OGC Op. No. 06-04-13
The Office of General Counsel issued the following opinion on April 17, 2006, representing the position of the New York State Insurance Department.
Re: Cooperatives and Group Property/Casualty Insurance.
Is the proposal discussed below permissible under the New York Insurance Law?
Without further details regarding the proposal, we can not provide the inquirer with a definitive response. However, certain aspects of the proposal appear to be inconsistent with the New York Insurance Law.
The inquirer's client is a purchasing cooperative located in Massachusetts, which consists of independently owned franchises that sell fast food. The franchises are located in six New England states and New York. Each franchise is a member of the cooperative and purchases its supplies and receives other benefits from the cooperative. The cooperative desires to contract with two major insurance brokers that are licensed in Rhode Island and Massachusetts, respectively, but not licensed in New York. The insurance brokers will obtain group property/casualty insurance from two New York authorized insurers that will cover the members of the cooperative. The inquirer did not specify the kind of property/casualty insurance that will be purchased. The cooperative itself will not be insured under the insurance policy. The coverage will be chosen by the brokers and the price and terms of the insurance policies will be independently negotiated and set between the members and the broker. All policies will have certain minimum coverage. The cooperative will collect the insurance premiums from each franchisee and remit them to the insurance brokers and in return the insurance brokers will pay the cooperative an administrative fee for performing this service. The inquirer would like to know whether this arrangement is permissible under the New York Insurance Law.
Group property/casualty Insurance
In New York, group property/casualty insurance is permissible in only certain limited instances. N.Y. Ins. Law § 3435 (McKinney 2000) provides, in relevant part, as follows:
(a) This section shall apply to public entities as defined in section one hundred seven of this chapter, organizations described by section 501(c)(3) of the United States internal revenue code, Type B corporations formed pursuant to paragraph (b) of section two hundred one of the not-for-profit corporation law, and organizations described by section two hundred sixteen-a of the education law.
(b) Notwithstanding any other provision of this chapter, group coverage for homogeneous groups formed for purposes other than obtaining insurance may be approved, subject to regulations to be promulgated by the superintendent, for the kinds of insurance permitted in subsection (c) of this section, provided such policies shall be available to all eligible members of such group upon application. . . .
Group property/casualty insurance policies under Section 3435 may be issued only where the group members are either "public entities" or non-profit organizations. However, there are other ways that group property/casualty insurance may be issued. For example, N.Y. Ins. Law Article 59 (McKinney 2000), which implements the Federal Liability Risk Retention Act of 1986, 15 U.S.C. §§ 3901, et. seq. ("L.R.R.A") permits the formation of purchasing groups as a vehicle for obtaining commercial liability insurance coverage.1
N.Y. Comp. Codes R. & Regs. tit. 11, Part 153 (Regulation 135) sets forth, inter alia, the parameters under which group property/casualty insurance may be issued. Section 153.1(g) defines the term "group policy", in relevant part, as:
(g)(1) a policy underwritten and issued on a collective basis of:
(i) property/casualty insurance insuring the interests of two or more persons or entities; or
(ii) liability insurance insuring a Federal purchasing group or its members;
(2) Where an insurer elects to issue a single policy with a first-named insured and additional insureds, such policy shall not be considered a "group policy" in regard to the following: . . .
(ii) franchisors and their franchisees, with regard to their related interests.
* * * *
If an arrangement falls within the above exception, the policy may be written on a non-group basis and would not be subject to the requirements of Regulation 135. Since the inquirer did not provide sufficiently detailed facts, we can not provide a definitive response regarding whether this arrangement would constitute permissible group property/casualty insurance under the New York Insurance Law or may be written as non-group insurance. The inquirer was directed to review the provisions of Section 3435, Regulation 135 and Article 59 to ascertain whether the arrangement complies with these provisions. Please note that this opinion would apply even if the group policy itself was issued outside of New York, since New York transactions, including the solicitation and delivery of certificates to New York members, are governed by the New York Insurance Law.
Collection of Insurance Premiums
N.Y. Ins. Law § 2102(a)(1)(McKinney Supp. 2006), prohibits any person, firm, association or corporation from acting as an insurance producer or insurance adjuster in this state without having the authority to do so by virtue of a license issued and in force pursuant to the provisions of Article 21 of the Insurance Law.
N.Y. Ins. Law 2101(k) (McKinney Supp. 2006) defines the term "insurance producer" as "an insurance agent, insurance broker, reinsurance intermediary, excess lines broker, or any other person required to be licensed under the laws of this state to sell, solicit or negotiate insurance. . . ."
N.Y. Ins. Law § 2101(c)(McKinney Supp. 2006), defines the term "insurance broker" as:
(c) [A]ny person, firm, association or corporation who or which for any compensation, commission or other thing of value acts or aids in any manner in soliciting, negotiating or selling, any insurance or annuity contract or in placing risks or taking out insurance, on behalf of an insured other than himself, herself or itself or on behalf of any licensed insurance broker . . .
Generally, an insurance broker acts or aids in the solicitation, negotiation or sale of insurance to an insured. If all the cooperative would be doing is performing the ministerial functions of collecting insurance premiums and remitting them to an insurance broker, it would not have to become licensed as an insurance broker to perform such activities.
Note that Section 2101(k)(6) exempts from the definition of insurance producer "a person who secures and furnishes information for the purpose of group life insurance, group property/casualty insurance, group annuities, group or blanket accident and health insurance, or for the purpose of enrolling individuals under plans, issuing certificates under plans or otherwise assisting in administering plans; or performs administrative services related to mass marketed property/casualty insurance, where no commission is paid to the person for the service." Thus, if this were group property/casualty insurance or mass marketed property/casualty insurance, the cooperative may qualify for this exemption.
Licensing of Non-resident Insurance Brokers
The inquirer stated that the two insurance brokers that will provide insurance to members of the cooperative are licensed in Rhode Island and Massachusetts, but not in New York. If the insurance brokers are soliciting, negotiating or selling insurance in New York without being licensed in New York, they would be violating Section 2102. The fact that the brokers are located outside of New York is not dispositive because the prohibition extends to contact with insureds in New York by telephone, fax, etc.
Moreover, N.Y. Ins. Law § 2116 (McKinney Supp. 2006) states that:
No insurer authorized to do business in this state, and no officer, agent or other representative thereof, shall pay money or give any other thing of value to any person, firm, association or corporation for or because of his or its acting in this state as an insurance broker, unless such person, firm, association or corporation is authorized so to act by virtue of a license issued or renewed pursuant to the provisions of section two thousand one hundred four of this article. . . .
Thus, the authorized insurer may not compensate the insurance brokers for placing insurance with New York insureds, since they are not licensed as non-resident brokers in New York. However, the inquirer stated that they are licensed in Rhode Island and Massachusetts, which are reciprocal states. In regard to reciprocity, N.Y. Ins. Law § 2136 (McKinney Supp. 2006) provides as follows:
The superintendent shall waive any requirements for a nonresident license applicant otherwise applicable under this chapter if:
(a) the applicant has a current and valid license in his or her home state and is in good standing in his or her home state;
(b) the applicant has submitted a completed application in the form prescribed by the superintendent or submitted the application for licensure submitted to his or her home state;
(c) the applicant has paid the fees required by this chapter; and
(d) the applicant's home state awards nonresident insurance producer licenses to residents of this state on the same basis as provided in this subsection.
The inquirer may direct the insurance brokers to contact our Licensing Bureau at 1-800-342-3736 or visit our website at http://www.ins.state.ny.us to obtain the requisite applications and further information regarding licensing.
Administrative Fee and Rebating
The inquirer stated that the insurance brokers would pay the cooperative an administrative fee for collecting premiums. N.Y. Ins. Law § 2324 (McKinney Supp. 2006) provides, in relevant part, as follows:
(a) 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 is 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, or shall give, sell or purchase, or offer to give, sell or purchase, as an inducement to the making of such insurance or in connection therewith, any stock, bond or other securities or any dividends or profits accrued thereon, nor shall the insured, his agent or representative knowingly receive directly or indirectly, any such rebate or special favor or advantage. . . .
Section 2324 prohibits providing, inter alia, rebates or other inducements to the insured in connection with the sale of property/casualty insurance that are not specified in the insurance policy, other than an 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.
If an insurance broker pays a fee to a membership organization, such as a cooperative, the question of rebating is raised, since it is possible that such compensation may inure to the benefit of the insureds. However, the Department has previously opined that payments to membership organizations are permissible under section 2324 if the following elements are met:
1. The members of the organization do not receive a readily identifiable or quantifiable benefit;
2. The benefits inure in a manner that is wholly unrelated to the purchase of insurance by the members. i.e., there is no proportionality or relationship between the amount of insurance purchased by an individual member of the organization and the degree of benefit enjoyed by the member; and
3. The benefits derived do not, as a practical matter, function as an inducement to purchase or retain insurance.2
The rationale behind this is that in a true rebate scenario, an identifiable quid pro quo exists and this was the evil that the statute was intended to prevent. Consequently, in the instant case, provided that the elements as delineated above are present, the arrangement would be permissible under section 2324.
However, if the cooperative were the group policyholder, there would be an impermissible rebate except if the cooperative is reimbursed only for its administrative costs in collecting the premiums and remitting them to the insurance brokers. 3
This opinion is strictly limited to an interpretation of the New York Insurance Law. No opinion is rendered on any other laws.
For further information you may contact Associate Attorney Pascale Jean-Baptiste at the New York City Office.
1 See also N.Y. Ins. Law §§ 3442, 3445 and 3446, which permit group property/casualty insurance in certain specific contexts, none of which appear to be relevant herein.
2See OGC Opinion No. 01-02-16, dated February 26, 2001 and OGC Opinion No. 02-11-07, dated November 13, 2002, which are currently available on the Department's website at http://www.ins.state.ny.us.
3 See OGC Opinion No. 06-03-06, dated March 9, 2006, which is also available on the Department's website.