New York Regulatory and Case Law Update
 

Written By Attorneys: Francine L. Semaya and William K. Broudy

 New York Insurance Department Requests Public Comment on a Revised Draft Producer Compensation Transparency Regulation

The New York Insurance Department (the "Department") issued on July 8, 2009 a draft of the proposed new producer compensation transparency regulation (the "regulation") and has set July 29, 2009 as the deadline for public comment. The draft replaces a January 29, 2009 version, which received mixed reactions. The primary difference between the two versions of the regulation is the removal of the mandated notice to purchasers of insurance in the latest draft. Instead, a prominent writing for categories of information to be disclosed to purchasers is required. Disclosure of other information becomes necessary only if requested by a purchaser.

The purposes of the regulation are to provide transparency with respect to compensation paid to producers and their role in insurance transactions and to protect the interests of the public, particularly concerning potential conflicts of interest created by compensation paid to producers.

The regulation sets minimum disclosure requirements. Under the heading "Disclosure of producer compensation, ownership interests and role in the insurance transaction", Section 30.3(a) of the regulation requires a producer, prior to binding an insurance contract, to disclose to the purchaser in "a prominent writing", or orally, if the purchaser requests oral disclosure, the following information:

● Whether the producer represents the purchaser or the insurer;

● That the producer will receive compensation from the insurer, based on the terms of the insurance contract;

● That the compensation insurers pay to producers varies from company to company and from insurance contract to insurance contract; and

● That the purchaser may, upon request, obtain detailed information about the source and amount of compensation expected to be received by the producer and information about alternate quotes obtained or considered by the producer.

Additional information may also be requested by a purchaser, including:

● The amount and source of the compensation;

● Alternative quotes, including the coverage, premium and the compensation the producer would have received;

● Any material ownership interest of the producer in the insurer or its affiliates;

● Any material ownership interest of the insurer in the producer or its affiliates; and

● An explanation that an insurance producer is prohibited by law from accepting a commission rate that is less than the filed commission rate in an effort to lower an insurance premium.

These proposed requirements apply only to persons required to be licensed as producers. The provisions of the regulation do not apply to renewals, the placement of reinsurance, or the placement of insurance with a captive insurer. In addition, the regulation does not apply to a producer such as a wholesale broker or a managing general agent, who has no direct contact with the purchaser.

Producers are required to maintain, for at least three years, copies of written disclosures provided to purchasers. For oral disclosures, the regulation requires the producer to maintain, also for three years, a certification that an oral disclosure was provided to the purchaser.

Insurers are required to keep a record of the amount of compensation paid to producers in producer files maintained by the insurers in accordance with existing Insurance Department regulations.

Violation of the regulation will be deemed an unfair method of competition or an unfair or deceptive act and practice in the conduct of the business of insurance in New York, under Sections 2402(c) and 2403 of the New York Insurance Law.

The regulation is the end product of the contingent compensation and bid-rigging exposé that led to charges against major brokers in New York and in other states, large settlement payments by brokers to their customers and agreements by some major brokers to forego contingent commissions. New York enacted no legislation with respect to contingent commissions and New York Courts and the New York Insurance Department Office of General Counsel have stated that contingent commissions are permitted in New York. The regulation is calculated to shed light on compensation practices, but does not approve or disapprove of any particular type of compensation payable to producers.

New York Insurance Superintendent Urges Compliance with Federal Money Laundering and Bribery Laws

The New York Insurance Department (the "Department") has announced in a Circular Letter, addressed to all New York-licensed entities that in the future, as part of market conduct review, the Department will inquire into licensees' compliance with existing federal statutes designed to prevent money laundering, bribery and other improper transactions. Circular Letter No. 11 (2009), issued June 29, 2009, available at the Department's website, http://www.ins.state.ny.us/, cites the Bank Secrecy Act, the Foreign Corrupt Practices Act and requirements of the Office of Foreign Assets Control.

Acknowledging that the federal government is responsible for enforcing these statutes, the Department calls on licensees to "...assess their business models and circumstances to determine the extent to which they should formulate or revisit their policies to ensure proper compliance with these federal laws". The Department "...consistent with risk-focused surveillance, may specifically ask the members of a licensee's senior most governing body or senior management about those policies."

The Bank Secrecy Act requires insurance companies to develop a written anti-money laundering program to prevent the use of permanent life policies, annuities and other products with cash value from being used to launder money and potentially to finance terrorism. Large dollar withdrawals made shortly after the issuance of a policy or contract or surrenders of annuities with return of premium guarantees are cited by the Department as examples of activities to be detected and monitored by an anti-money laundering program.

The Foreign Corrupt Practices Act ("FCPA") may be violated by payments or promises of payments to foreign officials or political parties made with the intent to influence an official act or decision in order to obtain or retain business or to secure an improper advantage. The U.S. Department of Justice website link in the Circular Letter, http://www.usdoj.gov/criminal/fraud/docs/dojdocb.html. provides that:

The FCPA potentially applies to any individual, firm, officer, director, employee, or agent of a firm and any stockholder acting on behalf of a firm. Individuals and firms may also be penalized if they order, authorize, or assist someone else to violate the antibribery provisions or if they conspire to violate those provisions.

The Office of Foreign Assets Control maintains a list of Specially Designated Nationals ("SDNs"). The Department cautions that:

No United States-based underwriter, broker, agent, primary insurer, reinsurer, or United States citizen employee of a foreign insurance firm may engage in any transaction, including an investment transaction, not licensed by the Office of Foreign Assets Control that involves any person or entity designated a Specially Designated National ("SDN"). See OFAC Regulations and the Insurance Industry, Office of Foreign Assets Control, U.S. Department of the Treasury (Apr. 29, 2004),at

 http://www.treas.gov/offices/enforcement/ofac/regulations/facin.pdf.

Licensees also should avoid engaging in transactions with SDNs and must freeze any asset (including any insurance policy) in which an SDN has a direct or indirect interest, and timely report such action to OFAC. See id. OFAC maintains a list of SDNs on its website that licensees should monitor closely.

The Department's overall objective is to require all licensees to develop and update adequate procedures and internal controls for compliance with the federal statutes, to audit and to arrange for independent testing of the procedures and controls and to designate specific persons responsible to implement the procedures and controls. Procedures should be in place to apprise senior management of non-compliance with regulations and compliance policies.

New York Court of Appeals Rules that Injury Caused During an Independent Medical Examination is Medical Malpractice.

In Lewis J. Bazakos v. Philip Lewis, the New York Court of Appeals, New York's highest court, held on June 24, 2009 in a 4-3 opinion, that a negligence action against a medical doctor for injuries incurred during an independent medical examination ("IME") is a claim for medical malpractice and is subject to the medical malpractice statute of limitations. (2009 WL 1765980, 2009 N.Y. Slip. Op. 05199)

The plaintiff, originally a plaintiff in a personal injury action arising from an automobile accident, asserted that he was injured by the forceful rotating of his head and neck by the medical doctor carrying out an IME in the original action. The Court rejected the plaintiff's argument that no doctor-patient relationship exists between a doctor conducting an IME and the person examined and concluded that:

Bazakos's claim here is that Lewis breached his duty "to perform the examination in a manner not to cause physical harm to the examinee." That is a claim for medical malpractice, and is governed by the 2 year, 6 month statute of limitations. Therefore, Bazakos's lawsuit was not timely.

The Court noted that the Legislature reduced the statute of limitations for medical malpractice actions from three years in 1975 to make it easier for health care providers to get malpractice insurance at reasonable rates. The Court found it unlikely that the Legislature would have found less of a reason to make malpractice insurance more available to doctors who conduct IMEs as part of their practice.

The dissenting Judges strongly assailed the majority's finding that an injury incurred during an IME should be governed by a medical malpractice standard, stating that:

These exams, far from being independent in any ordinary sense of the word, are paid for and frequently controlled in their scope and conduct by legal adversaries of the examinee. They are emphatically not occasions for treatment, but are most often utilized to contest the examinee's claimed injury and to dispute the need for any treatment at all.

The approach of other states to this issue was examined by the Supreme Court of Virginia in Harris v. Kreutzer, 624 S.E. 2d 24 (2006). That Court found that a cause of action for malpractice may lie for the negligent performance of an IME, stating that during such an examination, "...a physician's duty is limited solely to the exercise of due care consistent with the applicable standard of care so as not to cause harm to the patient in actual conduct of the examination." The Harris v. Kreutzer opinion analyzes cases from several jurisdictions on the issue of whether a person examined at an IME has a cause of action against the doctor conducting the examination, noting that "...the denomination of the basis of that cause of action has not been uniform."

Because the analysis of the nature of a cause of action against a doctor performing an IME varies from one jurisdiction to another, the law of each state must be carefully reviewed to resolve issues of liability.