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 October 27, 2003, representing the position of the New York State Insurance Department.

 RE: Sharing of Commission

Question Presented:

May a former broker of record, who is licensed as an insurance broker in New York and is now employed by the insured, accept a share of the commission for the placement of the insured’s accident and health insurance from the current broker of record?

Conclusion:

A former broker of record, who is licensed as an insurance broker in New York and is now employed by the insured, may accept a share of the commission for the placement of the insured’s accident and health insurance from the current broker of record provided that neither broker engages in illegal, dishonest, or untrustworthy conduct.

Facts:

The following facts were presented: in the 1980’s, a licensed insurance broker began placing health insurance for a company that designs and manufactures theatrical and Halloween costumes. The company continued to place this coverage through such broker until recently, when another licensed insurance broker was named the broker of record. In the meantime, prior to the changing of brokers, the original insurance broker of record accepted employment with this company as their general manager of purchasing, where he is in charge of purchasing materials and overseeing the company’s catalogue and Canadian operations. The employment does not involve his placing the company’s insurance business or deciding upon renewals, although he does review the policies to ensure proper coverage is in place for his employer. When the new broker was named, he made an agreement with the former broker to share the commission on the accident and health insurance placed with this company going forward, presumably as a matter of courtesy. It was not stated whether the employer is aware of this commission sharing arrangement.

Analysis:

In general, there is no Insurance Law statute or regulation that precludes the sharing of commissions between brokers excepting N.Y. Ins. Law § 2128 (McKinney 2000) and N.Y. Comp. Codes R. & Regs. tit. 11, §§ 29.1 – 29.6 (Reg. 87), which prohibit, under certain circumstances, the acceptance of commissions arising from insurance coverages or services placed on behalf of New York governmental entities. Thus, licensed insurance brokers may share commissions, provided there is no illegal, dishonest or untrustworthy conduct in the making of such agreement.

N.Y. Ins. Law § 4224 (McKinney Supp. 2003) states in relevant part:

(b) No insurer doing in this state the business of accident and health insurance, as specified in paragraph three of subsection (a) of section one thousand one hundred thirteen of this chapter, and no officer or agent of such insurer and no licensed insurance broker, and no employee or other representative of such insurer, agent or broker shall:

(1) make or permit any unfair discrimination between individuals of the same class in the amount of premiums, policy fees, or rates charged for any policy of accident and health insurance, or in the benefits payable thereon, or in any of the terms or conditions of such policies, or in any other manner whatsoever;

(2) refuse to insure, refuse to continue to insure or limit the amount, extent or kind of coverage available to an individual, or charge a different rate for the same coverage solely because of the physical or mental disability, impairment or disease, or prior history thereof, of the insured or potential insured, except where the refusal, limitation or rate differential is permitted by law or regulation and is based on sound actuarial principles or is related to actual or reasonably anticipated experience, in which case the insurer, subject to the limitations contained in section twenty-six hundred eleven of this chapter shall notify the insured or potential insured of the right to receive, or to designate a medical professional to receive, the specific reason or reasons for such refusal, limitation or rate differential;

(3) knowingly permit or offer to make or make, any policy of accident and health insurance, other than as plainly expressed in the policy.

(c) No such life insurance company and no such savings and insurance bank and no officer, agent, solicitor or representative thereof and no such insurer doing in this state the business of accident and health insurance and no officer, agent, solicitor or representative thereof, and no licensed insurance broker and no employee or other representative of any such insurer, agent or broker, shall pay, allow or give, or offer to pay, allow or give, directly or indirectly, as an inducement to any person to insure, or shall give, sell or purchase, or offer to give, sell or purchase, as such inducement, or interdependent with any policy of life insurance or annuity contract or policy of accident and health insurance, any stocks, bonds, or other securities, or any dividends or profits accruing or to accrue thereon, or any valuable consideration or inducement whatever not specified in such policy or contract; nor shall any person in this state knowingly receive as such inducement, any rebate of premium or policy fee or any special favor or advantage in the dividends or other benefits to accrue on any such policy or contract, or knowingly receive any paid employment or contract for services of any kind, or any valuable consideration or inducement whatever which is not specified in such policy or contract.

Based on the facts provided, the former broker accepts the share of the commission from the current broker of record, but the former broker does not share the commission with his employer. Hence, the employer will not be considered to have received a rebate of premium under N.Y. Ins. Law § 4224 provided that the employer has not offset the salary of its employee (the former broker of record) in any way based on the commission the employee receives from the current broker of record.

It was stated that the former broker of record does not make the determination for his employer as to whether the policy should be renewed. It was also stated that the former broker of record reviews the accident and health insurance policies "to ensure that they [are] satisfactory[.]" Although the former broker of record is not responsible for renewing coverage, his recommendation that coverage is satisfactory may influence his employer’s decision to renew. Where the employer is not aware that its employee is receiving commission on a policy that he has reviewed and recommended, the employer may not be able to make an informed decision as to whether to renew coverage because the employer will not know that the employee may have an interest in suggesting renewal. It is recommended that the former broker disclose to his employer the details of the commission sharing arrangement. Lack of disclosure in this instance could be considered a factor in determining whether the broker may be acting in an untrustworthy manner within the meaning of N.Y. Ins. Law § 2110(a)(4) (McKinney 2000).

For further information you may contact Associate Attorney Sally Geisel at the New York City Office.