OGC Opinion No. 08-05-05
The Office of General Counsel issued the following opinion on May 13, 2008, representing the position of the New York Insurance Department.
RE: Rebating inquiry; commissions for health insurance
Questions Presented:
1. If a health insurance producer presents a quotation to a customer for an experience-rated group health insurance policy at a specific rate with a specific commission, may the insurance producer or the insurer provide, or offer to provide, a reduction in the premium by reducing the producer’s commission?
2. If a health insurer offers an experience-rated group health insurance policy to a customer through an insurance producer at a specified quoted premium and commission rate, may the insurer offer the same policy to the customer through a second producer at a reduced commission rate with a commensurately reduced insurance premium?
Conclusions:
1. No. If a health insurance producer presents a quotation to a customer for an experience-rated group health insurance policy at a specific rate with a specific commission, the insurance producer or the insurer may not as a general matter provide, or offer to provide, a reduction in the premium by simply reducing the producer’s commission. However, if the filed rates with respect to that policy form reflect commission adjustments attributable to articulated factors, including but not limited to the level and type of insurance services to be provided by the producer, then the commission may be correspondingly reduced, as specified in the insurer’s filed rates.
2. No. If a health insurer offers an experience-rated group health insurance policy to a customer through an insurance producer at a specified quoted premium and commission rate, the insurer may not then offer the same policy to the customer through a second producer at a reduced commission rate with a commensurately reduced insurance premium, unless the reduced commission is reflected in the insurer’s filed rates for that policy form, and the filed rates articulate the factors that may result in commission adjustments.
Facts:
The inquirer reports that his client is an insurance producer (i.e., an insurance agent or broker). See N.Y. Ins. Law § 2101(k). The inquirer asks about two practices that he assert occur on a regular basis in this state. The first practice involves a health insurance agent or broker presenting a quotation to a customer for an experience-rated health insurance policy at a specific rate with a specific commission, and the producer or insurer providing or offering to provide a reduction in the premium by reducing the producer’s commission.
The second practice involves a health insurer offering an experience-rated health insurance policy to a customer through an insurance producer at a specified quoted premium and commission rate, but also offering the same policy to the customer through a second producer at a reduced commission rate with a commensurately reduced insurance premium. .
The inquirer claims that his client is at a competitive disadvantage since it does not engage in these practices. He wishes to know whether these practices constitute unlawful rebating in violation of N.Y. Insurance Law § 4224.
Analysis:
Originally enacted in 1889 as § 89 of the Insurance Law, Insurance Law § 4224 prohibits unfair discrimination and rebating with respect to contracts of life insurance, annuities, and accident and health insurance.1 The statute reads in relevant part as follows:
(b) No insurer doing in this state the business of accident and health insurance, as specified in paragraph three of subsection (a) of section one thousand one hundred thirteen of this chapter, and no officer or agent of such insurer and no licensed insurance broker, and no employee or other representative of such insurer, agent or broker shall:
(1) make or permit any unfair discrimination between individuals of the same class in the amount of premiums, policy fees, or rates charged for any policy of accident and health insurance, or in the benefits payable thereon, or in any of the terms or conditions of such policies, or in any other manner whatsoever;…
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(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, or 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.
By prohibiting unfair discrimination, unspecified inducements, and rebating, Insurance Law § 4224 ensures that all individuals of the same class are treated alike. To this end, the statute prohibits, among other things, rebating whereby a producer, eager to secure business, arranges to refund to any person a portion of the commission to which the producer would otherwise be entitled. These persons would receive, in effect, consideration or an inducement not reflected on the face of the policy or contract.
Under the first practice about which inquiry is made, the insurer and the producer would agree to a lower commission for the producer, or the producer would offer to take a lower commission, and thereby reduce the gross premium for a particular insured. If the reduction in commission were not attributable to specific factors articulated in the insurer’s filed rates for that policy form, such as providing a different level of insurance services,2 the insurer and the producer would be providing an unlawful rebate in violation of Insurance Law § 4224(c) (assuming that the lower commission were paid on an ad hoc basis).3
The only way the producer may lawfully accept a lower commission would be if the adjustment were attributable to specific factors articulated in the insurer’s filed rates for that policy form. In other words, the amount of commission may vary in accordance with discernible criteria set forth in the rate filing and applied on a consistent basis.
Under the second practice about which the inquirer asks, the insured would be provided the same experience-rated insurance coverage at different premium costs, depending upon which producer placed the policy. This circumstance would be acceptable so long as the difference in commission charged were attributable to specific factors articulated in the insurer’s filed rates for that policy form.
Although both practices the inquirer describes involve experience-rated group policies where the experience of each insured necessarily varies, Insurance Law § 4224 requires that insurers nonetheless utilize consistent methodology and rating factors so as to proscribe unfair discrimination between individuals of the same class.
In closing, an insurer need not pay all producers the same amount of commission; compensation is a matter of contract between the producer and the insurer.4 However, the ultimate premium charged for individuals of the same class may not vary solely because of the amount of the commission or the identity of producer. Rather, it must be based on the insurer’s filed rates, and applied uniformly to similarly situated insureds.5
For further information, you may contact Assistant Deputy Superintendent and Counsel Paul A. Zuckerman at the New York City office.
1 Insurance Law § 2324 contains similar prohibitions with respect to most other kinds of insurance.
2 “Insurance services” pertains to those services normally performed in connection with the sale of insurance, or otherwise provided for in the insurance contract. See OGC Opinion Number 07-03-10 (03/15/2007).
3 Schedules of rates of commissions, compensation and other fees or allowances to agents and brokers for group accident and health insurance must be filed with the Department pursuant to Insurance Law § 4235(h); similarly, schedules for group life insurance must be filed pursuant to Insurance Law § 4216(e).
4 The amount of commission is subject to maximum limitations, not relevant here, with respect to certain kinds of insurance. See, e.g., N.Y. Ins. Law § 4228.
5 Although the inquiry involves health insurance, which is subject to Insurance Law § 4224, the Department construes Insurance Law § 2324 in the same manner. See, e.g., Opinions of the Office of General Counsel dated November 7, 1974; June 15, 2007; and July 26, 2007.