In the competitive marketplace for the sale of insurance, producers continually adjust their advertising and marketing practices to demonstrate to the public how their services are different from those of other agents or brokers. Unfortunately, this is not always an easy task to accomplish. Insurance producers have to be very careful that their marketing activities do not run afoul of New York’s anti-rebate statutes. We are aware that the New York State Department of Financial Services has become quite aggressive lately in policing incidents of alleged rebating and illegal inducements. Previously, we addressed the issue of rebating in the February 2008 issue of The E&O Report​ (Vol. 20; No. 2), but with the increased monitoring activities of the DFS, we thought it best to revisit the issue and hopefully provide some guidance to insurance agents and brokers in their dealings with customers or prospective customers, both in advertising their services and selling insurance.

Preliminarily, rebating is defined as a practice by an insurer, agent or broker of providing or offering an insured a valuable inducement so that the insured or prospective insured will buy insurance from that same insurer or producer. As a general rule, producers may not reduce premiums or provide free services¹  or other “valuable consideration” as an inducement to an insured or prospective insured to purchase insurance unless such rebate is specified in the policy. Rebating is prohibited in 48 states and the District of Columbia. The general purposes of anti-rebating statutes are to prevent the creation of a competitive disadvantage or uneven playing field for other insurers, agents or brokers in the marketplace. Those statutes are also meant to protect insurance consumers from unfair or deceptive practices, prevent discriminatory rates and help maintain insurer solvency.

At the heart of anti-rebating statutes is the notion that the prohibition against rebates or inducements will help prevent discrimination in insurance rates. After all, insurance rate regulation is grounded in the concept that insureds who present the same degree of risk to an insurer should pay the same rate or premium. If similarly situated insureds or potential insureds were charged different premiums, or if they are treated differently in other respects, this would constitute discrimination. According to the DFS:

The purpose of New York's rebating and inducement provisions is to require an insurer or licensed insurance producer to provide insurance in a nondiscriminatory manner to like insureds or potential insureds, and to prohibit such an insurer or insurance producer from providing an insured or potential insured with any special benefit not afforded to other insureds or potential insureds. ... [T]he legislative history of Insurance Law Sections 2324 and 4224 shows that the two statutes are intended to reach discrimination, through rebating of any special favor or advantage, between insureds who are equal risks, without specifying the favor or advantage in the policy or contract. [Circular Letter 9 (2009)]

In addition to information from the DFS (in the form of Circular Letters, Office of General Counsel Opinions and the like), insurance producers should be familiar with New York’s two separate anti-rebating statues:

N.Y. Ins. Law § 2324 – applicable to property/casualty insurance
N.Y. Ins. Law § 4224​ – applicable to life, accident and health insurance

Prior to 2012, the key difference between the two statutes was that Section 2324 (for transactions involving property/casualty insurance) contained a limited exception for anti-rebating purposes. Meanwhile, Section 4224 (applicable to accident and health insurance, life insurance and annuities) contained no such exception and expressly prohibited an agent or broker from offering any valuable consideration or inducement, directly or indirectly, in connection with the sale of life, accident and health insurance when such consideration is not contained in the policy².  

Before 2012, Section 2324 of the Insurance Law provided an exception with respect to property/casualty insurance, formerly known as the “keepsake” exception. The term "keepsake" did not appear in Section 2324 but was a term generally used by the DFS to describe articles that were exempt from the broad prohibition against offering inducements. A "keepsake" was permitted to be offered or given as an incentive, inducement or thank-you to existing customers. But, again, “keepsakes” would only apply to property/casualty lines and only as a small token or memento. In 2012, the “keepsake” exception in Section 2324 was amended to permit an insurance producer to provide an insured or prospective insured with “valuable consideration, including but not limited to merchandise or periodical subscriptions, not exceeding twenty-five dollars in value³.”  Further, when the New York State Legislature amended Section 2324 in 2012, it made the same change to Section 4224. That section now expressly permits life and health agents to give “valuable consideration, including but not limited to merchandise or periodical subscriptions, not exceeding twenty-five dollars in value⁴.” 

As one could imagine, the most common example of rebating occurs when an agent or broker agrees to reduce a commission on a policy so that an insurance company will reduce the premium owed by the insured. Rebating also occurs when the agent or broker returns to an insured a portion of a commission earned on a policy as an inducement to buy or maintain an insurance policy. Unfortunately, in practice the overall simplicity of these two rebating examples does not adequately address the breadth and scope of potential rebating issues. Needless to say, the DFS has taken a fairly broad view of practices and transactions that might encompass rebating and illegal inducements.

Circular Letter 9 (2009) provides examples of some activities that are prohibited by the New York’s anti-rebating laws:

[A]n insurer or insurance producer may not provide or offer to provide an insured or potential insured with any special benefit or discount, including any rebate from the premium, or any service or other incentive in conjunction with the sale of insurance, that is not specified in the policy or contract, or vice versa. For example, an insurer or insurance producer may not provide 'free' insurance or offer to pay part of the insurance premium for an insured or potential insured as an incentive to purchase goods, services or even other insurance.

While certainly not an exhaustive list, below are some examples of some marketing practices previously deemed by the DFS to constitute illegal inducements or rebating⁵: 

1. A licensed agent providing a $15 gift certificate toward the cost of a six-hour defensive driving class or a $5 gas card to insureds or prospective insureds. [Office of General Counsel, Opinion No. 04-08-03, dated Aug. 3, 2004].
   
2. A proposed newspaper advertisement that states "free $15 gas card for any new client who brings in both their auto and homeowner Insurance policies for a free quote. And you may save hundreds of dollars." [Office of General Counsel, Opinion No. 03-05-05, dated May 7, 2003].
   
3. An offer by an insurance broker to supply a free cellular phone device to those that complete an insurance application. [Office of General Counsel, Opinion No. 01-11-07, dated Nov. 7, 2001].
   
4. A licensed insurance producer providing prospective insureds who seek an insurance quote on the Internet a free coupon to cover the $10 charge for insureds to be listed in an online directory to advertise their businesses. [Office of General Counsel, Opinion No. 06-12-07, dated Dec. 8, 2006].
   
5. A licensed insurance producer giving insureds a free Carfax vehicle history report with every vehicle insured through the producer's office. [Office of General Counsel, Opinion No. 06-05-01, dated May 1, 2006].
   
6. An insurance agency offering a free car wash to prospective clients to whom the agent is providing an automobile and home insurance quote. [Office of General Counsel, Opinion No. 07-07-07, dated July 13, 2007].
   
7. A bank offering a customer a lower interest rate on an automobile loan on the condition that the customer purchases automobile insurance from an insurance agency owned by the bank. [Office of General Counsel, Opinion No. 07-08-08, dated Aug. 28, 2007].
   
8. An insurance agent or broker providing the book “Insurance for Dummies” to insureds and prospective insureds when the retail price of the book was over the then-“keepsake” exception of $15. [Office of General Counsel, Opinion No. 08-09-06, dated Sept. 22, 2008].
   
9. A property/casualty insurance company giving its insureds a phone card less than the then-“keepsake” exception of $15 that has the name and address of the insurance company printed on the front. [Office of General Counsel, Opinion No. 02-05-17, dated May 14, 2002].
   
10. An insurance agency giving customers a $25 postage credit as an inducement for the purchase of insurance. [Office of General Counsel, Opinion No. 04-10-22, dated Oct. 22, 2004].
    

We would caution insurance producers to examine their marketing and advertising activities to avoid a claim of rebating or illegal inducement by the NYDFS. An agent or broker should evaluate any promotional items that might be given away to the general public as part of a marketing or advertising campaign, ensuring those items are not tied to the sale or solicitation of insurance. Insurance producers should also make certain any article of merchandise provided to insureds or prospective insureds are valued less than $25 and, again, are not tied to the sale of insurance.

To the extent practical, any proposed advertising practice that might skirt the fine line between “rebating” and permissible marketing activities should first be brought to the attention of the DFS to avoid future complications. As we always cautioned, by acting carefully and in accordance with New York law concerning inducements and rebating, the prudent insurance producer will hopefully avoid any claims that he or she engaged in illegal rebating.