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 opinion on August 6, 2003 representing the position of the New York State Insurance Department.

RE: Sharing a Percentage of the Net Income of a Company with Non-licensees for Referrals.

Question Presented:

May an insurance agent, who is a partner in a CPA firm, form a new company that will provide financial planning services, including the sale of life and health insurance, and compensate the unlicensed employees of the CPA firm for referrals by providing them with a percentage of the net income of this new company, that includes commissions earned from the placement of insurance?

Conclusion:

No. The insurance agent may not compensate the unlicensed employees of the CPA firm for referrals by providing them with a percentage of the net income of the new company. However, the insurance agent may compensate the unlicensed employees of the CPA firm if there is no discussion of specific policy terms and conditions and the compensation is not based on the purchase of insurance.

Facts:

Mrs. A is employed by a CPA firm and is not licensed as an insurance agent in New York. One of the partners of the firm is independently licensed as an insurance agent in New York and has started a new company that will provide financial planning services. These financial planning services will include estate planning, college savings, retirement planning, life, health and disability insurance. Mrs. A does not know whether the new company will be licensed as an insurance agent in New York. Therefore, for purposes of this opinion, we will assume that the new company will be so licensed.1

The agent would like Mrs. A and another employee of the CPA firm to help him in establishing a client base for the new company. Specifically, if an existing client of the CPA firm mentions the need for financial planning, insurance or any of the other services that the company offers, she will tell the client that the agent is now in a position to help them with all of their needs. Mrs. A will not discuss with the client whether they should buy insurance or what kind of insurance they should buy. She will also perform other tasks, such as handling the bookkeeping of the new company and maintaining its client database. She will be working from the office of the CPA firm, since there will be no separate office for the new company. We will assume, for purposes of this opinion, that the other partners of the CPA firm are aware of this arrangement.

In exchange for her services, the agent will pay her a percentage of the net income of the new company on a quarterly basis. The net income of the new company will consist of fees paid by brokerage houses for client referrals for opening new accounts, fees paid by clients for financial planning, and commissions from the placement of insurance.

Mrs. A would like to know whether this arrangement is permissible under the New York Insurance Law.

Analysis:

N.Y. Ins. Law § 2114 (McKinney Supp. 2003) applies to life, accident and health insurance agents and brokers and provides, in relevant part, as follows:

(a)(1) No insurer or fraternal benefit society doing business in this state shall pay any commission or other compensation to any person, firm or corporation, for any services in obtaining in this state any new contract of life insurance or any new annuity contract, except to a licensed life insurance agent of such insurer or of such society or to an insurance broker licensed under subparagraph (A) of paragraph one of subsection (b) of section two thousand one hundred four of this article, and except to a person described in paragraph two or three of subsection (a) of section two thousand one hundred one of this article.

2) No agent or other representative of any such life insurer or fraternal benefit society shall pay any commission or other compensation to any person for any services of the kind specified in paragraph one hereof, except to a licensed life insurance agent of such insurer or of such society as the case may be.

(3) No insurer, fraternal benefit society or health maintenance organization doing business in this state and no agent or other representative thereof shall pay any commission or other compensation to any person, firm, association or corporation for services in soliciting or procuring in this state any new contract of accident or health insurance or any new health maintenance organization contract, except to a licensed accident and health insurance agent of such insurer, such society or health maintenance organization, or to a licensed insurance broker of this state, and except to a person described in paragraph two or three of subsection (a) of section two thousand one hundred one of this article.

(4) Services of the kind specified in this subsection 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.

N.Y. Ins. Law § 2115 (McKinney Supp. 2003), in regard to property/casualty insurance agents and N.Y. Ins. Law § 2116 (McKinney Supp. 2003), in regard to insurance brokers, contain similar provisions. 2

Pursuant to the above provisions, insurers or agents are expressly prohibited from paying or sharing any commissions or other compensation to or with a non-licensee for providing certain services in regard to life, accident and health insurance. However, N.Y. Ins. Law § 2114 (McKinney Supp. 2003) specifically excludes from the services specified therein referrals that do not include a discussion of specific insurance policy terms and conditions and where the compensation for referral is not based on whether a sale is made. Therefore, referrals from non-licensees and the compensation for such referrals are permissible if they fall within the parameters of Section 2114(a)(4).

Accordingly, the insurance agent may compensate the unlicensed employees of the CPA firm if there is no discussion of the specific policy terms and conditions and the compensation for referral is not dependent upon the sale of the policy. However, the insurance agent may not compensate these employees by providing them with a percentage of the net income of the new company. Since the net income of the new company will include the commissions received from the placement of insurance, such method of compensation would not fall within the parameters of Section 2114(a)(4) and would, therefore, be impermissible.

This opinion is limited to an analysis of the New York Insurance Law. We offer no opinion on any other New York laws.

For further information you may contact Senior Attorney Pascale Joasil at the New York City Office.


1 Please note that the insurance agent may only do business in his individual name and not under the name of the new company, unless such company is licensed as an insurance agent in New York.

2 N.Y. Ins. Law §§ 2114, 2115 and 2116 (McKinney Supp. 2003) have been extended by the Legislature pursuant to Ch. 241, which was signed into law on July 29, 2003. As such, they will now expire on September 10, 2007.