After months of discussion with industry and consumer groups, the New York Insurance Department (the “Department”) released yesterday proposed regulations creating an obligation on the part of insurers to disclose information about producer compensation to purchasers. The stated purpose of Regulation 194, titled Producer Compensation Transparency, is “to protect the interests of the public by establishing minimum disclosure requirements relating to the role of insurance producers and the compensation paid to insurance producers.”

According to the Department’s press release, the proposed regulation is the result of extensive outreach to interested parties, including representatives of the insurance industry and consumer groups, beginning with public hearings in July 2008. To see our posts regarding those hearings, click here and here.

Proposed Disclosure Requirements Prior to Submitting an Application for Insurance

Subdivision 30.3(a) of the proposed Regulation No. 194 requires insurance producers to disclose orally or in writing to clients prior to submitting the application for insurance or renewal, the following information:

  1. whether the insurance producer represents the purchaser or the insurer for purposes of the transaction;
  2. that the insurance producer will receive compensation from the selling insurer;
  3. that the compensation insurers pay to insurance producers may vary depending on a number of factors (e.g., volume of business the producer provides to the insurer, profitability of the insurance contracts that the insurer provides to the insurer, etc.); and
  4. that the purchaser may obtain information about the compensation expected to be received by the insurance producer for the sale and for any alternative quotes obtained by the insurance producer.  

If this information is disclosed orally, the insurance producer must retain for a minimum of three years either a certification that the oral disclosure was given or an audio recording of the oral disclosure. In addition, if this disclosure is given orally, the insurance producer must also provide a disclosure in a prominent writing of the same required information no later than the issuance of the insurance contract.

Proposed Disclosure Requirements Prior to the Issuance of an Insurance Contract

Under subdivision 30.3(b), if the client requests further information about the insurance producer’s compensation prior to the issuance of the contract, the insurance producer must disclose in a prominent writing no later than the issuance of the insurance contract the following:

  1. a description of the nature, amount and source of any compensation to be received by the producer;
  2. a description of any alternative quotes obtained by the producer, including the coverage, premium and compensation that the insurance producer would have received based in whole or in part on any such alternative quotes; and
  3. a description of any material ownership interest between the insurance producer and the insurer issuing the insurance contract; and
  4. a statement whether the insurance producer is prohibited by law from altering the amount of compensation received from the insurer for the sale.  

In situations where time is of the essence to issue the insurance contract, the insurance producer must disclose this information in a prominent writing within five business days of the issuance of the insurance contract.

Proposed Disclosure Requirements After the Issuance of an Insurance Contract

Under subdivision 30.3(c), if the client requests more information about the producer’s compensation within three years after issuance of the insurance contract, the insurance producer must disclose the information required by Section 30.3(b) in a prominent writing within 30 days of the request.

Contingent and Supplemental Commissions

Under subdivision 30.3(d), if the nature, amount or value of any compensation to be disclosed by the insurance producer is not known at the time of the disclosure required by subdivisions 30.3(b) or (c), then the insurance producer must include in the disclosure:

  1. a description of the circumstances that may determine the receipt and amount or value of such compensation, and
  2. a reasonable estimate of the amount or value, which may be stated as a range of amounts values.

Record Retention

All written disclosures required by the proposed Regulation No. 194 must be retained by the insurance producer for three years.

Exemptions

The proposed Regulation No. 194 does not apply to (1) the placement of reinsurance; (2) the placement of insurance with a captive insurance company; (3) to an insurance producer that has no direct sales or solicitation contact with the purchaser (e.g., wholesalers and managing general agents); or (4) to a sale of insurance by a person who is not required to be licensed as an insurance producer. The proposed regulation also doe not apply to renewals when the producer has no sales or solicitation contact with the purchaser in connection with the renewal.

Comment Period

The proposed regulation has been sent to the Governor’s Office of Regulatory Reform (the “GORR”) for review. Once approved by the GORR, the proposed regulation will be published in the New York Register, followed by a 45-day formal public comment period. After a review of the comments submitted, the Department may adopt, revise or withdraw the proposed regulation.

If you would be interested in having EAPD assist you with preparing and submitting comments, please click the “Email the Editor” button and provide your contact information for follow-up by an EAPD attorney.

Click here to see a full version of proposed Regulation 194