed prior to its enactment and not as modifying it.
The predecessor of New York Insurance Law § 3220(c)(1), New York Insurance Law § 161(3) (McKinney 1969) was enacted, 1969 N.Y. Laws 643, in response to rulings by the Internal Revenue Service holding that adverse tax consequences might follow if there had not been statutory authorization to assign the policy. Consistent with New York Insurance Law § 3220(c)(1), it has been the position of the Department since that time that New York Insurance Law § 3220(c)(1) does not serve to override the prohibition in New York Insurance Law § 4216(b)(1). [see 1971 Opinion enclosed].
New York Insurance Law § 3205(a) & (b) (McKinney 2000 and 2005 Supplement) provide:
(a) In this section: (1) The term, "insurable interest" means: . . . (B) in the case of other persons, a lawful and substantial economic interest in the continued life, health or bodily safety of the person insured, as distinguished from an interest which would arise only by, or would be enhanced in value by, the death, disablement or injury of the insured. . . .
(b) (1) Any person of lawful age may on his own initiative procure or effect a contract of insurance upon his own person for the benefit of any person, firm, association or corporation. Nothing herein shall be deemed to prohibit the immediate transfer or assignment of a contract so procured or effectuated. (2) No person shall procure or cause to be procured, directly or by assignment or otherwise any contract of insurance upon the person of another unless the benefits under such contract are payable to the person insured or his personal representatives, or to a person having, at the time when such contract is made, an insurable interest in the person insured. . . .
Corporate Owned Life Insurance has been the subject of N.Y. Comp. Codes R. & Regs. tit. 11, Part 48 (2005) (Regulation 180). That Regulation, N.Y. Comp. Codes R. & Regs. tit. 11, §§ 48.0 (2005) and 48.2(2005) provides, in pertinent part
(c) Under Section 3205(a)(1)(B), an employer has an insurable interest in the lives of certain employees and other persons, commonly referred to as key employees or key persons, whose services and qualifications are of such nature that their death or disability would cause the employer to incur a substantial pecuniary loss.
(d) The purpose of this Part is to establish standards for life insurers and fraternal benefit societies issuing key person company-owned life insurance to ensure that the employees or other persons on whose lives coverage is being written pursuant to Section 3205(a)(1)(B) of the Insurance Law are actually key persons.
N.Y. Comp. Codes R. & Regs. tit. 11, § 48.0
For purposes of this Part and for establishing whether there exists an insurable interest under Section 3205(a)(1)(B) at the time the policy is issued, the term key person shall include the following persons: (a) An employee who is one of the five highest paid officers of the employer; (b) An employee who is a five-percent owner of the employer. . . . (c) An employee who had compensation from the employer in excess of $ 90,000 in the preceding year; (d) An employee who is among the highest paid 35 percent of all employees; or (e) An employee or other person who makes a significant economic contribution to the company, including but not limited to, an employee who is responsible for management decisions, has a significant impact on sales or a special rapport with customers and creditors, possesses special skills, or would be difficult to replace. Criteria for the employer's determination shall be included in the insurer's underwriting guidelines.
N.Y. Comp. Codes R. & Regs. tit. 11, § 48.2
The Department views New York Insurance Law § 3205 and Regulation 180 as affecting only individual life insurance. Thus, even if the employer had an insurable interest in the Class 1 employees, the prohibition in New York Insurance Law § 4216(b)(1) of the employer receiving benefits under the group policy would prevent the assignments.
For further information please contact Principal Attorney Alan Rachlin at the New York City office.