The Office of General Counsel issued the following opinion on September 12, 2005, representing the position of the New York State Insurance Department.

Re: Broker Payments to Unlicensed Trainees.

Question Presented:

Under the presented facts, may ABC Brokerage, a New York licensed insurance agent and broker, share commissions with its unlicensed sales trainees?

Conclusion:

No. ABC Brokerage may not share commissions with its unlicensed sales trainees. Please see the analysis below.

Facts Presented:

ABC Brokerage is licensed in New York as both an insurance agent and an insurance broker. ABC Brokerage employed unlicensed individuals as "insurance counselors" to, inter alia, handle incoming telephone calls from members of the general public who were "inquiring about insurance products." ABC Brokerage’s "insurance counselors" would ascertain the nature of such calls (e.g., requests for insurance quotes or claim forms) and "provide information where possible and appropriate, and, if the caller wished to purchase insurance, obtain basic information and transfer them to a licensee." Compensation for the counselors was calculated based on a percentage of the gross premiums that the counselors generated on calls, which resulted in a licensed employee making a sale.

Analysis:

N.Y. Ins. Law § 2102(a)(1) (McKinney Supp. 2005) provides that: "[n]o person, firm, association or corporation shall act as an insurance producer or insurance adjuster in this state without having authority to do so by virtue of a license issued and in force pursuant to the provisions of this chapter." N.Y. Ins. Law § 2101(k) (McKinney Supp. 2005) defines an insurance producer as, inter alia, an insurance agent or insurance broker.

N.Y. Ins. Law § 2101(a) and (a)(1) (McKinney Supp. 2005) provide the definition of an insurance agent and an exception to such definition:

(a) In this article, "insurance agent" means any 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 sale of, an insurance, health maintenance organization or annuity contract, other than as a licensed insurance broker, except that such term shall not include:

(1) any regular salaried officer or employee of a licensed insurer, fraternal benefit society or health maintenance organization or of a licensed insurance agent, who does not solicit or accept from the public, outside of an office of such insurer, health maintenance organization or agent, applications or orders for any such contract, if such officer or employee does not receive a commission or other compensation for his services which commission or other compensation is directly dependent upon the amount of business done . . . .

N.Y. Ins. Law § 2101(c) (McKinney Supp. 2005) provides the following definition of an insurance broker:

In this article, "insurance broker" means any person, firm, association or corporation who or which for any compensation, commission or other thing of value acts or aids in any manner in soliciting, negotiating or selling, any insurance or annuity contract or in placing risks or taking out insurance, on behalf of an insured other than himself, herself or itself or on behalf of any licensed insurance broker . . . .

N.Y. Ins. Law § 2114(a)(2)-(3) (McKinney Supp. 2005) prohibits, inter alia, agents from paying commissions to any person, firm, association or corporation that is not licensed in New York as a life or accident and health insurance agent, or insurance broker for any services in obtaining any new life, or accident or health insurance contract. N.Y. Ins. Law § 2114(a) provides the following in pertinent part:

(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, negotiating or selling 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(a)(1) (McKinney Supp. 2005) prohibits, inter alia, agents from paying commissions to any person, firm, association or corporation that is not licensed in New York as a property/casualty insurance agent for acting as an insurance agent:

(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 insurance agent in this state, except to a licensed insurance agent of such insurer or to a person described in paragraph two or four of 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.

N.Y. Ins. Law § 2116 (McKinney Supp. 2005) prohibits, inter alia, agents from paying commissions to any person, firm, association or corporation that is not licensed in New York as an insurance broker for acting as an insurance broker:

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.

Under the facts presented, it is not clear whether ABC Brokerage conducted these transactions as an insurance agent or broker. But while there are different standards of permissible activity for the unlicensed employees of brokers and agents, the "insurance counselors'" activities exceeded the permissible standards for both in this case. In accordance with § 2101(a)(1) above, a licensed insurance agent’s employees (which would include ABC Brokerage's "insurance counselors") may solicit and accept applications and orders for insurance contracts from the public if: (1) the employees do not receive commissions or other forms of compensation for their services that are directly dependent upon the amount of business generated, and (2) such services are conducted within the confines of the agent's office (please note that the Department also expects licensees to closely supervise the provision of such services). But the "insurance counselors" did not meet § 2101(a)(1)'s exception under the presented facts, and were, consequently, acting as insurance agents without the authority to do so by virtue of an insurance agent's license in violation of § 2102(a)(1) because the compensation they received was dependent upon the amount of business they generated from the solicitation and sale of insurance.

Similarly, with respect to the unlicensed employees of a broker, they may not engage in the solicitation or sale of insurance, and may only engage in executive, administrative, managerial or clerical activities. Under the presented facts, the unlicensed "insurance counselors" did not observe such restrictions, and, as such, violated § 2102(a)(1) by acting as insurance brokers without the authority to do so by virtue of an insurance broker's license.

Thus, ABC Brokerage's "incentive payments" to unlicensed "insurance counselors" constitute the sharing of commissions or other compensation with unlicensed individuals in violation of N.Y. Ins. Law §§ 2114(a)(3), 2115(a)(1) and 2116 (or any combination thereof). And such payments do not satisfy the Insurance Law's exception for referrals contained within those sections because the payments were based upon the purchase of insurance.

For further information you may contact Associate Attorney Kristian Earl Lynch at the New York City Office.