OGC Op. No. 06-08-15
The Office of General Counsel issued the following opinion on August 22, 2006, representing the position of the New York State Insurance Department.
1. May a broker hold a raffle for a group of franchisees for which the prize would be one year of property and liability insurance coverage?
2. If an insurance policy is not allowed as a prize, would a cash prize or a vacation of similar value be allowed in the alternative?
1. No, a broker may not hold a raffle for a group of franchisees for which the prize would be insurance coverage.
2. No, whether an insurance policy or a vacation, the prize would be considered to be an impermissible inducement in violation of New York Ins. Law § 2324.
The inquiry states:
ABC Insurer, a New York domiciled company, is one of five approved carriers from which all franchisees of Fast Food Restaurant X may obtain their insurance. In order to be an approved carrier, the five insurers agree to provide a minimum property and liability coverage grant that is both broad and comprehensive. Currently, ABC Insurer insures a small number of Fast Food Restaurant Xs in New York in the Free Trade Zone. In other states, ABC Insurer insures a small percentage of Fast Food Restaurant Xs on a surplus lines basis. ABC Insurer works with DEF Brokerage, a surplus lines broker also approved by Fast Food Restaurant X and located in New York. DEF Brokerage wants to have a raffle wherein the winning entrant, chosen at random, would receive free insurance coverage (subject to a minimum of $10,000 and a maximum of $15,000), issued by ABC Insurer, for one store. The coverage that will be provided in the contest will meet the all of the requirements that are necessary for ABC Insurer to be an approved carrier. Whether admitted or surplus lines, all taxes and fees will be included in the prize. As an alternative, the prize would be $15,000 in cash paid by DEF Brokerage.
The contest would be open to all Fast Food Restaurant X franchise owners irrespective of whether they have ever purchased or procured, or will ever purchase or procure, insurance from ABC Insurer or DEF Brokerage. Each Fast Food Restaurant X would constitute a separate entry. Thus, if one franchisee owned two stores, such individual could enter each store into the contest. Entrants will not be asked to do anything other than provide certain information that would allow for the identification of the winner. Specifically, for each Fast Food Restaurant X entered into the contest, the franchisees would be required to provide its address/location, contact information and type of store (i.e., whether free standing or a kiosk in a mall). The purpose of the latter requirement is to allow ABC Insurer/DEF Brokerage to ensure that the winner receives the full value of the prize to which it is entitled. For example, it is significantly less expensive to insure a kiosk in a mall as opposed to a free standing store. Thus, if the winning store were a kiosk, there would be a supplemental cash payment so that the total value of the prize was at least $10,000. There will be no requirement that the entrants fill out an insurance application, receive a quote or purchase anything.
New York Ins. Law § 2324 (McKinneys Supplement 2006) provides in pertinent part:
(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, provided, however, a licensed insurance agent or a licensed insurance broker may retain the usual commission or underwriting fee on insurance placed on his own property or risks, if the aggregate of such commissions or underwriting fees will not exceed five percent of the total net commissions or underwriting fees received by such licensed insurance agent or insurance broker during the calendar year (emphasis added).
Accordingly, an insurance agent or broker may not offer or pay a rebate to an insured. A so-called "free" insurance policy is simply a full rebate of the premium for the policy. Therefore, an agent or broker may not give away a policy of insurance.
Further, an insurance agent or broker may not give any valuable consideration or inducement not specified in the policy. The only exception provided in § 2324, with respect to property/casualty insurance, is that an insurer or an insurance agent or broker may distribute as a "keepsake" an item that does not exceed $15.00 in value. This item must be designed to keep the name of the insurer or producer before the customer by embossing the insurers or producers name on the item. However, raffle tickets as proposed do not satisfy the exception. Due to the limited target audience qualified for the raffle, the raffle is an inducement tied to the sale of insurance to potential insureds. This is distinguishable from the situations in Office of General Counsel Opinion 03-10-30 (October 31, 2001) and Office of General Counsel Opinion 06-02-13 (February 16, 2006), cited in the inquiry. The above mentioned opinions specifically discuss raffles in relation to referrals and state that the raffle must be open to the public, unlike the limited class in the proposal, which is limited to franchise owners of Fast Food Restaurant X and not to all members of the public.
The Office of General Counsel Opinion 04-06-02 (June 7, 2004), also referred to in the inquiry, does not discuss raffles or incentives. In that opinion, the agent offered a specified group of employees a defensive driving course on behalf of the employer for no charge. The course was not given with any connection to insurance. Moreover, the opinion specifically stated that the agency offering the course may not advertise for insurance in association with sponsoring the course.
The inquiry also refers to Office of General Counsel Opinion 06-01-24 (January 4, 2006). That opinion stated that no information may be required of the entrants in order to enter the raffle. Under the proposal the franchisees would have to provide the type of store owned (in addition to contact information) in order for the insurer to have proper information on the amount of insurance required. The proposed raffle is unacceptable as it would be an inappropriate inducement under N.Y. Ins. Law § 2324, unless it is open to the public.
Lastly, the inquiry refers to excess line insurance in the inquiry. Since the insurer is authorized in New York, the policies are not being written on an excess line insurance basis. However, the discussions above, with respect to the activities of an agent or a broker, would be applicable were there an excess line placement.
For further information you may contact Principal Attorney Paul A. Zuckerman at the New York City Office.