Anti-Rebating & Compensation Disclosure: Best Practices for Multi-Jurisdictional Regulatory Compliance

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1 SILA New York & New Jersey Chapter Meeting March 10, 2010 Anti-Rebating & Compensation Disclosure: Best Practices for Multi-Jurisdictional Regulatory Compliance Charles R. Welsh Edwards Angell Palmer & Dodge LLP

2 Topics to be Discussed Broker/Agent Distinction. Anti-Rebating. Compensation Disclosure. Best Practices for Multi-Jurisdictional Regulatory Compliance. 2

3 Distinction Between Agents and Brokers Agent acts as the sales representative for the insurance company. Broker usually acts on behalf of the insured. Combined into single Producer license. NAIC Producer Licensing Model Act. 3

4 Distinction Between Agents and Brokers Still important! Agents and brokers owe a fiduciary duty to the party they represent. Compensation regulated by whether producer is acting for insurer or insured. Factual determination. 4

5 Distinction Between Agents and Brokers Agent appointments Section 14 of the NAIC Producer Model Act states: An insurance producer shall not act as an agent of an insurer unless the insurance producer becomes an appointed agent of that insurer. An insurance producer who is not acting as an agent of an insurer [i.e., a broker] is not required to become appointed. Brokers should not be appointed. 5

6 Broker vs. Agent - Determining Capacity Factual Determination Factors Marketing materials Acting on behalf of company Soliciting specific products of specific company Binding authority 6

7 What s s In A Name An appointed agent cannot become a broker in a transaction by simply calling himself a broker. If, based on the facts, the producer is acting as the agent of the insurer the transaction will be regulated as such regardless of whether the producer calls itself a broker. In most states a producer that has been appointed as an agent of an insurance company may not also act as a broker on behalf of the insured in connection with placing business with the appointing insurance company. 7

8 Fiduciary Obligation of Brokers The broker is required to: exercise reasonable diligence; follow the insured s clear instructions; and use reasonable care and skill in carrying out its duties. Provide the insured as principal with information relevant to the affairs entrusted to the broker and which the insured would wish to have communicated to it. 8

9 Distinction Between Agents and Brokers Service Fees Agents, as the representative of the insurer, are generally prohibited from charging the insured any fee in addition to Standard Commissions received from the insurer. Broker fees permitted with written agreement. 1. A clear statement of the amount of the fee to be charged and the nature of the services to be provided; 2. A statement that such fees are not a part of the premium charged by the insurance company and that such fees can be charged only if the insured so consents in writing; 3. A clear statement as to whether a commission will be received from the purchase of insurance; and 4. The signature of the insured and the licensed broker or insurance consultant and the date of execution of the agreement. 9

10 Anti-Rebating General Producers may not reduce premiums or provide free services or other valuable consideration as an inducement to prospective insureds to purchase insurance unless such rebate is specified in the policy. Rebating is prohibited in 48 states & D.C. State laws are nearly identical, and are based on NAIC Model Unfair Trade Practices Act. Purpose Anti-Discriminatory Insurer Solvency 10

11 Anti-Rebating NAIC Model Act The following is considered rebating and shall be considered an unfair trade practice in the business of insurance: Except as otherwise expressly provided by law, knowingly permitting or offering to make or making any life insurance policy or annuity, or accident and health insurance or other insurance, or agreement as to such contract other than as plainly expressed in the policy issued thereon, or paying or allowing, or giving or offering to pay, allow, or give, directly or indirectly, as inducement to such policy, any rebate of premiums payable on the policy, or any special favor or advantage in the dividends or other benefits thereon, or any valuable consideration or inducement whatever not specified in the policy; or giving, or selling, or purchasing or offering to give, sell, or purchase as inducement to such policy or annuity or in connection therewith, any stocks, bonds or other securities of any insurance company or other corporation, association or partnership, or any dividends or profits accrued thereon, or anything of value whatsoever not specified in the policy. 11

12 Anti-Rebating - NAIC Model Act Exceptions: Practices that are Not Rebating Life Insurance Policies or Annuities. Life insurance policies issued on the Industrial Debit Plan. Group Insurance Policies Premium Rate Readjustment. 12

13 New York Anti-Rebating Laws NYIL Life Insurance, Accident and Health Insurance, and Annuities. NYIL Title Insurance NYIL Mortgage Guaranty Insurance NYIL Financial Guaranty Insurance 13

14 NYID Guidance Permissible Services Producers may provide services to clients that are not specified in the insurance policy if the following conditions are met: The service directly relates to the sale or servicing of the policy or provides general information about insurance or risk reduction; and The insurer or producer provides the service in a fair and nondiscriminatory manner to like insureds and potential insureds. (Cir 9/09) 14

15 NYID Guidance Examples of Permissible Services Services that producers may lawfully provide if the 2 requirements above are met: Risk assessment related services; Insurance consulting services or other insurancerelated advice; Insurance-related regulatory and legislative updates; Certain claims assistance services; Tax preparation on behalf of an employer reporting information regarding insurance policy coverage, fees, and commissions, investment and annuity contracts, and welfare benefit contracts; 15

16 NYID Guidance Examples of Permissible Services Services that producers may lawfully provide if the 2 requirements above are met (cont d): Information to group policy holders and members, as well as forms needed for plan administration, enrollment in a plan, insurance company website links, and answers to frequently asked questions related to the insurance; Certain services provided in accordance with HIPAA, such as those pertaining to health care access, portability, and renewability, when offered in connection with the provision of accident and health insurance; and Certain services performed pursuant to COBRA, such as billing former employees, collecting the insurance premiums, and forwarding the aggregate premiums to the employer policy or policyholder or to the insurance company, when offered in connection with the provision of accident and health insurance. 16

17 NYID Guidance Examples of Services that May Violate NY Anti-Rebating Laws Flexible spending account administration services Legal services Payroll services Referrals to third-party service providers through which policyholders may receive a discounted rate Advice regarding compliance with laws concerning human resource issues not relating to insurance purchased Management of employee benefit programs not relating to insurance purchased Preparation of employee benefit statements listing benefits provided to employees not relating to insurance purchased; Development of employee handbooks and training not relating to insurance purchased Services related to employee compensation, discipline, job descriptions, leaves of absence, organizational development, business policies and practices, safety, staffing, and recruiting not relating to insurance purchased (Cir 9/09) 17

18 N.Y.I.L Broker Service Fees Permitted A broker representing a policyholder may charge for services unrelated to the policy if the broker: Obtains a written service fee agreement signed by the party to be charged, clearly specifying the amount or extent of such compensation. An agent representing an insurance company may never provide services that are not directly related to the sale and servicing of an insurance policy. 18

19 New Jersey Anti-Rebating Statutes All Lines of Insurance N.J.A.C. 11:17A-2.3 Life & Health Insurance N.J.S.A. 17:29B-4 N.J.S.A. 17B:30-13 Commercial Property & Casualty - N.J.S.A. 17:29AA-14 Personal Property & Casualty - N.J.S.A. 17:29A-15 Mortgage Guaranty Insurance - N.J.S.A. 17:46A-5 Title Insurance - N.J.S.A. 17:46B-34 & 35 19

20 New Jersey - Permitted Service Fees Both brokers and agents may charge fees for services rendered subject to certain requirements, except that: An agent for personal lines insurance shall not charge or receive any fee for services rendered except for reimbursement of certain actual out-ofpocket expenses. No insurance producer may charge a service fee for services rendered in the sale of life or health insurance. Bail bond agencies shall not charge certain fees. (N.J.A.C. 11:17B-3 & Bulletin 08-12). 20

21 NJ Fee Requirements for Commercial Lines Must first obtain a written agreement containing only certain provisions as set forth in N.J.A.C. 11:17B-3.1. Fee must bear a reasonable relationship to the services provided and shall not be discriminatory. A new written agreement shall be entered into for each fee charged and each time a fee is charged. An initial agreement shall not be used as the sole basis to charge a fee for a renewal policy. No insurance producer may pay or return, or offer to pay or return, all or part of a fee charged as an inducement to purchase a specific policy, or coverage within a policy, or coverage from a particular insurer. No insurance producer may charge a fee for services not actually performed. No insurance producer, except a duly authorized producer employed by and acting on behalf of his or her employer, may execute a written fee agreement on behalf of any other insurance producer or premium finance company. (N.J.A.C. 11:17B-3.1) 21

22 NJ Service Fee Requirements for Personal Lines P&C or Personal Lines Surplus Lines 1. No service fee for any one policy shall exceed $ No insurance producer may charge a fee for completing accident or claim report forms, nor shall a fee be charged for providing forms required by an insurer for servicing a policy. 3. An inspection fee may only be charged on a surplus lines policy and shall not exceed two percent of the premium or $10.00, whichever is greater; except that the insured may be charged the actual amount paid to an unrelated firm or person for the service if said firm or person is not an insurance agent or an insurance broker. 4. No charge may be made for services not actually performed. 5. A maximum service fee of $15.00 may be charged by an insurance producer acting as an insurance broker or insurance consultant upon placement of a renewal, except that an inspection fee may be charged in accordance with (a)3 above if no inspection of the property has occurred during the three years prior to issuance of the renewal policy. 6. Only one service fee per policy per year shall be charged, regardless of whether the policy term is for less than one year. 7. A motor club membership sold in connection with a policy shall not be considered separate coverage for the purpose of charging a service fee. 8. A motor club claim arising from the same loss as a claim under a private passenger automobile coverage policy shall not be considered a separate claim for purposes of charging a fee. 9. Insurance producers may charge a service fee for new automobile insurance applications, subject to the $20.00 per policy limit and the other conditions referenced in (a)1 through 8 above, as reimbursement for out-of-pocket costs in obtaining documents or other materials related to the underwriting process, if [certain additional requirements are met]. (N.J.A.C. 11:17B-3.2) 22

23 Producer Compensation Disclosure General Requires producers to disclose certain compensation information to potential insureds. Purpose More transparency for insurance consumers through better disclosure of insurance producer compensation. 23

24 Compensation Disclosure: NAIC Producer Licensing Model Act Where any insurance producer or producer affiliate receives any compensation from the customer for the placement of insurance or represents the customer with respect to that placement, neither that producer nor the affiliate shall accept or receive any compensation from an insurer or other third party for that placement of insurance unless the producer has, prior to the customer s purchase of insurance: Obtained the customer s documented acknowledgement that such compensation will be received; and Disclosed the amount of compensation from the insurer or third party for that placement. If the amount of compensation is not known at the time of disclosure, the producer shall disclose the specific method for calculating the compensation and, if possible, a reasonable estimate of the amount. 24

25 Compensation Disclosure: NAIC Producer Licensing Model Act These compensation disclosure requirements shall not apply to a producer who: Does not receive compensation from the customer for the placement of insurance; and In connection with that placement of insurance represents an insurer that has appointed the producer; and Discloses to the customer prior to the purchase of insurance: That the insurance producer will receive compensation from an insurer in connection with that placement; or That, in connection with that placement of insurance, the insurance producer represents the insurer and that the producer may provide services to the customer for the insurer. 25

26 NY Disclosure Requirements Regulation 194 Regulation 194 Published in the New York State Register 2/10/10 Effective 1/1/2011 Producers must disclose certain compensation information to potential insureds, including: A description of the producer s role in the sale; Whether the producer will receive compensation from the selling insurer or another third party; 26

27 NY Disclosure Requirements Regulation 194 Producers must disclose certain compensation information to potential insureds, including (cont d): Compensation paid to the producer may vary depending on a number of factors, including the insurance contract and the insurer that the purchaser selects; and That, upon request, the purchaser can obtain information from the producer regarding the producer s expected compensation for the sale, as well as expected compensation for any alternative quotes presented by the producer. 27

28 New Jersey Health Insurance Disclosure Requirements Producers who sell, solicit or negotiate health insurance policies to NJ residents shall: Notify potential insureds, in writing, of the amount of any commission, service fee, brokerage, or other valuable consideration that the producer will receive as a result of the sale, solicitation or negotiation of the health insurance policy or contract. If the commission, fee, brokerage, or other valuable consideration is based on a percentage of premium, the insurance producer shall include that information in the notification to the purchaser. (N.J.S.A. 17:22A-41.1 Effective since 1/2009) 28

29 Best Practices for Multi-Jurisdictional Regulatory Compliance Know your role agent or broker Know your jurisdictions Required disclosure Restrictions on agents or brokers Compliance department Track laws, regulations, bulletins and circular letters dissemination Maintain licensing protocols Dotted line reporting 1. Marketing 2. Telemarketing 3. Client intake 4. Etc. Written guidelines 1. Anti-rebating 2. Charitable giving 3. Disclosure 4. Etc. Consistent forms Client disclosure Service agreements 29