New York State Seal
STATE OF NEW YORK
INSURANCE DEPARTMENT
25 BEAVER STREET
NEW YORK, NEW YORK 10004

George E. Pataki
Governor

Gregory V. Serio
Superintendent

The Office of General Counsel issued the following informal opinion on February 26, 2002, representing the position of the New York State Insurance Department.

Re: Alliance between Insurance Agency and Mortgage Brokerage

QUESTIONS PRESENTED:

1. If a mortgage brokerage ("brokerage") and an insurance agent become owners of a new corporation, an insurance agency, may the brokerage share in the profits of such agency without having to become licensed as an insurance agent?

2. May the brokerage refer its clients to the insurance agency for insurance services without having to become licensed as an insurance agent?

3. May the insurance agent utilize the brokerage’s client list to solicit life, home and automobile insurance from such clients?

CONCLUSIONS:

1. Yes. A brokerage and an insurance agent may become owners of a new corporation, an insurance agency, and the brokerage, as an owner, may share in the profits of the corporation which must be in the form of dividends declared in the usual course of business of the corporation.

2. The brokerage may refer its clients to the insurance agency for insurance services without having to become licensed as an insurance agent, provided it does not discuss specific insurance policy terms and conditions with the client and does not condition approval of the mortgage loan on the client purchasing insurance from the insurance agency.

3. Yes. The insurance agent may utilize the brokerage’s client list to solicit life, home and automobile insurance from such clients.

FACTS:

An agent, licensed to sell life, accident and health, and property/casualty insurance, and a mortgage brokerage will become owners of a new corporation, an insurance agency, at the same location as the mortgage brokerage. The inquirer would like to know if the brokerage may refer its clients to the agency and share in the profits of such agency. The inquirer would also like to know if the agent may utilize the brokerage’s client list.

ANALYSIS:

An unlicensed person or entity and a licensed agent may become owners of an insurance agency provided that the unlicensed person does not act as an agent or broker or share in commissions with the licensee. The unlicensed person’s compensation from the corporation, as an owner, must be in the form of dividends declared in the usual course of business of the corporation.

Further, the inquirer would like to know whether the brokerage, an unlicensed entity, may refer its clients to the newly formed corporation/insurance agency. N.Y. Ins. Law § 2114(a)(2) & (4) (McKinney 2000 & Supp. 2001-2002), N.Y. Ins. Law § 2115(a)(1) (McKinney 2000 & Supp. 2001-2002) and N.Y. Ins. Law § 2116 (McKinney 2000 & Supp. 2001-2002), contain virtually identical language.

Specifically, N.Y. Ins. Law § 2115(a)(1) provides:

(a)(1) No insurer doing business in this state, and no agent or other representative thereof, except as provided in subsection (b) hereof, shall pay any commission or other compensation to any person, firm, association or corporation for acting as an insurance agent in this state, except to a licensed insurance agent of such insurer or to a person described in paragraph two or four subsection (a) of section two thousand one hundred one of this article or except as provided in subsection (c) of this section. For the purposes of this section, "acting as insurance agent" shall not include the referral of a person to a licensed insurance agent or broker that does not include a discussion of specific insurance policy terms and conditions and where the compensation for referral is not based upon the purchase of insurance by such person. (emphasis added).

Thus, pursuant to the above statutes, the brokerage, as an unlicensed entity, may refer its clients to the insurance agency provided it does not discuss any specific insurance policy terms and conditions with the client. The brokerage may also receive compensation for referrals to the insurance agency, provided such compensation is "not based on the purchase of insurance" by the person referred. Only licensed insurance agents may discuss policy terms and conditions with the client and receive compensation based on the purchase of insurance by the client.

N.Y. Ins. Law §2101(a) (McKinney 2000) defines an insurance agent1 as:

    1. …[A]ny authorized or acknowledged agent of an insurer, fraternal benefit society or health maintenance organization issued a certificate of authority pursuant to article forty-four of the public health law, and any sub-agent or other representative of such an agent, who acts as such in the solicitation of, negotiation for, or procurement or making of, an insurance, health maintenance organization or annuity contract, other than as a licensed insurance broker….

Where an unlicensed person engages in discussion of insurance policy terms and conditions with the potential insured, such discussion would constitute solicitation and would require licensing as an insurance agent or broker, pursuant to N.Y. Ins. Law § 2102(a)(1) (McKinney 2000), which prohibits a person, firm, association or corporation from acting as an insurance agent or broker without a license.

Under the proposed arrangement, N.Y. Ins. Law § 2103(i)(1)(C) (McKinney 2000) may also be relevant. That section provides in pertinent part:

(i)(1) …The superintendent may refuse to issue, suspend or revoke a license, as the case may be, to or of any applicant if he finds that such applicant has been or will be, as aforesaid, receiving any benefit or advantage in violation of section two thousand three hundred twenty-four of this chapter, or if he finds that more than ten percent of the aggregate net commissions, received during the twelve month period immediately preceding, if any, or to be received during the ensuing twelve months, by the applicant, resulted or will result from insurance on the property and risks:

(C) of the shareholders of an applicant corporation and their respective spouses, and of any affiliated and subsidiary corporations of such applicant corporation, and of any subsidiary and affiliated corporations of a corporation owning any interest in such applicant corporation, and of any firm or association and the members thereof and their respective spouses which either individually or collectively own more than fifty percent of the shares of the applicant corporation, and of any corporation of which such firm or association and its members and their respective spouses, either individually or in the aggregate, own more than fifty percent of the shares, and of any affiliated or subsidiary corporation of such corporation.

(3) The word "applicant" in this subsection, includes a licensee or sub-licensee. (emphasis in original).

N.Y. Ins. Law § 2103(i)(C) would be applicable where, as here, the insurance agency, as the newly formed corporation, is owned, in whole or in part, by the brokerage. Under that section, there would be a violation if more than 10% of the agency’s aggregate net commissions comes from insurance on the property and risks of the brokerage,2 and the brokerage owns more than 50% of the applicant (licensee) corporation.

This arrangement may also implicate the anti-rebating laws of the Insurance Law. N.Y. Ins. Law § 2324(a) (McKinney 2000) prohibits certain activities in connection with the sale of property/casualty insurance.

N.Y. Ins. Law § 2324(a) provides:

(a)   No authorized insurer, no licensed insurance agent, no licensed insurance broker, and no employee or other representative of any such insurer, agent or broker shall make, procure or negotiate any contract of insurance other than as plainly expressed in the policy or other written contract issued or to be issued as evidence thereof, or shall directly or indirectly, by giving or sharing a commission or in any manner whatsoever, pay or allow or offer to pay or allow to the insured or to any employee of the insured, either as an 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 special favor or advantage in the dividends or other benefit to accrue thereon, or shall give or offer to give any valuable consideration or inducement of any kind, directly or indirectly, which is not specified in such policy or contract, other than any article of merchandise not exceeding five dollars in value which shall have conspicuously stamped or printed thereon the advertisement of the insurer, agent or broker, or shall give, sell or purchase, or offer to give, sell or purchase, as an inducement to the making of such insurance or in connection therewith, any stock, bond or other securities or any dividends or profits accrued thereon, nor shall the insured, his agent or representative knowingly receive directly or indirectly, any such rebate or special favor or advantage, provided, however, a licensed insurance agent or a licensed insurance broker may retain the usual commission or underwriting fee on insurance placed on his own property or risks, if the aggregate of such commissions or underwriting fees will not exceed five percent of the total net commissions or underwriting fees received by such licensed insurance agent or insurance broker during the calendar year.

(b)   Within the meaning of subsection (a) hereof, the sharing of a commission with the insured shall be deemed to include any case in which a licensed insurance agent or a licensed insurance broker which is a subsidiary corporation of, or a corporation affiliated with, any corporation insured, received commissions for the negotiation or procurement of any policy or contract of insurance for the insured. (emphasis added).

Pursuant to N.Y. Ins. Law § 2324, the insurance agency may not receive more than 5% of its total commissions or underwriting fees from business that is placed on the risks of the brokerage, where the brokerage is the insured. This is so because, as specified in subsection (b) of Section 2324, "sharing of a commission with the insured shall be deemed to include any case in which a licensed insurance agent … which is a subsidiary corporation of any corporation insured received commissions for the negotiation or procurement of any policy or contract of insurance for the insured." Unlike the 50% ownership requirement in N.Y. Ins. Law § 2103(i)(1)(C), the prohibition in N.Y. Ins. Law § 2324 (McKinney 2000) applies to arrangements where an insurance agency is the insured’s subsidiary, as defined in N.Y. Ins. Law § 107(a)(40) (McKinney 2000).3  The 5% of net commissions or fees in N.Y. Ins. Law § 2324 would be counted toward the 10% aggregate limitation found in N.Y. Ins. Law § 2103(i)(1). Any percentages above the limitations herein would constitute a violation of Section 2324.

Additionally, the brokerage may furnish the agency with its client list and receive compensation for providing to the agency such list. Such compensation may be made contingent upon the successful placement of insurance by the agency and may be a percentage of the insurance commission earned by the agency.

Please be advised that although the brokerage may refer its clients to the insurance agency, N.Y. Insurance Law § 2502(a) (Supp. 2001-2002) prohibits a person, firm or corporation engaged in the business of financing the purchase of real or personal property and lending money on the security thereof from requiring a borrower to purchase insurance from a particular insurer, agent or broker. That section, entitled, "Designation of Particular Insurer, Agent or Broker Property Financing Transactions and Other Unfair Practices" states in relevant part:

(a) … No person, firm, or corporation engaged in the business of financing the purchase of real or personal property, lending money on the security thereof, or servicing a mortgage thereon, and none of its trustees, directors, officers, agents or other employees, shall require, as a condition precedent to financing any such purchase or making any such loan or renewing or extending any such loan or mortgage or performing any other act in connection therewith, that the person, firm or corporation for whom the transaction is undertaken negotiate any policy of insurance or renewal thereof covering such property through a particular insurance company, agent or broker.

Accordingly, the brokerage may not require its clients to purchase insurance from the insurance agency, and condition approval of the mortgage loan on such purchase by the client.

For further information you may contact Senior Attorney D. Monica Marsh at the New York City Office.


1 See N.Y. Ins. Law §2101(c) (McKinney 2000) for the definition of insurance broker.

2 For example, insurance on property where the brokerage is the mortgagee and retains a security interest in the property until the final payment is made.

3 Subsidiary "means an institution controlled, directly or indirectly, by another institution or retirement system." N.Y. Ins. Law § 107(a)(16) (McKinney 2000) defines the term "control" to mean the "possession, direct or indirect, of the power to direct or cause the direction of the management and policies of an institution, whether through the ownership of voting securities, by contract or otherwise."