The Office of General Counsel issued the following opinion on November 10, 2005, representing the position of the New York State Insurance Department.
Re: Permissibility of Proposed Business Arrangement to Own Title Agency
Question Presented:
Does N.Y. Ins. Law § 6409(d) (McKinney 2000) prohibit the formation of a title insurance agency under the circumstances outlined below?
Conclusion:
No, provided there is strict compliance with the requirements laid out herein.
Facts:
The inquirer states that ABC of New York ("ABCNY") is exploring the possibility of becoming, in New York, a co-owner of a for-profit entity whose business purpose would be to act as a title insurance agency in New York. The other co-owner would be DEF American Title Insurance Company ("DEF American"). The inquirer states also that ABCNY and DEF American intend to be the sole owner of two separate entities formed with the single purpose of representing them in this venture. ABCNY's entity would assist ABCNY in marketing the title agency. DEF American's entity would assist DEF American with the technical aspects of the title agency's business.
The title insurance agency would provide title insurance to the public, the real estate community and to the members of ABCNY. The members of ABCNY include, among others, office and residential property owners, builders, brokers and managers, banks, financial service companies, utilities, attorneys, architects and contractors. The inquirer also states that although members of ABCNY would be asked to obtain title insurance from the title agency, they would not, in any way, be required to do so. The inquirer also states that no direct benefit would accrue to any person or entity obtaining insurance from the agency.
Further, the inquirer states that any capital required by the title insurance agency would be contributed by ABCNY and DEF American on a 50/50 basis. The title insurance agency would pay for all direct costs and expenses incurred in running its operations, but DEF American would be responsible for supervising the technical aspects of the business. The inquirer states that ABCNY would recommend the services of the title insurance agency to the real estate community, the members of ABCNY and to non-members of the public.
The inquirer states that all net profits of the title insurance agency would be divided on a 50/50 basis between ABCNY and DEF American. The inquirer further states that any profit generated from the title insurance agency and distributed to ABCNY would accrue to the benefit of ABCNY, to be used for its general purposes.
Analysis:
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 a title insurance corporation or anyone acting for or on behalf of such title insurance corporation from giving, among other things, any 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 one of the prohibited classes listed in Section 6409(d) above, 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 is based upon their ownership interests. Further, there may not be an agreement regarding the amount of title insurance business each co-owner will refer to the title agent.
In this instance, ABCNY is a real estate board with members from various sectors of the real estate, legal and banking community including, but not limited to, office and residential property owners, builders, brokers, banks, financial service companies, attorneys and contractors. These members constitute ABCNY and most, if not all, of ABCNY's members fall within the prohibited classes. Therefore, the restrictions above apply so that there must be multiple sources of business for the title agency. In addition, there must not be any agreement regarding the amount of business the co-owners, ABCNY or DEF American, must bring in to the title agent. In terms of profits to ABCNY and DEF American, any compensation they receive must be based upon their ownership interest and not on the amount of business they refer to the title agency.
Further, members of ABCNY, including those who are applicants for insurance, may not, directly or indirectly, be given, among other things, any consideration or valuable thing, or be given any preferential treatment, for using the title agency to obtain title insurance. Also, they may not be required to utilize the services of the title agency or be penalized for using the services of other title agents or title insurance companies.
For further information please contact Associate Attorney D. Monica Marsh at the New York City Office.