You must be logged in as a member to access this information.
Please use the Member Login tab at the upper left.
(If your name shows in the red login box, you are already logged in)
(If you are an AOL member, please minimize your AOL browser
and launch Internet Explorer or another Web browser to log in.)
A Special Report Reviewing Trends in Insurance Agents' and Brokers' Errors
and Omissions Liability Prepared by the Law Firm of Lustig & Brown, LLP
February 2008 Volume 20, Number 2
The E&O Report index page / IIABNY Insider index page
(If not already logged in, a user ID and password are required to view)
New York's Anti-Rebate Law Has Serious Implications for Agents, Brokers
Quite often, New York Insurance agents and brokers contact us to discuss whether certain actions
they are considering constitute rebating under New York law. While rebates in many consumer
transactions are viewed favorably, such is not the case in the insurance industry. Rebates in the
insurance industry are illegal, and an insurance agent or broker engaging in rebating practices can
face serious consequences, including fines and revocation of an agent or broker’s license. In this
issue of
The E&O Report
, we will discuss New York’s anti-rebate statutes and penalties that can
accompany violations of these statutes, as well as practical considerations for insurance agents or
brokers to follow so as to help avoid problems with rebating.
Generally, rebating is defined as a practice by an insurer, agent or broker of providing or offering an
insured a valuable inducement so that the insured or prospective insured will buy insurance from
that same insurer or producer. The general purpose of the anti-rebating statute is to:
z prevent the creation of a competitive disadvantage or uneven playing field for other agents or
brokers in the marketplace; and
z protect insurance consumers from unfair or deceptive practices or discriminatory rates.
The most common examples of rebating occur when an agent or broker agrees to reduce a
commission on a policy so that an insurance company will reduce the premium owed by the insured.
It can also occur when the agent or broker returns to an insured a portion of a commission earned
on a policy as an inducement to buy or maintain an insurance policy. However, as we discuss below,
rebating encompasses more than simply returning or reducing commissions to effectuate a sale or
maintain a customer relationship.
New York has two separate anti-rebating statutes. Under N.Y. Ins. Law § 2324, which is applicable
to property and casualty insurance, agents and brokers are prohibited from
directly or indirectly
offering rebates, inducements or valuable consideration, other than an article of merchandise not
exceeding $15 in value, in connection with the sale of insurance when such rebates or inducements
are not specified in the insurance policy. N.Y. Ins. Law § 2324 provides a penalty of $500 for each
violation. In the alternative, the Superintendent of Insurance may decide to either refuse to renew,
revoke or suspend the license of the agent or broker engaging in illegal rebating activity pursuant to
N.Y. Ins. Law § 2110(a)(1) or impose “a penalty in a sum not exceeding $500 for each offense, and
a penalty in a sum not exceeding $2,500 in the aggregate for all offenses,” pursuant to N.Y.
Insurance Law § 2127(a).
Pa
g
e 1 of 3
N.Y. Ins. Law §4224, which applies to accident and health insurance as well as life insurance and
annuities, prohibits an agent or broker from offering any valuable consideration or inducement,
directly or indirectly, in connection with the sale of insurance when such offering is not specified in
the policy. A violation of N.Y. Ins. Law § 4224 may result in the imposition of a penalty pursuant to
N.Y. Ins. Law § 109, and with respect to a licensed insurance agent, suspension, revocation or non-
renewal of such license pursuant to N.Y. Ins. Law § 2110.
While the statutes are similar in most respects, there is one fundamental difference. With respect to
the sale of property and casualty insurance, an agent or broker is allowed to provide an insured or
prospective insured with an “article of merchandise” not exceeding $15 in value. This has been
called the “keepsake” exception and requires that the merchandise has conspicuously stamped or
printed on it the advertisement of the insurer, agent or broker. Typical “keepsakes” include such
items as pens, calendars, key chains and flashlights. On the other hand, gift cards, gift certificates,
tickets to special events and meals do not meet the “keepsake” criteria specified by the statute.
There is no similar “article of merchandise” exception under the anti-rebate statute for accident,
health and life insurance.
As mentioned above, rebating can involve more than simply reducing or returning commissions. The
anti-rebate statutes can and do impact how an agency or brokerage markets itself to promote its
services and insurance products, both to prospective insureds and existing customers. For the past
several years, the New York State Insurance Department’s Office of General Counsel has authored
a number of advisory opinions concerning rebating and the marketing practices of insurance
agencies and brokerages. Specifically, the Insurance Department has identified the following
practices as being in violation of, or potential violating, New York’s anti-rebating statutes:
1. a licensed agent providing a $15 gift certificate toward the cost of a six-hour defensive driving
class or a $5 gas card to insureds or prospective insureds
[1]
2.
a proposed newspaper advertisement that states “free $15 gas card for any new client who
brings in both their auto and homeowner Insurance policies for a free quote. And you may
save hundreds of dollars”
[2]
3. an offer by an insurance broker to supply a free cellular phone device to those that complete
an insurance application
[3]
4. a licensed insurance producer providing prospective insureds who seek an insurance quote
on the Internet a free coupon to cover the $10 charge for insureds to be listed in an on-line
directory to advertise their businesses
[4]
5. a licensed insurance producer giving insureds a free Carfax vehicle history report with every
vehicle insured through the producer’s office
[5]
6.
an insurance agency offering a free car wash to prospective clients to whom the agent is
providing an automobile and home insurance quote
[6]
7.
a bank offering a customer a lower interest rate on an automobile loan on the condition that
the customer purchases automobile insurance from an insurance agency owned by the bank
[7]
These are only a few examples of marketing practices by insurance agents or brokers in which the
Insurance Department has viewed as violations or potential violations of New York’s anti-rebate
statutes.
Interestingly, the state Insurance Department has also been aggressive in applying the anti-rebating
law against insurers. In December, a major property and casualty insurer in New York settled
charges brought by the Insurance Department that it had engaged in the practice of rebating.
Specifically, the Insurance Department alleged that this insurer was systematically non-renewing
homeowner policies if the policyholders did not have other insurance (i.e., automobile, life) with the
insurer as of a certain past date. When it learned of this practice, the Insurance Department issued
Circular Letter Number 11
of 2007, advising all property and casualty insurers in New York State that
such “tying” practices violated the state’s anti-rebate statute contained in Insurance Law §2334.
When this insurer continued the practice after the Circular Letter was issued, a formal citation was
issued by the Insurance Department. The charges were recently settled, with the insurer agreeing
that individuals whose homeowners insurance policies were improperly non-renewed would have the
opportunity to obtain new homeowners coverage with the company.
Pa
g
e 2 of 3
As a practical matter, insurance agents and brokers should evaluate whether their marketing
activities could possibly run afoul of New York’s anti-rebate statutes before engaging in any
promotional or marketing campaign. For example, the agent or broker should determine whether any
promotional items that might be given away as part of a marketing campaign are freely distributed to
the general public and not tied to any sale or solicitation of insurance. With respect to the sale of
property and casualty insurance, the agent or broker should make sure that promotional items
provided to insureds or prospective insureds fall within the “keepsake” exception of N.Y. Ins. Law §
2324. That is, the article of merchandise should be valued at less than $15 and conspicuously
contain the advertisement of the agency or brokerage printed on it. Finally, if the agency or
brokerage is unsure as to whether a proposed promotional or advertising effort will violate New
York’s anti-rebate statutes, the agency or brokerage should consider seeking an advisory opinion as
to the proposed practice from the Insurance Department’s Office of General Counsel. By acting
carefully and in accordance with New York law governing rebating, prudent agents and brokers can
hopefully avoid any allegations that they engaged in illegal rebating practices.
Submitted by:
Darren P. Renner
, Esq.
and
James C. Keidel
, Esq.
of Lustig & Brown, LLP
[1]
New York State Insurance Department, Office of General Counsel, Opinion No. 04-08-03, dated
Aug. 3, 2004
[2]
New York State Insurance Department, Office of General Counsel, Opinion No. 03-05-05, dated
May 7, 2003
[3]
New York State Insurance Department, Office of General Counsel, Opinion No. 01-11-07, dated
Nov. 7, 2001
[4]
New York State Insurance Department, Office of General Counsel, Opinion No. 06-12-07, dated
Dec. 8, 2006
[5]
New York State Insurance Department, Office of General Counsel, Opinion No. 06-05-01, dated
May 1, 2006
[6]
New York State Insurance Department, Office of General Counsel, Opinion No. 07-07-07, dated
July 13, 2007
[7]
New York State Insurance Department, Office of General Counsel, Opinion No. 07-08-08, dated
Aug. 28, 2007
Lustig & Brown, LLP concentrates its practice in the defense of agents' and brokers' errors and omissions litigation and insurance
coverage litigation. Kindly direct comments to James C. Keidel at the New York City office of Lustig & Brown at 28 West 44th Street,
20th Floor, New York, New York 10036, or to R. Scott Atwater at P.O. Box 9077, Buffalo, New York 14231-9077, or to James C.
Keidel or Christopher B. Weldon at the Stamford, Connecticut office of Lustig & Brown, LLP at 1177 Summer St., Stamford,
Connecticut 06905. Lustig & Brown, LLP also has an office located at 744 Broad Street, 16th Floor, Newark, NJ 07102.
Copyright 2008, Lustig & Brown, LLP
All rights reserved
Pa
g
e 3 of 3
