State insurance regulators continue to show an interest in state laws prohibiting insurers and producers from giving rebates of insurance premium or other inducements not specified in the insurance policy (“Anti-Rebate Laws”). Over the past year or so, several states published authority interpreting such laws. This client alert discusses recent authority published by the insurance regulators in Connecticut, Iowa, New York, South Dakota and Texas.1
States began passing Anti-Rebate Laws in the late 1800s. The laws were a reaction to a then common life insurance industry practice of agents paying rebates to obtain business. As agents paid higher rebates, agents demanded higher commissions from life insurers. This practice ultimately raised concern about the solvency of life insurers. Other concerns included the potential for unfair discrimination in the rates paid among insureds of the same risk class and an industry focus on price rather than quality of service. The Anti-Rebate Laws were intended to address these concerns.
Over time, certain agents, consumer advocates and others have questioned whether the Anti- Rebate Laws reflect appropriate public policy.2 Some have argued that the laws artificially fix the commission component of insurance premiums and that customers would benefit if they could shop for the lowest commission and/or elect to pay higher commissions for better service. Others have argued that the Anti-Rebate Laws are overly broad (e.g., could prevent an insurer or producer from providing additional goods or services that would be beneficial to customers).
Almost all states have Anti-Rebate Laws. Several examples are cited below. Exceptions include California, which repealed its Anti-Rebate Law applicable to most lines of insurance as part of Proposition 103 in 1988.3 Also, Florida permits insurance agents to rebate commissions, but Florida agents must comply with statutory guidelines intended to prevent discrimination in how the rebates are made available to the agent’s customers. See Fla. Ins. Code § 626.572.
Many Anti-Rebate Laws are substantially similar to a provision in the Model Unfair Trade Practices Act promulgated by the National Association of Insurance Commissioners. The model act deems the following activities to be unfair trade practices 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.
Model Unfair Trade Practices Act § 4(H)(1) (emphasis supplied). The above-cited provision prohibits an insurance company or producer from giving, or offering to give, any rebate or valuable consideration that is not specified in the insurance policy to induce a potential insurance customer to buy an insurance policy.
Connecticut Bulletin S-12
The Connecticut Insurance Department, in Bulletin S-12 (12/24/08), discussed whether insurers or producers may give gifts of nominal value without violating Connecticut’s Anti-Rebate Law (i.e, Conn. Ins. Code § 38a-825). While some state Anti-Rebate Laws contain an express exception allowing insurers or producers to give promotional items not exceeding a specified value, the Connecticut law does not contain such an exception. However, Bulletin S-12 states that insurers or producers would not violate the state’s Anti-Rebate Law if they offer or give clients or prospective clients “gifts of nominal value” that are not conditioned upon the purchase of insurance. The Connecticut Insurance Department views gifts of nominal value as items whose fair market value do not exceed, in the aggregate, $15 per year. The bulletin concludes that “it is impractical and unnecessary to prohibit inexpensive gifts that, because of their low market value, would be insufficient to promote the kind of conduct and negative results that the anti-rebating provisions intend to prevent.”
Iowa Bulletin 08-15
The Iowa Insurance Division’s Bulletin 08-15 (9/30/08) provides guidelines on certain practices that the Division views as violating the state’s Anti-Rebate Law (i.e., Iowa Ins. Code § 507B.4 (8)).4 The bulletin states that reductions in commission or premium at the time of sale “are clearly rebates.” Also, the bulletin states that “[u]nrelated products, memberships, or services provided solely upon purchase or renewal of an insurance policy are not allowed under Iowa law.”
However, Bulletin 08-15 advises that the following practices would not violate Iowa’s Anti-Rebate Law: engaging existing clients in social settings, such as meals or sporting events, after the point of sale; giving items of minimal value, such as pens and calendars, or branded or logo merchandise to the general public; sponsorship of charitable and other events; and educational seminars open to the general public. Also, the Division does not view newsletters and other value-added services as rebates if they are related to the type of insurance purchased or intended to reduce claims. We note that Bulletin 08-15 represents a softening of the Division’s initial position on rebates in 2008. Specifically, Bulletin 08-11 (later rescinded) found that any goods or services not incorporated as part of the policy were prohibited.5
As is standard in other states, Iowa's Anti-Rebate Law prohibits rebates of premium or inducements not specified in the insurance contract. It is not uncommon for insurers to seek to avoid rebate/inducement issues by adding the additional service or benefit to be provided to the insurance contract. In Bulletin 08-15, the Iowa Insurance Division made the following comment on this practice: “The Division is concerned that this trend is an attempt to circumvent the spirit of the law. And, at this point, the Division will be disapproving such contracts if the added items do not appear to be related to the insurance product.”
New York Circular Letter No. 9 and General Counsel Opinions Nos. 08- 06-05 and 08-09-06
In Circular Letter No. 9 (3/3/09), the New York Department of Insurance provides guidance on the types of services that an insurance agent or broker may provide without violating New York’s Anti-Rebate Laws (including N.Y. Ins. Code §§ 2324, 4224). As a guiding principle, the circular letter states that an insurer or producer may provide a service not specified in the policy without violating New York’s Anti- Rebate Laws if:
- 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 insurance producer provides the service in a fair and nondiscriminatory manner to like insureds or potential insureds.
The circular letter lists examples of services that would fall within the guidelines (e.g., risk assessments and certain claims assistance) and examples of free or reduced fee services that would not fall within the guidelines and could constitute prohibited rebates/inducements (e.g., flexible spending administration and payroll services).6
Circular Letter No. 9 discusses rebates/inducements with respect to services not specified in the policy. New York’s Anti-Rebate Laws prohibit giving valuable consideration or inducement not specified in the policy. Similar to the comment by the Iowa Division of Insurance discussed above, the New York Department of Insurance comments in the circular letter on the practice of describing an additional benefit or service in the policy in order to avoid the prohibitions of the state’s Anti-Rebate Laws. Specifically, in endnote 2 of the circular letter, the Department states:
[e]ven if the policy or contract specifies a particular good or service and makes it available to all persons of the same class, the Department may still find the endorsement unacceptable …. Thus, in reviewing policy or contract forms, the Department looks to see that the goods or services offered in the policy or contract have a legitimate nexus to the insurance coverage provided under the policy or contract, and are necessarily or properly incidental to the insurer’s insurance business.
Apart from Circular Letter No. 9, the New York Department of Insurance, in several 2008 Opinions of the General Counsel, continued to apply a narrow reading of the promotional merchandise exception in the state’s Anti-Rebate Law that applies to most property and casualty insurance. The applicable statute allows an insurer, agent or broker to provide “any article of merchandise not exceeding fifteen dollars in value which shall have conspicuously stamped or printed thereon, the advertisement of the insurer, agent or broker” See N.Y. Ins. Code § 2324(a).7 The department interprets this exception as only permitting the distribution of “keepsakes” designed to keep the name of the insurer or the producer before the consumer. See, e.g., N.Y. Dept. Ins. Opinions of General Counsel Nos. 08-06-05 (6/10/08) ($10 gift card deemed a rebate; even if the insurer’s or producer’s name is embossed on the card, it’s viewed as something intended to be traded away for a tangible gift, not kept); 08-09-06 (9/22/08) (a book whose retail, but not wholesale price to the producer, exceeded $15 not viewed as falling within the exception; also simply stapling producer’s business card to the book not viewed as making it a keepsake).
South Dakota Bulletin 09-01
The South Dakota Division of Insurance, in Bulletin 09-01 (2/11/09), discusses South Dakota’s Anti-Rebate Laws (i.e., S.D. Ins. Code §§ 58-33-14, 58-33-24), including section 58-33-74 which allows insurers or producers to give “insureds, prospective insureds, or others for advertising purposes or promotional programs, any article of merchandise having an invoice value of not more than twentyfive dollars.” The bulletin discusses several hypothetical questions. Not surprisingly, the division concludes that an agent giving $10 in cash to an existing client whose policy is $10 more upon renewal would be giving an illegal rebate. Similarly, an agent providing free lunches at local restaurants to clients in exchange for purchasing insurance would be viewed as providing a rebate. The bulletin also discusses a couple of examples the division viewed as falling within the exception for promotional merchandise having a value of less than $25. These include (i) giving a free coffee mug to anyone who came in for a quote, so long as the customer was not required to apply for insurance to obtain the mug, and (ii) giving away up to $25 of gas per vehicle at a local gas station, provided that the giveaway is open to the general public, and not just insureds.
Texas Bulletin B-0004-08
In Bulletin B-0004-08 (1/31/08), the Texas Department of Insurance discussed whether the provision of certain administration services in connection with the sale of health insurance violated the applicable Texas Anti-Rebate Laws (i.e., Tex. Ins. Code §§541.056(a), 543.003, 4005.053(c)). The bulletin advised that an insurer or agent providing certain administrative services not included in the insurance contract could be viewed giving prohibited rebates/inducements. The bulletin mentions “COBRA administration, Flexible Spending Account administration, and similar types of services” that are administrative in nature and not ordinarily provided under an insurance contract. The bulletin cautions against insurers and agents providing administrative services for no additional charge directly or indirectly, by engaging a third party to provide the services.
In the bulletins and other publications described above, state insurance regulators provide guidelines on certain practices viewed as permissible or impermissible by their state’s Anti-Rebate Laws. In many cases, the guidelines provide only narrow exceptions to the broad prohibitions in the Anti-Rebate Laws. This recent regulatory interest in the Anti-Rebate Laws suggests that insurers and producers need to continue to carefully consider whether their marketing programs comply with such laws.
Also, some of the comments by the Iowa and New York regulators discussed above suggest that not every rebate/inducement issue can be cured simply by describing the additional benefit or service to be provided in the policy. At least in some states, insurers may find increasing regulatory resistance to including additional benefits or services in policy filings if such services or benefits are not closely related to coverage being provided under the policy. This raises an interesting issue. If the Anti-Rebate Laws are intended to prevent unfair discrimination, then adding the service or benefit to the policy seems to address this concern (i.e., each policyholder has a contractual right to the service or benefit) even if the service or benefit is not closely related to the coverage being provided. For this reason, there may be some question of a regulator’s authority to deny including an additional benefit or service in a policy absent authority outside of the Anti-Rebate Laws, such as that the insurer does not have the statutory authority to provide the service or benefit.