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Decision Regarding Insurance Policy Limits

October 1, 2014
By: Frank Scahill

Rebates paid by an insurance broker to the insured are generally prohibited by statute. Insurance Law section 2324(a), prohibits insurance brokers from paying "either as inducement to the making of insurance or after insurance has been effected, any rebate from the premium which is specified in the policy, or ... any valuable consideration or inducement of any kind, directly or indirectly, which is not specified in such policy or contract ..." in the context of property/casualty insurance, but not, inter alia, accident and health insurance (see Insurance Law (hereinafter "Ins. Law") § 2302(a) excluding some forms of insurance from the provisions of Article 23, which regulates insurance rates so as to avoid discrimination (see Ins. Law § 2301). Various other statutes prohibit rebating in the context of other types of insurance (see, e.g., § 4224((b)-(c)) (accident and health insurance); § 6409 (d) (title insurance); § 6504(b)(1)(mortgage insurance); § 6904 (g) (financial guaranty insurance).

The purpose of the anti-rebate statutes is to ensure that insurance providers, including brokers, "provide insurance in a non-discriminatory 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" in those areas of insurance that are covered by statute (see Circular Letter of March 3, 2009, from the State of New York Insurance Department, cited by defendant).

Hirsch Wolf & Co., (Wolf) an insurance broker, tried to persuade his client to place workers' compensation insurance in a specific program, the Health Insurance Trust of New York (HITNY).

When the client expressed concerns that the program may be subject to a retroactive adjustment, Wolf guaranteed that if any adjustment occurred, he, or his company, would pay 50% of any retroactive adjustment for the 2003-2004 policy year.

As a result of this guarantee, plaintiffs placed their workers' compensation coverage with HITNY for the 2003-2004 year and in subsequent years.

When the HITNY became insolvent the Workers' Compensation board ordered retroactive assessments and the client sued the broker to collect on the guarantee. Wolf argued that the guarantee is unenforceable as illegal, because it violates provisions of the New York Insurance Law prohibiting an insurance broker from selling a policy to a client with the promise that he will refund or rebate a portion of the premium.

On January 14, 2014 Judge Demarest of New York County Supreme Court decided the issue in Cliffside Nursing Home Inc. v. Estate of Wolf (42 Misc.3d 1213(A)).

In a fatal error to the motion, counsel failed to include a copy of the policy which was the subject of the case. Judge Demarest denied the motion stating, "The vice is not in the giving of a rebate, inducement, or consideration, but the giving of any rebate, inducement, or consideration not specified in the policy. As copies of the insurance policies have not been produced, the court is unable to make a determination as to the legality or illegality of the guarantee."

Read the decision here.

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