OGC Op. No. 07-08-14
The Office of General Counsel issued the following opinion on August 31, 2007, representing the position of the New York State Insurance Department.
RE: Pre-Paid Legal Services
1. May a licensed insurance agent or broker sell the pre-paid legal expense plans described below from a company that is not a New York authorized insurer?
2. May a licensed insurance agent or broker sell the pre-paid identity protection plan described below from a company that is not a New York authorized insurer?Conclusions:
1. A licensed agent or broker may not sell the pre-paid legal expense plans described below from a company that is not a New York authorized insurer, unless a separate fee is charged for each service that is contingent on the occurrence of a fortuitous event and the separate fee fully covers the cost of rendition of such service, including reasonable overhead. The Insurance Department has insufficient information at this time to determine whether the cost of rendition exception is satisfied.
2. A licensed agent or broker may not sell the pre-paid identity protection plan described below because a part of the plan constitutes the doing of an insurance business by an unauthorized insurer.
It is reported that Pre-Paid Legal Services, Inc. (“Pre-Paid”), a company that is not an authorized insurer in New York, markets legal expense and identity theft protection plans in New York. The inquiry asks whether licensed property/casualty insurance brokers and life insurance agents may participate in the sale of these plans for compensation. Pursuant to Pre-Paid’s website, the Comprehensive Plan sells various legal services for a monthly fee plus an enrollment fee. The plan includes the primary member plus a spouse, unmarried children up to age 21 who live at home, unmarried children up to age 23 who are full time college students, and any dependent child of any age who is mentally and physically disabled. The coverage includes the following services:
- Consultation on any personal or business related legal matter by phone or letter up to three times a year with no more than two inquiries based on the same subject matter. Additional assistance for same subject is available for a 25% discount;
- Unlimited contract and document review;
- Will preparation for the primary member and any other covered person;
- Trust preparation for a 25% discount;
- Calls and letters by an attorney on warranty issues;
- Lease review before or after signing;
- Assistance with contacting government agencies;
- Living will and health care proxy preparation;
- Preferred contingency fees for collection litigation not to exceed 25% in a debt collection case with debt collection letters prepared at no charge;
- Unlimited personal financial alternatives review before the filing of a court action including bankruptcy;
- Advice on tenant issues and collection of government benefits such as social security, Medicare and veterans benefits;
- Motor vehicle related services where a lawyer will represent the primary member and any other covered person for a minor legal expense such as a moving traffic violation for a $25.00 minimum fee per occurrence. A lawyer will represent the primary member and any other covered person for a major legal expense such as a charge of manslaughter, involuntary manslaughter, negligent homicide, or vehicular homicide at a rate of $49.00 an hour;
- Assistance by a lawyer with driver’s license recovery at a rate of $50.00 a case;
- Assistance by a lawyer with the collection of personal injury or property damage claims of $2,000 or less resulting from driving, riding in or being struck by any motor vehicle or boat at a rate of $50.00 a case;
- Assistance to the primary member and spouse by a lawyer, at $49.00 per hour, if either is named as a defendant or respondent in a covered civil or job related criminal action in court;
- IRS audit services provided for $49.00 per hour for fifty hours;
- Personal injury claim review and evaluation with recommendations. If the case is pursued after recommendation, the lawyer fees will not exceed 25% of the award;
- Assistance by a lawyer at a 25% reduction to his or her standard hourly rate for the primary member and spouse on legal matters not covered;
- A “legal shield” where the primary member and any other covered person has 24 hour toll free access to legal assistance should those persons be arrested or detained.
Other plans are offered by Pre-Paid in New York that include many, but not all, of the services listed above.
The Business Plan offers services for a monthly fee based on a business’s number of employees. The business plan offers the following services:
- Legal consultation services by phone;
- One letter per legal subject each year with follow up letters provided at a 25% discount;
- Designated consultations that include two telephone consultations per year with a lawyer;
- The review of three contracts by a lawyer each month;
- The review of one signed contract by a lawyer per month;
- The review of three documents per month by a lawyer with advice;
- The preparation of ten debt collection letters per month;
- Reduced fee services for litigation and other legal work at a 25% discount off the lawyer’s rate, 5% off of the lawyer’s contingency fee for contingency type cases.
The Identity Theft Shield Plan provides services for a monthly fee plus an enrollment fee. The plan provides a credit report and continuous credit monitoring. It also provides identity restoration where a trained expert will assist in the restoration of the name and credit of the covered identify theft victim.
N.Y. Ins. Law § 1101 (McKinney 2006) is relevant the inquiry. It defines “doing an insurance business” in pertinent part as follows:
(a) In this article: (1) “Insurance contract” means any agreement or other transaction whereby one party, the “insurer”, is obligated to confer benefit of pecuniary value upon another party, the “insured” or “beneficiary”, dependent upon the happening of a fortuitous event in which the insured or beneficiary has, or is expected to have at the time of such happening, a material interest which will be adversely affected by the happening of such event.
(2) “Fortuitous event” means any occurrence or failure to occur which is, or is assumed by the parties to be, to a substantial extent beyond the control of either party.
Therefore, a legal service plan that offers services pursuant to a pre-paid fee does not constitute the doing of an insurance business as defined in Insurance Law § 1101, provided that the services are not triggered by a fortuitous event.
Section 261.0(f) of NYCRR, Title 11, Pt. 261 (Regulation 161) clarifies the term “fortuitous event” as follows:
On the other hand, an arrangement that for a prepaid fee provides services which are dependent upon the happening of a fortuitous event in which the recipient of the services has, or is expected to have at the time of such happening a material interest which will be adversely affected by the happening of such event, would constitute the doing of an insurance business, specifically legal services insurance. For example, such a prepaid legal services arrangement that provides defense coverage for a lawsuit would constitute insurance.
However, a pre-paid legal services plan may provide services dependent upon the happening of a fortuitous event if a separate fee for each such service is charged, and the fee for the service fully covers the cost of rendition of such services, including reasonable overhead. Such an arrangement may provide for a pre-arranged discount on services, but the provider of the services may not assume a risk of loss. See 11 NYCRR § 261.0(g); Office of General Counsel (“O.G.C.”) Opinion No. 2000-32 (February 28, 2000). The cost of rendition includes the cost of labor, material and reasonable overhead expenses. See O.G.C. Opinion No. 99-60 (June 1, 1999). 11 NYCRR § 261.1(a) refers to such a plan - one that offers pre-paid legal services and does not constitute the doing of an insurance business - as an “access plan.”1
Several services that Pre-Paid provides as part of its Comprehensive Plan appear to be permissible under the Insurance Law because they are not contingent on the occurrence of a fortuitous event or require an additional fee. These services include contract and document review, will drafting, trust preparation, review of leases, preparation of living wills and health care proxies. See O.G.C. Opinion No. 99-60 (June 1, 1999).
Other services provided by Pre-Paid in its Comprehensive Plan are triggered by the occurrence of a fortuitous event, and thus could constitute the doing of an insurance business for which a license is required. These services include motor vehicle related services, drivers license recovery, assistance with collecting damages arising from a motor vehicle or boat accident, I.R.S. audit services, and trial defense assistance. Each of these services are offered for a fee per hour for the service or for a discount from the normal lawyer rate, but it is unclear whether the fees or the discount meet the “cost of rendition” test as set forth in 11 NYCRR § 261.0 (g). See O.G.C. Opinion No. 99-75 (June 17, 1999); O.G.C. Opinion No. 99-60 (June 1, 1999), O.G.C. Opinion No. 98-68 (September 16, 1998). If the services pass the rendition test, then the services may be sold as part of the Comprehensive Plan, despite their contingency on the happening of a fortuitous event.
The Business Plan provides services that include consultation, letters, contract and document review, all of which are permissible under the Insurance Law. The reduced fee for litigation services would not be in compliance with the Insurance Law unless it meets the “cost of rendition” test.
The Identity Theft Shield Plan provides services that include supplying a credit report and continuous credit monitoring, neither of which constitutes the doing of an insurance business. The identity restoration part of the plan, however, is dependent upon the happening of a fortuitous event - the identify theft - and thus fails the “cost of rendition” test because there is no additional fee involved.
An insurance agent or broker may sell insurance only from a New York authorized insurer, subject to certain exceptions not relevant here. In pertinent part, Insurance Law § 2117 provides:
(a) No person, firm, association or corporation shall in this state act as agent for any insurer or health maintenance organization which is not licensed or authorized to do an insurance or health maintenance organization business in this state, in the doing of any insurance or health maintenance organization business in this state or in soliciting, negotiating or effectuating any insurance, health maintenance organization or annuity contract or shall in this state act as insurance broker in soliciting, negotiating or in any way effectuating any insurance, health maintenance organization or annuity contract of, or in placing risks with, any such insurer or health maintenance organization, or shall in this state in any way or manner aid any such insurer or health maintenance organization in effecting any insurance, health maintenance organization or annuity contract.2
However, a licensed insurance agent or broker may sell non-insurance products, such as a legal services access plan as defined in 11 NYCRR § 261.1(a), provided that it is made clear to prospective purchasers that the plan is not insurance, and that the agent or broker is not selling the product in his or her capacity as a licensed agent or broker. See O.G.C. Opinion No. 00-02-12 (February 28, 2000).
Without additional information about the cost of rendition for each service provided by each lawyer, the Insurance Department is unable to determine at this time whether, in conformance with Insurance Law § 2117, a licensed insurance agent or broker - or for that matter, anyone else - may sell the Comprehensive Plan, Business Plan, or other plans with services that are contingent on the happening of a fortuitous event and do not meet the “cost of rendition” test. However, no person - including a licensed insurance agent or broker - may sell the Identity Theft Shield Plan, because an element of that plan constitutes insurance, and Pre-Paid is not a New York authorized insurer
For further information you may contact Associate Counsel Alexander Tisch at the New York City Office.
1 Insurance Law § 1113(a)(29) defines legal services insurance as “insurance providing legal services or reimbursement of the cost of legal services.” 11 NYCRR § 261.1(m) defines a pre-paid legal services plan as “an access plan as defined in subdivision (a) of this section, provided by an authorized insurer, and may also include legal services insurance.” Insurance Law § 1116 governs pre-paid legal services plans and legal services insurance provided by an authorized insurer, and 11 NYCRR § 261.0(d) sets forth examples of the types of services that may be included in such a pre-paid legal services plan.
2 A licensed agent selling on behalf of an unauthorized company may also stand in violation of Insurance Law § 2112 because a licensed agent may act only on behalf of an authorized insurer upon appointment by that insurer.