The Office of General Counsel issued the following opinion on October 28, 2005, representing the position of the New York State Insurance Department.
Re: Permissibility of Proposed Ownership of Title Agency
Does N.Y. Ins. Law § 6409 (McKinney 2000) prohibit the formation of a title insurance agency under the circumstances outlined below?
N.Y. Ins. Law § 6409 (McKinney 2000) does not prohibit the formation of a title insurance agency under the circumstances outlined below.
The inquirer proposes the formation of a title insurance agency that will conduct title insurance business with the general public in New York. The title agent will be co-owned by an underwriter, a real estate group (comprised of real estate professionals and companies) and outside investors. The outside investors will have no relation to the real estate group. The underwriter will hold a 40% ownership interest in the title agency while, together, the real estate group and the outside investors will have a 60% ownership interest therein. In terms of the real estate group, the inquirer is unsure whether it will own interest in the title agency directly or indirectly through a New York limited liability company. The inquirer states that it has not yet been determined what portion of the 60% ownership interest the real estate group or the outside investors will hold.
The inquirer states that the underwriter will handle the accounting function for the title agency and will charge the title agency fair market value for such services pursuant to an agency agreement. There is no requirement in the agency agreement that the agency write business on the underwriter. The inquirer also states that there will be no affirmative obligation for any owner of the agency, or any owner of any entity that holds an interest in the agency, to use the agency to issue title insurance policies in connection with real estate transactions. The co-owners will not be obligated to refer any specified amount of title business to the agency.
The inquirer also states that the agency will actively conduct business with the public and make all required disclosures. The agency and its subsidiaries will distribute dividends to its co-owners on the basis of their respective percentages of ownership interest and not on the amount of business they bring in.
N.Y. Ins. Law § 6409(d) (McKinney 2000) provides:
(d) No title insurance corporation or any other person acting for or on behalf of it, shall make any rebate of any portion of the fee, premium or charge made, or pay or give to any applicant for insurance, or to any person, firm, or corporation acting as agent, representative, attorney, or employee of the owner, lessee, mortgagee or the prospective owner, lessee, or mortgagee of the real property or any interest therein, either directly or indirectly, any commission, any part of its fees or charges, or any other consideration or valuable thing, as an inducement for, or as compensation for, any title insurance business. Any person or entity who accepts or receives such a commission or rebate shall be subject to a penalty equal to the greater of one thousand dollars or five times the amount thereof.
Section 6409(d) prohibits, among other things, the giving of a rebate, consideration or other valuable thing, directly or indirectly, to the persons listed therein if such remuneration constitutes, among other things, an inducement for, or compensation for, any title insurance business. While Section 6409(d) could be construed as precluding any compensation to owners or co-owners who belong to the one of the prohibited classes listed in Section 6409(d) above, in circumstances where the owners or co-owners fall within those classes, the Department has generally construed the statute as not being violated where there are multiple sources of business for the title agency and where, in terms of profits, any compensation that the co-owners receive corresponds to the amount of their ownership interests and not to the amount of title business they bring in. Further, there should not be an agreement regarding the amount of title insurance business each co-owner will refer to the title agency.
The inquirer is still unsure about various aspects of the proposal such as what the actual percentage of ownership interest will be between the real estate group and the outside investors and whether the real estate group will be a direct or indirect co-owner of the title agent. There is also a possibility that some other company, not mentioned in the proposal, will be a co-owner of the title agency. Consequently, as seen above, this opinion is general in nature.
In terms of the agreement between the agency and the underwriter, whereby the underwriter agrees to handle the accounting function for the title agency and charge fair market value for such services, the Department has held that there is no violation of the Insurance Law if the compensation paid is commensurate with the actual services performed.
This opinion is limited to an interpretation of the Insurance Law.
For further information please contact Associate Attorney D. Monica Marsh at the New York City office.