Plugged Into Insurance @ Hinman Straub – November 13, 2018

New York’s Extraterritorial Expense Limitations Law

When insurers consider the impact of New York Insurance Laws on the manner in which they conduct business, perhaps the most significant of these laws is New York Insurance Law Section 4228 (“NYIL Section 4228”). This is because NYIL Section 4228 limits the amount of agent compensation that can be paid on sales of individual life insurance and annuity business written by a New York licensed domestic or foreign life insurer regardless of where that business is sold. For this reason, many foreign insurance companies form a New York domestic subsidiary which is only licensed in New York leaving the foreign company free to sell insurance in the other 49 states without being subject to NYIL Section 4228.

NYIL Section 4228 imposes limits on first year and renewal commissions and expense allowance payments attributable to the sale of individual life insurance and annuity products. The law differentiates between the amount of commission and expense allowance payments that can be made depending upon whether such payments are made directly to selling agents or general agents. Additionally, the law sets forth limits on asset based compensation as well as so called “compensation arrangements”, which although specifically defined in the law, generally refer to any type of compensation plan other than a commission-based or fund-based plan. Bonus plans, which are allowed under the law as long as the plans do not exceed the statutory limits, are one example of what would likely be categorized as a “compensation arrangement”.

The law also addresses a number of other issues that bear on the relationship between insurers and their agents. For example, insurers may wish to enter into a loan or advance agreement with an agent who is marketing a new type of insurance program that may take some time to develop. NYIL Section 4228 specifically defines the parameters of loans and advances and as a result, any loan or advance agreement must comply with those requirements. Additionally, the law outlines a standard for whether payments made in connection with agent conferences and meetings are included in the compensation limits and also imposes limits on prizes and awards that may be given to agents.

Perhaps most importantly, the law requires insurers to file their compensation plans with the New York Department of Financial Services. There are three levels of filing: (i) annual informational; (ii) file and use and (iii) prior approval. As outlined in the law, and as a general matter, compensation plans that fall within the first year compensation limits can be filed on an informational basis at the end of February of each year. Any changes to existing plans or new plans that meet this definition should be included in that annual informational filing. The law categorizes other types of compensation plans and sets forth whether these plans fall under the file and use or prior approval filing regime. For example, “compensation arrangements”, such as bonus plans, must be filed for prior approval.

It is important for insurers to make sure that they have a system in place to monitor the development of new compensation plans and changes to existing plans so that they can determine whether these plans comply with NYIL Section 4228 and then submit the plan under the appropriate filing level referenced above. In this regard, insurers are cited on market conduct examinations for failure to make the required filings, for exceeding the compensation limits in the law and for making loans that are in excess of the permissible amount.

Finally, please note that NYIL Section 4228 (h) requires all individual life and annuity policies to be “self-supporting” on reasonable assumptions as to interest, mortality, persistency, taxes, agents’ and brokers’ survival and expenses resulting from the sale of the policy form. All policy forms sold in New York and all policy forms filed in New York for sale outside New York by a domestic life insurer must have a statement of self-support along with a demonstration provided by a qualified actuary.

For more information and assistance on this topic, please email Sandra McDermott or call 518.689.7224.

Preliminary Information Form and Policy Summary

New York Insurance Law Section 3209(b)(1) requires (i) delivery of the most recent buyer’s guide and the preliminary information required by Section 3209(d) at or prior to the time an application is taken for a life insurance policy in New York and (ii) a policy summary upon delivery of the policy. These requirements vary, as noted in Section 3209(b)(1)(A), when sales solicitations are made by mail, without the involvement of an agent or broker.

Insurers have faced compliance issues with the NY Department of Financial Services (“the DFS”) in instances where the preliminary information and the buyer’s guide have not been provided to the applicant “at or prior to the time an application is taken”. Section 3209(d)(8) provides that notwithstanding the requirements regarding the delivery of the buyer’s guide, preliminary information and the policy summary, no applicant for life insurance shall be prevented or delayed in applying for coverage by such requirements and, where prior to application it is impractical to provide the items prescribed by Section 3209, such items may be estimated in good faith or furnished as soon thereafter as practical prior to the delivery of the policy.

However, notwithstanding this statutory exception, the DFS has strictly interpreted the “at or prior to the time an application is taken” language, and they have been unwilling, to the best of our knowledge and experience, to allow delivery of the preliminary information after the application (whether paper or electronic format) is taken.

The preliminary information must be in writing and must include, to the extent applicable, the information specified in Section 3209(d). Examples of the required information, in general terms, include:

The name and address of the agent or broker;
The name and home office, administrative office or branch or agency office address of the insurer;
The date of the preliminary information and the generic name, the initial amount of insurance and the initial annual premium for the basic policy;
The guaranteed cash surrender value at specified times while the policy is in force; and,
The effective policy loan annual interest rate.

The required content of the policy summary is specified in Section 3209(e). Much of the information in the policy summary is also required in the preliminary information. Examples of the necessary information in the policy summary, in general terms, include:

The annual premium for the basic policy and, separately, for each optional rider;
The guaranteed amount payable upon death at the beginning of the policy year for the basic policy and, separately, for each optional rider;
The cash dividends payable at the end of the year; and,
Life insurance cost indexes.

Insurance Regulation 74 includes additional information regarding the preliminary information (Section 53-2.1) and the policy summary (Section 53-2.2).

Section 3209(l) of the Insurance Law provides that no preliminary information and policy summary is required for those policies marketed with an illustration which complies with DFS regulatory requirements.

For more information and assistance on this topic, please email Fred Bodner or call 518.689.7296.

Claims Procedures and NY DFS Circular Letter No. 9 (1999)

Nearly twenty years after its authoring, New York Department of Financial Services Circular Letter No. 9 of 1999 remains relevant and continues to impact insurers writing health insurance in New York. This Circular Letter stemmed from the Department’s dissatisfaction with some boards’ of directors level of involvement in their companies’ claims adjudication process. The letter is intended as a blunt reminder to insurers that their boards must be well informed regarding claims administration and adjudication processes.

Insurers’ boards (and in the case of controlled companies, their parents) are ultimately responsible for the compliance with all laws, regulations and rules regarding claims administration in New York. The DFS also reminds insurers that their boards are responsible for overseeing the actions of outside parties (e.g. third party administrators), if any should be involved in the adjudication of their claims.

In this letter, the DFS clearly states the “critical” importance of adopting procedures to ensure the accurate processing of health insurance claims, and it provides a recommendation to insurers in fulfilling their responsibilities. Specifically, the DFS recommends that insurers charge the officers directly responsible for claims adjudication with issuing, distributing, and regularly updating claims manuals, and with providing training to those impacted by any changes to those manuals. Further, the DFS recommends that insurers obtain annual certifications of compliance with claims processing laws and regulations, either from internal auditing resources, or from their legal departments.

Claims administration is an important area for insurers to remain mindful of their compliance responsibilities, as the DFS concludes Circular Letter No. 9 by stating its intention to “undertake frequent targeted Market Conduct investigations to ensure [] compliance with the applicable statutes, rules and regulations.”

For more information and assistance on this topic, please email Ben Bodner or call 518.689.7215.

Accident and Health Insurance Advertising Materials

Department of Financial Services’ (“DFS”) Regulation 34 sets forth minimum standards for advertising of accident and health insurance which are intended to prevent misleading and deceiving consumers as well as to prevent unfair competition among insurers. The format and content of an advertisement of an accident and health insurance policy must be “sufficiently complete and clear to avoid deception or the capacity or tendency to mislead or deceive. Whether an advertisement has a capacity or tendency to mislead or deceive shall be determined by the superintendent from the overall impression that the advertisement may be reasonably expected to create upon a person of average education and intelligence, unique to the particular type of audience to which the advertisement is directed, and whether it may be reasonably comprehended by the segment of the population to which it is directed” (11 NYCRR 215.5). In addition, advertising materials must adhere to various content requirements including identity of the insurer, policy form numbers, jurisdictional licensing and status, utilization of statistics, testimonials or endorsements by third parties, disclosure of policy provisions relating to renewability, cancellability and termination, and benefits payable, losses covered and premiums payable.

Significantly, Regulation 34 (11 NYCRR 215.2(b)) obligates insurers to “establish and at all times maintain a system of control over the content, form and method of dissemination of all advertisements of its policies” and imposes the following compliance requirements: (1) maintenance, at an insurer’s home or principal office, of a complete advertising file containing every printed, published or prepared advertisement with a notation attached to each advertisement indicating the manner and extent of distribution and form number of the policy advertised; and (2) filing of a compliance certification with an insurer’s annual statement attesting that the advertisements disseminated by the insurer in the preceding statement year complied or were made to comply in all respects with applicable statutory and regulatory requirements. Insurers found to be in noncompliance with the requirements set forth in Regulation 34 may be subject to monetary penalties and ordered, at their own expense, to publish a corrective advertisement.

Lastly, it is important to note that only Medicare supplement advertising materials require prior review and approval by DFS; advertising materials for all other accident and health products do not require prior approval.

For more information and assistance on this topic, please email Leanne Kontogiannis or call 518.689.7201.