What’s It Worth?

Rebates, Gifts, Inducements

Have you read LA Advisory Letter 2015-01? Originally issued in 2015, it was revised and reissued in March of 2017. This advisory letter has a lot of information and we recommend that you read it in its entirety (6 pages). That said, we want to draw your attention to a couple of specific elements of this letter.  

In a nutshell, this letter does the following:

  • Reminds insurers, distributors, and producers (note that fraternal benefit societies are exempt from this Advisory Letter) that rebates are prohibited by the Louisiana Unfair Trade Practices Act.
  • Then it distinguishes rebates from typical marketing practices, allowing a certain amount of discretion and common sense to be applied to determine if something violates the rebating laws:

The letter provides a list of things that fall into this category including, but of course not limited to: “giving of tangible goods (tee shirts, caps, pens, calendars, etc.), the giving or purchase of consumables (such as food and beverages, etc.), the provision of continuing education course materials or instruction, and the giving of tickets to sporting, cultural or other charitable events, or the making or giving of charitable donations (including pro bono services) …”

The letter also looks at services that can be offered by an insurer and draws a distinction between those that are “incidental to and closely related to the administration of the insured’s policy,” which the letter advises are not rebates, and those services that are not truly incidental to the contract of insurance. Those services are likely to constitute rebating if the costs are not passed on to the insureds. In both cases, the services are offered and provided to insureds. Examples of those that might be incidental, according to the letter, include risk assessments, claims form preparation, and billing under COBRA. Examples of services that are more likely not to be incidental include COBRA administration that goes beyond billing, legal services, human resource software or services related to employee compensation. When evaluating whether a service might fall into the prohibited category, the key is how close the nexus of the services provided are to the insurance contract. The closer the nexus, the more likely the service is permitted and not rebating. 

So that makes sense, but what about when services are offered to the public? Here the trade practice at issue is not as likely to be rebating and the question is more likely to be whether or not the services constitute an inducement.

Louisiana tells us that it is not rational to interpret “inducement” to mean any and every motivation. That is too broad of an interpretation and to do so would prohibit “common and ordinary business activities where such prohibition bears no reasonable relation to the evils sought to be cured by the Unfair Trade Practices Act.” But clearly there are actions and motivations that do operate as inducements and how do we tell them apart?

The letter includes four factors that the Louisiana Department of Insurance would consider:

  1. Whether the offering of the thing of value is open and obvious to the public. This is important because the starting point of the analysis is basically that we are all free to offer things of value to the public so long as our motivation is not a prohibited one, such as to unlawfully induce the sale of insurance.
  2. Whether the offering is directed primarily to insureds or prospective insureds. This then qualifies the first statement because if an insurer or producer asserts that the offering is to the public, but in fact only insureds or prospective insureds participate in the offering, then it begins to look more like an inducement.
  3. Whether a member of the public can obtain the thing of value on equal terms and through the same means as insureds or prospective insureds. This drills down a little further. If there are insureds and prospective insureds involved, but the public can participate on equal terms, then the argument is that the thing or the service may not be an inducement.
  4. Whether any impediment to access the thing of value exists that is imposed on the public and not equally imposed on an insured or prospective insured. And this is the flip side – another way of saying that the terms are not the same for the public as those for insureds or prospective insureds and again, this looks more like an inducement. For example, if an event is offered and it is free for insureds or prospective insureds, but the general public has to pay for it, it may look like an inducement. However, we then need to return to the beginning of the letter and note that if it is a common and ordinary marketing practice, then it may be acceptable.

The letter repeats that it’s not the spirit of the statute to prohibit any person from “employing marketing practices that are routine, ordinary, and acceptable throughout the broader economy and that do not inhibit or undermine the statutory goals of protecting consumers from discriminatory pricing or insurers from the risk of insolvency.”

Given this, we think LA supports insurers and agents leveraging regular marketing and promotional activities. Keep in mind, each state is different, and not all issue guidance as clear as this. Some states have strict limits that have resulted in significant fines on producers who were found in violation of the unfair trade practices act regarding unlawful rebating and inducements.

For more information on the laws and regulations governing rebates and inducements, we encourage you to check out this 50-state research tool.