OGC Opinion No. 06-09-14
The Office of General Counsel issued the following opinion on September 21, 2006, representing the position of the New York State Insurance Department.
Re: Insurance Broker Offering Free Services in Exchange for a Client's Health Insurance Business
Questions Presented:
1. May an insurance broker who, in order to obtain a prospective client's health insurance business, provide for free or offer to pay, that client's premiums on a group life or accidental death & dismemberment ("AD & D") policy from the commissions he would receive if he obtained that client's health insurance business?
2. May an insurance broker offer Comprehensive Omnibus Budget Reconciliation Act of 1986 ("COBRA"), 29 U.S.C.A. § 1161 et seq. (West 2001), or Flexible Spending Administration services for free in order to get a prospective client's health insurance business?
Conclusions:
1. It would be a violation of N.Y. Ins. Law § 4224 (McKinney Supp. 2006) for an insurance broker to engage in such practice, if not specified in both insurance policies.
2. An insurance broker may not offer COBRA or Flexible Spending Administration services for free, in order to get a prospective client's health insurance business. However, if done pursuant to N.Y. Ins. Law § 2119(c) (McKinney 2006), a broker may offer such services for a fee.
Facts:
The inquirer states that a broker proposes, as a sales tool, to offer to provide a free group life or accidental death & dismemberment ("AD & D") policy to a client, or offer to pay that client's premiums on such policy by giving up some of the commissions he receives, if he obtains that client's health insurance business.
In addition, the inquirer states that the broker would like to offer Comprehensive Omnibus Budget Reconciliation Act of 1986 ("COBRA") and Flexible Spending Administration services for free to get a client's health insurance business. The COBRA administrative services in question will involve the distribution of notices and collection of premiums for all COBRA beneficiaries, by an insurance broker. Specifically, the broker states that he will mail out election notices to beneficiaries upon occurrence of a qualifying event. The broker will monitor the election period and, upon election of coverage, the broker will collect the monthly premiums and monitor the due dates and grace periods to ensure payments are timely and remit the premiums to the insurance company. In some cases, the broker will process eligibility changes with the appropriate insurance companies.
In terms of Flexible Spending Administration (FSA), the broker will monitor employee elections, substantiate claims and process reimbursements under the Healthcare and Dependent Care Flexible Spending Account. The administrator will keep a record of all enrollees in the Flexible Spending Account along with their plan elections and payroll contribution accounts. As claims are submitted for reimbursement, the broker will review the claim to ensure it qualifies and will process or deny payment accordingly. The broker will then supply the enrollees, as well as the client, with periodic reporting on the status of the accounts.
Analysis:
N.Y. Ins. Law §4224(c) (McKinney Supp. 2006) provides as follows:
(c) No such life insurance company and no such savings and insurance bank and no officer, agent, solicitor or representative thereof and no such insurer doing in this state the business of accident and health insurance and no officer, agent, solicitor or representative thereof, and no licensed insurance broker and no employee or other representative of any such insurer, agent or broker, shall pay, allow or give, or offer to pay, allow or give, directly or indirectly, as an inducement to any person to insure, or shall give, sell or purchase, of offer to give, sell or purchase, as such inducement, or interdependent with any policy of life insurance or annuity contract or policy of accident and health insurance, any stocks, bonds, or other securities, or any dividends or profits accruing or to accrue thereon, or any valuable consideration or inducement whatever not specified in such policy or contract; nor shall any person in this state knowingly receive as such inducement, any rebate of premium or policy fee or any special favor or advantage in the dividends or other benefits to accrue on any such policy or contract, or knowingly receive any paid employment or contract for services of any kind, or any valuable consideration or inducement whatever which is not specified in such policy or contract.
Concerning life or accident and health insurance, N.Y. Ins. Law § 4224(c) prohibits an insurance company, insurance agent or broker from, among other things, giving directly, or indirectly, any inducement or valuable consideration that is not specified in the policy or contract. The broker's proposal to pay the group life or AD & D premiums from the commissions earned on the client's health insurance business constitutes an inducement that would violate Section 4224(c), unless such payments were specified in both policies. However, it would be unlikely that the Department would approve a policy that contains such an inducement.
The insurance broker also proposes to provide COBRA and Flexible Spending Administration services for free. COBRA requires that group health plans provide continuation coverage to former employees upon the occurrence of specified qualifying events. There is no prohibition in the Insurance Law against an employer delegating some of the administrative duties imposed by COBRA. The inquirer states that the Flexible Spending Administration services involve the monitoring of employee elections, substantiating claims and processing reimbursements under the Healthcare and Dependent Care FSA. COBRA and Flexible Spending Administration services are administrative in nature and are not normally provided by an insurance company, its agent or a broker. Therefore, if such services are provided by the broker, free of cost, they would constitute unlawful inducements not specified in the policy, in violation of Section 4224(c).
An insurance broker may provide certain services for compensation pursuant to N.Y. Ins. Law § 2119(c) (McKinney 2006), which provides as follows:
(c)(1) No insurance broker may receive any compensation, other than commissions deductible from premiums on insurance policies or contracts from any insured or prospective insured for or on account of the sale, solicitation or negotiation of, or other services in connection with, any contract of insurance made or negotiated in this state or for any services on account of such insurance policies or contracts, including adjustment of claims arising therefrom, unless such compensation is based upon a written memorandum, signed by the party to be charged, and specifying or clearly defining the amount or extent of such compensation.
The insurance broker may not provide COBRA administration and Flexible Spending Administration services for free. However, in accordance with N.Y. Ins. Law § 2119(c) (McKinney 2006), an insurance broker may provide such services for a fee. Service fees should be reasonable and different insureds should not be charged different amounts for the same services. Section 2119(c) agreements must be retained by the licensee for not less than three years after fully performing the services.
For further information please contact Associate Attorney D. Monica Marsh at the New York City Office.