The Office of General Counsel issued the following opinion on September 1, 2005 representing the position of the New York State Insurance Department.
Re: Arrangement Between an Insurance Broker and Unlicensed Entities
1) Does the Insurance Law permit a licensed broker and unlicensed entities to become owners of a corporation that is licensed as an insurance broker (hereinafter "insurance brokerage")?
2) Does the Insurance Law allow such an unlicensed entity to receive compensation for referring potential insureds to the insurance brokerage without being licensed as an insurance agent?
1) Yes, a licensed broker and unlicensed entities may become owners of a new corporation that is licensed as an insurance broker provided that the unlicensed entities do not engage in any activities that would require an insurance license and do not receive any share in the commissions. The unlicensed entities may, however, share in the profits of the corporation which must be in the form of dividends declared in the usual course of the business of the corporation.
2) Yes, such an unlicensed entity may refer potential insureds to the insurance brokerage for insurance services without having to become licensed as an insurance agent, provided that it does not discuss specific insurance policy terms and conditions with the client and is not compensated based upon sales.
An insurance broker licensed to sell property/casualty insurance would like to form a subsidiary that would become licensed as an insurance broker ("insurance brokerage") to sell property/casualty insurance. The insurance brokerage would also provide certain non-insurance services to retail boat dealerships (hereinafter "dealers") and their customers, including water safety education programs, United States Coast Guard watercraft documentation and New York State watercraft registration.
Sales of the insurance and the services would be separate and would not be tied together or interdependent in any way. The price of the services would be the same regardless of whether a customer had purchased insurance or not.
Dealers who would refer their customers to the insurance brokerage would be compensated with a set fee for each referral and would not be compensated based upon sales. The dealers would not discuss the terms or conditions of any specific insurance policy offered by the insurance brokerage nor discuss the specific insurance needs of their customers.
It is contemplated that shares in the insurance brokerage would also be owned by selected dealers. Such dealers would receive dividends from the insurance brokerage based upon the profits, if any, of the total business of the company. Payments to the dealers would not be based upon the amount of commissions generated by the insurance brokerage.
N.Y. Ins. Law § 2116 (McKinney Supp. 2005) provides as follows:
No insurer authorized to do business in this state, and no officer, agent or other representative thereof, shall pay any money or give any other thing of value to any person, firm, association or corporation for or because of his or its acting in this state as an insurance broker, unless such person, firm, association or corporation is authorized so to act by virtue of a license issued or renewed pursuant to the provisions of section two thousand one hundred four of this article. For the purposes of this section, "acting as insurance broker" 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.
A licensed insurance broker and unlicensed entities may become owners of a licensed insurance brokerage provided that none of the unlicensed entities act as an insurance agent or broker or otherwise engage in activities that require an insurance license, or receive a share of the commissions. Such unlicensed entities may only be compensated in the form of dividends declared in the usual course of the business of the corporation. E.g., Opinion of General Counsel No. 04-08-11 (August 18, 2004).
As provided for in N.Y. Ins. Law § 2116, an unlicensed entity may be compensated for making referrals to the insurance brokerage provided that the referral does not include a discussion of specific policy terms and conditions and the compensation is not based upon the purchase of insurance by such person. Referrals meeting these conditions may be made by unlicensed entities that are shareholders of the insurance brokerage as well as unlicensed entities that are not. E.g., Opinion of General Counsel No. 02-02-31 (February 26, 2002).
In addition, N.Y. Ins. Law §§ 2104(d)(3) and 2324(a) may be relevant to the proposal herein discussed if the dealers retain security interests in the insured boats or insure other risks of the dealers. However, the inquiry did not contain sufficient information to analyze the application of these statutes to this proposal.
N.Y. Ins. Law § 2104(d)(3) (McKinney Supp. 2005) provides as follows:
The superintendent may refuse to issue a license or renewal license, as the case may be, to 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 term of the existing license, if any, or to be received during the term of the license applied for, by the applicant, resulted or will result from insurance on the property and risks set forth in subparagraphs (A), (B) and (C) of paragraph one of subsection (i) of section two thousand one hundred three of this article.
Thus, N.Y. Ins. Law § 2104(d)(3) (McKinney Supp. 2005) permits the superintendent to refuse to issue, to revoke or to suspend a license if he finds that a licensee or sub-licensee has received or will receive any benefit or advantage in violation of § 2324, or if he finds that more than ten percent of the aggregate net commissions received during the twelve months immediately preceding (if any) or to be received during the ensuing twelve months, by the licensee or sublicensee, result from insurance on the property and risks of all of the entities listed in N.Y. Ins. Law § 2103(i)(1)(A), (B) and (C), including any subsidiary or affiliated corporations of a corporation owning any interest in such applicant corporation.
Subparagraph (C) of paragraph one of subsection (i) of § 2103 of the Insurance Law is the subparagraph that is relevant to your inquiry, and provides, as follows:
(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.
N.Y. Ins. Law § 2324 (McKinney Supp. 2005) provides, in relevant part, as follows:
(a) . . . 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.
Unlike the 50% ownership requirement in N.Y. Ins. Law § 2103(i)(1)(C) (McKinney Supp. 2005), the prohibition contained in N.Y. Ins. Law § 2324 (McKinney Supp. 2005) applies to arrangements where an insurance broker is the insureds subsidiary, as defined in N.Y. Ins. Law § 107(a)(40) (McKinney Supp. 2005), or is affiliated with any corporation insured. 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 § 2104(d)(3). Opinion of General Counsel No. 02-02-35 (February 26, 2002).
Finally, please be advised that although the dealers may refer their clients to the insurance brokerage, N.Y. Ins. Law § 2502(a) (McKinney Supp. 2005) 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. Accordingly, a Dealer engaged in financing purchases of its products may not require customers to purchase insurance from the insurance brokerage, or condition approval of loans on such purchases.
For further information you may contact Assistant Counsel Brenda M. Gibbs at the Albany Office.