The Office of General Counsel issued the following informal opinion on December 13, 2001, representing the position of the New York State Insurance Department.
Re: Legality of Sales Commission Calculation for Insurance Sales Agent
Does a sales commission contract which, by its commission fee structure, encourages insurance agents to promote payment of the entire premium in one lump sum with the application, rather than installment payments, violate the Insurance Law?
Such a contract is not illegal. If, however, to earn a commission, a broker or insurance agent engaged in illegal activity, the broker or insurance agent would be liable for his or her actions.
The inquiry concerned a commission sales contract provided by an insurance agent, (hereinafter ABC), for various insurers. ABC sells insurance to the public using sub-agents. In particular, the inquirer was a sub-agent who contracted with ABC to sell long term health care insurance.
ABC shares its commission with its sub-agents pursuant to its contract that the inquirer claimed promotes illegal activity by promoting one premium payment structure over another. The inquirer wanted to know if such a contract could be considered as illegal based on two factors. Specifically, the inquirer was concerned with the way the contract defined "renewals" and "renewal bonuses."
First, the inquirer claimed that the fee structure, which turns on the contractual definition of "renewals" and "renewal bonuses," favors the sub-agent immediately collecting full payment of the premium rather than installment payment plans so that the sub-agent meets his or her minimum quota to be eligible for a commission. Second, the inquirer claimed that because immediate premium payment is more beneficial to the sub-agent, the sub-agent will be encouraged to promote this payment method, even if it is more beneficial to the consumer to choose an alternate payment plan.
The contract itself is not illegal. The law generally does not require one form of payment over another. The fact that the agents fee contract favors one method of premium payment that may sometimes not be in the best interests of an insured, is not sufficient to make the agents contract illegal, particularly since the method of payment itself is legal.
The commission fee structure, which is controlled by the contractual definitions that may not conform to the commonly used meaning of such words, may impact on the commissions paid to the sub-agent. However, this should not affect the rights of the insured whose primary concern is obtaining the best insurance at the best price, not whether the sub-agent benefits more fully from one form of premium payment plan over another.
N.Y. Ins. Law § 2110 (a) (3) and (4) (McKinney 2000) sets the standards for behavior by licensed insurance agents. N.Y. Ins. Law § 2110 (a) (3) and (4) (McKinney 2000) states in the relevant part:
(a) The superintendent may refuse to renew, revoke, or may suspend for a period the license of any insurance agent, insurance broker . . . if, after notice and hearing, he determines that the licensee or, in the case of an insurance broker or adjuster, any sub-licensee has:
(3) been guilty of fraudulent or dishonest practices;
(4) or demonstrated his incompetency or untrustworthiness to act in such capacity.
An insurance agent has a duty to act in the best interest of the insured, and may not act in a dishonest, incompetent or untrustworthy manner. Whether the agents duty has been violated can only be determined on a case-by-case basis after examining the facts.
For further information you may contact Senior Attorney Susan Dess at the New York City Office.