This opinion represents the views of the Office of the State Comptroller at the time it was rendered. The opinion may no longer represent those views if, among other things, there have been subsequent court cases or statutory amendments that bear on the issues discussed in the opinion.
CONFLICTS OF INTEREST-- Insurance Transactions (town supervisor placing insurance through same agency through which town's insurance placed) -- Interest in Contract (arising from general concern with overall financial well-being or success of company)
PUBLIC CONTRACTS -- Policies and Procedures (applicability to procurement of insurance)
GENERAL MUNICIPAL LAW, §§104-b, 800(3): A town supervisor who places insurance through the same insurance agency through which the town's insurance is placed, but who does not receive a commission on the town's insurance and is not an officer, director, employee or stockholder of the insurance agency, would not have an "interest" in the town's insurance contracts. The supervisor, however, should disclose his or her business relationship with the insurance agency and, under certain circumstances, should not participate in the discussion or vote on any matter affecting the insurance agency.
This is in reply to your request for our opinion concerning a potential conflict of interest on the part of a town supervisor.
You state that the supervisor is an insurance broker who places insurance through the same insurance agency through which the town's insurance is placed. The insurance agency is a corporate entity and the supervisor is not a stockholder, director, officer or employee of the agency. The supervisor and the insurance agency split the commissions on the insurance placed by the supervisor through the agency, which results in payments to the supervisor of approximately $5,000 per year. The supervisor, however, does not place the town's insurance through the agency and does not receive a commission on the town's insurance. Under these circumstances, you ask whether the supervisor would have a prohibited interest in the town's insurance contracts.
Article 18 of the General Municipal Law (§800 et seq.) contains the provisions of law which relate to conflicts of interest of municipal officers and employees, including town officers and employees (General Municipal Law, §800, ). Pursuant to General Municipal Law, §800(3), a municipal officer or employee has an "interest" in any contract with his or her municipality if he or she receives a direct or indirect pecuniary or material benefit as a result of that contract. In addition, a municipal officer or employee is deemed to have an "interest" in the contracts of a firm, partnership or association of which he or she is a member or employee, and in the contracts of a corporation of which he or she is an officer, director, employee or stockholder (General Municipal Law, §800[b]-[d]). Unless a statutory exception applies (see General Municipal Law, §802), that interest is prohibited if the officer or employee, individually or as a member of a board, has the power or duty to: (a) negotiate, prepare, authorize or approve the contract or approve payments thereunder; (b) audit bills or claims under the contract; or (c) appoint an officer or employee who has any such powers or duties (General Municipal Law, §801).
The threshold question, therefore, is whether the town supervisor would have an "interest" in the town's insurance contracts because of his relationship to the insurance agency through which the town's insurance is placed. In this instance, since the town supervisor does not receive a commission on the town's insurance, and is not an officer, director, employee or stockholder of the insurance agency, it appears that the only basis for concluding that the supervisor has an "interest" in the town's insurance contracts is that the supervisor may be generally concerned with the success of the insurance agency because the supervisor also places insurance through that agency. We have examined analogous relationships in prior opinions.
In 1981 Opns St Comp No. 81-216, p 230, we concluded that a town board member who provides services under contract to an engineering firm would not have an "interest" in a contract between the town and the engineering firm, unless the board member were to receive a pecuniary or material benefit as a result of the contract between the town and the engineering firm. Although the board member may have had a general concern with respect to the overall financial well-being of the engineering firm, we concluded that such a general interest is insufficient to constitute an "interest" within the meaning of section 800(3).
Similarly, in 1981 Opns St Comp No. 81-403, p 445, we concluded that a city water maintenance supervisor who lends money to the owners of a plumbing supply company would not necessarily have an "interest" in contracts between the municipality and the company. In reaching this conclusion we reasoned that:
Because [the water maintenance supervisor] is a creditor of the company's proprietors, it could be asserted that he is interested in the financial well-being of the company to the extent that it affects the ability of the lendees to repay the loan. However, that fact, in and of itself, does not give rise to a statutory interest under General Municipal Law, §800(3). There must be a finding that [the water maintenance supervisor] derives a direct or indirect pecuniary or material benefit traceable to the purchases by the city from the plumbing company. (id.).
Thus, in our view, the fact that a municipal officer or employee may be generally concerned with the overall financial well-being or success of a company does not give the municipal officer or employee an "interest" in a contract between the company and the municipality because the benefit from the contract to the municipal officer or employee is too speculative or attenuated.
Accordingly, it is our opinion that in this instance the supervisor's general concern with the success of the insurance agency, by itself, would be insufficient to constitute an "interest" within the meaning of section 800(3). Therefore, we believe that the supervisor would not have an "interest" in the town's insurance contracts.
In reaching this conclusion, we are mindful that in 11 Opns St Comp, 1955, p 732, we concluded that a town may not contract for insurance with an insurance brokerage firm when a member of the town board is an insurance salesman who writes insurance through the firm. We reached this conclusion relying on former Town Law, §104 and former Penal Law, §1868 which essentially prohibited certain public officials from having a direct or indirect "interest" in contracts with the jurisdiction they served, but did not define the term "interest". In the absence of a statutory definition of the term "interest", we reasoned that the brokerage firm and the supervisor had a principal-agent relationship similar to an employer-employee relationship which gave the supervisor a direct interest in the continued success of the firm and, thus, at least an indirect "interest" in any town insurance contract written through the firm.
The statutes relied upon in 11 Opns St Comp, 1955, supra, were repealed or rendered inapplicable to municipal officials by the legislation which enacted article 18 (L 1964, ch 946)1. That legislation was intended to be more than a mere recodification of preexisting law. It was intended to simplify and clarify, and thereby making more certain, the circumstances giving rise to conflicts of interest on the part of local officials in order to, inter alia, "protect innocent public officers from unwarranted assaults on their integrity" (see L 1964, ch 946, §1). In furtherance of this purpose, the Legislature defined the term "interest" as a "pecuniary" or "material" benefit, and deemed a municipal officer or employee to have an "interest" in the contracts of a corporation only when the municipal officer or employee is a corporate officer, director, employee or stockholder. Based on this history and statutory scheme, it is our view that the Legislature did not intend a municipal officer or employee to have an "interest" in corporate contracts solely by virtue of a much less sharply defined concern with respect to the general financial well-being or success of the corporation. Therefore, in view of our later opinions construing section 800(3) and the legislative purpose of article 18, l1 Op St Comp 1955, supra, is no longer an accurate statement of law to the extent that it suggests that a municipal officer or employee may have an "interest" in a corporation's contracts solely by reason of having a general concern with the overall financial well-being of the corporation2.
Although we conclude that the town supervisor in this instance would not have an "interest" in the town's insurance contracts, we note that General Municipal Law, §806 requires each town to adopt a code of ethics setting forth for the guidance of its officers and employees the standards of conduct reasonably expected of them. One of the subjects that must be addressed in a code of ethics is private employment in conflict with official duties. Therefore, we suggest review of the town's code of ethics to determine whether it contains any pertinent provisions.
Apart from article 18 and codes of ethics promulgated thereunder, the courts of this State have held public officials to a high standard of conduct and, on occasion, have negated certain actions which, although not violating the literal provisions of article 18 or a municipality's code of ethics, violate the spirit and intent of these enactments, are inconsistent with public policy, or suggest self-interest, partiality or economic impropriety (see, e.g., Zagoreos v Conklin, 109 AD2d 281, 491 NYS2d 358; Matter of Tuxedo Conservation and Taxpayers Ass'n v Town Board of the Town of Tuxedo, 69 AD2d 320, 418 NYS2d 638; Conrad v Hinman, 122 Misc 2d 531, 471 NYS2d 521). The courts, however, have refrained from invalidating the actions of a municipal board on the basis of allegations that a board member has a non-statutory interest in a matter before the board if the individual disclosed the interest and refrained from participating in the proceedings (see Cahn v Planning Board of the Town of Gardiner, 157 AD2d 252, 557 NYS2d 488).
In addition, the courts have concluded that not every private business relationship between a municipal board member and a person with a non-statutory interest in a matter before the board is sufficient to require disclosure and recusal (see Ahearn v u>Zoning Board of Appeals of the Town of Shawangunk, Ulster County, 158 AD2d 801, 551 NYS2d 392, lv den 76 NY2d 706, 560 NYS2d 988; Town of North Hempstead v Village of North Hills, 38 NY2d 334, 379 NYS2d 792; Opns St Comp No. 91-48, p 132). For example, in Parker v Town of Gardiner Planning Board, 184 AD2d 937, 585 NYS2d 571, lv den 80 NY2d 761, 592 NYS2d 670, the court declined to invalidate planning board approval of a proposed subdivision when one of the board members who voted for the subdivision was the president of a company which had an ongoing business relationship with one of the applicant's principals. The court noted that the board member's company had annual gross sales of between $2 and $3 million and that purchases by the applicant's principal ranged from $400 to $3,000 per year, or at most .15% of the company's annual gross sales. Under these circumstances, the court concluded that the likelihood that such a de minimis non-statutory interest would or did in fact influence the board member's judgment and/or impair the discharge of his official duties was little more than speculative and, therefore, disqualification was not required.
In this instance, since the town supervisor and the insurance agency appear to have an ongoing business relationship, we believe the supervisor should disclose the relationship. We also believe that if the amount received by the supervisor in commissions split with the insurance agency is more than a de minimis portion of the supervisor's annual income, the supervisor should not participate in the discussion or vote on any matter affecting the insurance agency.
Finally, we note that although it has been held that the procurement of insurance is not subject to competitive bidding requirements (Surdell v City of Oswego, 91 Misc 2d 1041, 399 NYS2d 173; Lynd v Heffernan, 286 App Div 597, 146 NYS2d 113), it is subject to the requirements of General Municipal Law, §104-b. Section 104-b requires a town to adopt written internal policies and procedures to govern all procurements of goods and services not required by law to be made pursuant to competitive bidding requirements. The stated objectives of section 104-b include assuring the prudent and economical use of public moneys in the best interest of the taxpayers and guarding against favoritism in the award of municipal contracts which are not subject to competitive bidding.
At a minimum, the policies and procedures adopted pursuant to section 104-b must provide, inter alia, that when competitive bidding is not required by law, alternative proposals or quotations will be secured by requests for proposals, written or verbal quotations, or other methods which further the purposes of section 104-b, except in limited circumstances (see General Municipal Law, §104-b[b],[f]). Moreover, the policies and procedures must require justification and documentation of any contract awarded to other than the lowest responsible dollar offeror, setting forth the reasons the award furthers the purpose of section 104-b. Proper adherence to these procurement procedures and policies will help ensure that town insurance contracts are awarded in the best interest of the town.
April 18, 1996
John T. Biscone, Esq., Town Attorney
Town of New Scotland
1 Former Town Law, §104 was repealed (L 1964, ch 946, §16). Former Penal Law, §1868 was amended to not apply to municipal officers and employees subject to article 18 of the General Municipal Law (L 1964, ch 946, §9). Subsequently, the provisions of provisions of former Penal Law, §1868, as amended, were transferred to Education Law, §410 (see L 1965, ch 1031, §35).
2 We also note that the analysis in 11 Opns St Comp, 1955, supra, is predicated on a characterization of the relationship between the insurance brokerage firm and the town supervisor as a principal-agent relationship, essentially equivalent to an employer- employee relationship. Article 18, however, provides an exception to its prohibition on conflicts of interest for contracts with corporations in which a municipal employee has an interest solely by reason of his or her status as a corporate officer or employee, if the remuneration of such employment will not be directly affected as a result of the contract and the duties of such employment do not directly involve the procurement, preparation or performance of any part of the contract (General Municipal Law, §802[b]). Therefore, to the extent that 11 Opns St Comp, 1955, supra, suggests that a municipal officer or employee may have a prohibited interest in the contracts of a corporation solely by virtue of being an employee of the corporation, without consideration of the individual's private remuneration and duties, it is inconsistent with the express provisions of article 18. Further, even if we were to assume that the town supervisor is an employee of the insurance agency through which the town's insurance is placed, it appears that the supervisor's "interest" in the town's insurance contracts would not be prohibited because the supervisor's "interest" arises solely by virtue of his status as an employee of the insurance agency (see 1989 Opns St Comp No. 89-39, p 91; 1981 Opns St Comp No. 81-430, p 484) and the supervisor does not place the town's insurance through the agency or receive a commission on the town's insurance.