The New Jersey Department of Banking and Insurance (the “Department”) released a draft rule, N.J.A.C. 11:17B-4 (PRN 2009-242) (the “Proposed Rule”), setting forth the specific requirements of N.J.S.A. 17:22A-41.1. N.J.S.A. 17:22A-41.1, which became effective on January 5, 2008, requires that insurance producers selling, soliciting or negotiating health insurance policies provide the purchaser with written notification of “the amount of any commission, service fee, brokerage, or other valuable consideration” received. If the compensation is based on a percentage of premium, the notification must also state the respective percentage.
Although N.J.A.C. 11:17B-4 applies to all health insurance policies, the proposed rule only applies to health benefit plans as defined in N.J.A.C. 11:22-5.2. As described below, the Department deferred issuing a proposed rule in regards to other health insurance policies, such as disability, long-term care and accident only, because these types of plans involve complex compensation issues (i.e., all or a majority of the commission may be paid in the first year of the policy with little or no commissions paid in later years).
The Proposed Rule sets forth the following guidelines for notification and disclosure requirements for insurance producers selling, soliciting or negotiating health benefit plans:
- Insurance producers must disclose in writing any valuable consideration received in connection with the sale, solicitation or negotiation of such health insurance policies, including, but not limited to, commissions and service fees. The consideration must be disclosed whether the amount is fixed, can be calculated or must be estimated. The precise nature of the compensation (i.e., whether the compensation is a commission or service fee), however, need not be disclosed.
- Notification and disclosure of compensation on new business must be made either (i) at the time of the proposal or (ii) thirty (30) days prior to the date the policy is executed by the purchaser, whichever is later.
- Notification and disclosure of compensation on renewals must be made at least thirty (30) days prior to the effective date of the renewal.
- Disclosure may be made on a form prescribed by the Department, on a form that provides the required information or in the rate quote.
- General agent commission must be specifically identified and can not be aggregated with the compensation to the retail producer.
The premium, rate or charge for coverage for group benefit plans that are not subject to N.J.S.A. 17B:27A-17 et seq. (related to health insurance policies or coverages offered to small employers) may be calculated by the insurance company based on the actual commission paid, but the fact that the premium was calculated in this manner must be disclosed to the policyholder. Violations of the Proposed Rule may result in penalties as authorized by law, including, but not limited to, a penalty not exceeding $5,000 for the first offense and not exceeding $10,000 for each subsequent offense, and an order of restitution of moneys owed any person and reimbursement of the costs of investigation and prosecution.
According to the Department, the Proposed Rule will enable purchasers “to better understand the components of the full cost of the coverage” and assist “employers in the large group market in negotiating commissions, which may result in reductions in the fees paid by employers to acquire such coverage.”
The Department also issued a notice of pre-proposal (PRN 2009-1) (the “Notice of Pre-Proposal”) requesting comments from interested parties on rules for health insurance policies that are not health benefit plans (such as disability, long-term care and accident only). The Department is particularly interested in suggestions and comments on how to address compensation disclosure and notification requirements: (i) when commissions are paid in a lump sum in one year with little or no commissions paid in subsequent years; or (ii) when individuals leave or enter New Jersey after a policy is effectuated. After reviewing the comments submitted, the Department will propose amendments to the Proposed Rule or establish new rules applicable to these health insurance policies.
Comments on the Proposed Rule and the Notice of Pre-Proposal should be submitted by October 16, 2009 to:
Robert J. Melillo, Chief
Legislative and Regulatory Affairs
Department of Banking and Insurance
20 West State Street
PO Box 325
Trenton, NJ 08625-0325