by John Darer CLU ChFC MSSC CeFT RSP CLTC
A series of opinions by the Office of General Counsel of the New York Insurance Department present a well worn path of examples of what is and is not an illegal inducement and a violation of the insurance law in New York.
What are the penalties?
Violation of N.Y. Ins. Law § 4224(c) may result in the imposition of a penalty pursuant to N.Y. Ins. Law § 109 (McKinney 2000), and with respect to a licensed insurance agent, suspension, revocation or non-renewal of such license pursuant to N.Y. Ins. Law § 2110 (McKinney 2000). Additionally, a violation of N.Y. Ins. Law § 4224(c) constitutes a N.Y. Ins. Law § 2402(b) (McKinney 2000) "defined violation". A violator of N.Y. Ins. Law § 2402(b) may be subject to the provisions of, and additional penalties provided under, N.Y. Ins. Law Article 24 (McKinney 2000) regarding unfair methods of competition and unfair and deceptive acts and practices.
Example One An attorney waives legal fees for legal work performed in exchange for life insurance commission
1. Does an attorney violate the Insurance Law when he waives legal fees for attorney work in exchange for a client's life insurance business and, in lieu of these fees, accepts the commission from the sale of such life insurance?
2. Does the policyholder violate the Insurance Law when he accepts an inducement on the purchase of a life insurance policy that is not specified in the policy?
1. Yes, an attorney violates the Insurance Law when she waives legal fees for attorney work in exchange for a client's life insurance business and receives a commission from the sale of such life insurance in lieu of a commission.
2. Yes, a policyholder violates the Insurance Law when he accepts an inducement on the purchase of a life insurance policy that is not specified in the policy
Note that the customer is also in violation of insurance law! May 24, 2000 opinion
Structured settlement firm advertises its contributions to AAJ, NYSTLA, New York Academy or local trial lawyer association
Following is an excerpt of a published opinion of the Office of General Counsel New York State Insurance Department dated September 24, 2007:
"Turning to the question about advertising donations to certain not-for-profit organizations like association of trial lawyers, note as an initial matter that in Opinion of General Counsel No. 07-03-07 (March 12, 2007), the Department stated that “nothing precludes the agent or broker from making charitable contributions so long as the advertising of a charitable contribution as an incentive for new insurance business does not constitute an improper inducement in violation of Insurance Law § 2324.” This statement applies with equal force to life, accident and health insurance policies for which such an inducement would be a violation of Insurance Law § 4224.
The inquiry references an “affinity program” of an association representing trial lawyers. To participate in the program, a business must sign an agreement that provides for certain advertising-related services by the not-for-profit in exchange for a contribution from the participating business. The member businesses are responsible for providing all advertising content. The association urges its members to make purchases from any business that has joined the affinity program.
If this form of arrangement were strictly an exchange of compensation by an agent or broker for advertising services, the Department would regard the contributions as fees paid for permissible advertising, and not donations to a not-for-profit. In that circumstance, the contributions would not constitute an inducement in violation of Insurance Law § 4224.
However, where, as here, an agent or broker advertises that the agent or broker makes contributions to a not-for-profit organization of concern and interest to potential purchasers of insurance or annuities, such conduct constitutes an illegal inducement to purchase insurance that runs afoul of Insurance Law § 4224. Nor may an agent or broker evade the prohibition set forth in the Insurance Law by enlisting the aid of the not-for-profit organization to do what the agent or broker cannot do lawfully".
Example Three Gift cards as inducement to purchase
OGC Op. 08-06-05, concerned a licensed insurance agent who offered a $10 gift card to current clients to refer clients to an insurance company for an insurance quote.
"A ten dollar gift card does not qualify as a keepsake -- even if the insurer’s or producer’s name is embossed upon the card -- because the card is intended to be traded away for a tangible gift – gas -- and therefore not designed to keep the company’s name before the consumer. See Office of General Counsel Opinions dated March 12, 2008; April 22, 2005; May 14, 2002 and August 2, 2004"
Example Four Free Car Wash is Even Considered Unlawful Rebating
OGC Op. 07-07-07 "an insurance agency offering a free car wash to prospective clients would constitute an unlawful inducement in violation of NY.Y. Insurance Law § 2324
Example Five How About Waive interest on Pre-settlement and/or Post-settlement loans/advances if structured settlement is placed with related broker?
Life insurance agent who places structured settlement annuities wears multiple hats. The second hat is that of pre-settlement loans or advances and post settlements advances
Can the licensed agent legally offer to waive tens of thousands of dollars in interest on the pre-settlement and/or posts settlement loan as an inducement to the plaintiff agreeing to allow him or her to place the structured settlement annuity and make a commission?
The New York Department of Financial services has not yet opined, but another opinion involving a title agent provides a window into department thinking. Pursuant to OGC Op 04-10-29 " N.Y. Ins. Law § 6409(d) (McKinney 2000), such reduction in costs to a customer/purchaser who utilizes a title agent or title insurer that is owned by, or affiliated with a seller constitutes the giving, directly or indirectly, of consideration or valuable thing as an inducement for, or as compensation for such title insurance business"
The quid pro quo where a licensed insurance agent who offers lien resolution and/or MSA services, offers to waive the cost of services provided, if the law firm agrees to give then the structure on which the licensed agent receives a commission.
There are plenty of other possible examples
Given that it is as unlawful to accept a rebate or illegal inducement as it is to offer and/or pay an illegal inducement in connection with the placement of insurance, lawyers , settlement planners, structured settlement brokers and financial advisers for injured plaintiffs should be guided accordingly.
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