Relates to prohibitions on rebating and discrimination in rates and payments under insurance policies; provides that certain services shall not be considered to be an inducement or rebate unless the superintendent determines that the offer and sale of such services constituted the sole reason for the purchase of such insurance policy.
NEW YORK STATE ASSEMBLY MEMORANDUM IN SUPPORT OF LEGISLATION submitted in accordance with Assembly Rule III, Sec 1(f)
BILL NUMBER: A5081
SPONSOR: Hunter TITLE OF BILL:
An act to amend the insurance law, in relation to prohibitions on rebat-
ing and discrimination
PURPOSE:
To modernize the anti-rebating statutes of the Insurance Law, by adding
a provision to each statute which requires the imposition of a quid pro
quo standard as necessary for the Superintendent to find that a
violation of those statute's prohibitions have occurred.
SUMMARY OF PROVISIONS:
Section 1 of the bill amends section 4224(c) of the insurance law to
provide that services offered or delivered as part of the sale or
renewal of a life insurance policy, contract or group insurance policy
shall not be considered to be an inducement or rebate when the offer and
sale of such services does not constitute the sole reason for the
purchase of such life insurance policy, contract or group insurance
policy such services shall not be considered to be an inducement or
rebate prohibited by this section unless the Superintendent determines,
after a notice and hearing, that the offer and sale of such services
constituted the sole reason for the purchase of such life insurance
policy, contract or group insurance policy and that, but for the offer
or delivery of such service, the purchase of such policy or contract
would not have taken place.
Section 2 is the effective date.
JUSTIFICATION:
Section 4224 prohibits "rebating" and "inducements" being used in the
sale of an insurance policy. This situation occurs when a life insurance
agent or life insurance company offers to return all or a portion of the
premium paid by an insured for a policy directly back to that insured
for the sole purpose of "inducing" that insured to buy the policy in the
first place. Thus, the returned premium is "rebated" to the insured.
The anti-rebating provisions have their origin in the historically
significant investigation conducted by the New York Legislature in 1905
known as the "Armstrong Commission". That commission conducted a compre-
hensive investigation of allegations concerning extravagant spending and
political payoffs by the Equitable Life Assurance Society which were
undertaken at the expense of the company's policyholders. The Armstrong
Commission found a number of abuses including interlocking directorates,
the creation of subsidiary financial institutions to evade investment
restrictions, the use of proxy voting to frustrate policyholder control
of mutual, unlimited company expenses, tremendous spending for lobbying
activities, and rebating.
The Armstrong Commission recommended changes to the insurance law which
were enacted in the 1907 session, including the prohibition of rebating.
The life insurance business has changed significantly since those
original anti-rebating provisions were enacted. Some companies have
sought legislative exemptions for services offered to insureds in order
to ensure that the service does not run afoul of the anti-rebating stat-
utes. In addition, the Department of Financial Services has sought to
administratively expand the list of services which life companies and
producers wish to offer their insured's in conjunction with the policy,
and have labeled such services, "rebates". The DFS has created an ever-
expanding list of goods and services which violates the anti-rebating
provisions. (See DFS circular letter No. 22, 2009) As a result, a great
deal of confusion exists in the insurer, producer and insurance consumer
communities as to exactly which services may or may not be offered with
the policy. A need has arisen to create a clear standard with which all
parties may use to ensure compliance with the law and also which allows
insurers and producers to convey value to insureds along with the insur-
ance policy, while returning to the original intent and purpose of the
anti-rebating statutes.
This legislation imposes a standard for services offered by life insur-
ance companies and producers which requires that in order to show a
violation, the Superintendent must show through evidence at a hearing
that the offered service was the sole reason for the sale of the policy
and that such sale would not have taken place without the offered
service. This standard will restore the original intent of the statute
to prevent insurance sales made solely to obtain the service while
allowing the provision of valuable services to insureds which happen to
come along with the purchase of their insurance policies.
LEGISLATIVE HISTORY:
2023-24: A3211
2020: A.6844
FISCAL IMPLICATIONS:
None.
EFFECTIVE DATE:
The bill will take effect 60 days after it is signed.
