New York State Seal
STATE OF NEW YORK
INSURANCE DEPARTMENT
ONE COMMERCE PLAZA
ALBANY, NEW YORK 12257

George E. Pataki
Governor

Howard Mills
Superintendent

The Office of General Counsel issued the following opinion on January 10, 2006, representing the position of the New York State Insurance Department.

RE: Sharing Commissions – Limited Liability Company

Question Presented:

Must a Limited Liability Company (hereinafter "LLC"), with a licensed insurance agent and unlicensed persons as its members, be licensed as an insurance agent for the LLC to receive commissions from the sale of life insurance and annuities?

Conclusion:

A licensed insurance agent may form an LLC with unlicensed members. However, the LLC may not receive commissions for the sale of insurance and annuities nor may the licensed insurance agent conduct insurance agent business in the name of the LLC unless the LLC first obtains an insurance agent license naming the licensed insurance agent present in these facts as sublicensee. The unlicensed members of the LLC may not share in any insurance commissions but may share in the net profits of the LLC.

Facts:

The inquirer is a licensed life insurance agent. The inquirer stated in his letter of inquiry that he would like to form an LLC with an attorney, a marketing person and the inquirer, as members. The inquirer would be the only member licensed under the Insurance Law. The inquirer would like to know if the LLC must be licensed as an insurance agent for the LLC to receive commissions for the sale of life insurance and annuities.

The inquirer would expect the marketing person to have immediate marketing contacts and to set up appointments for the inquirer, as a licensed insurance producer, to meet with prospective insureds. The marketing person would not discuss the insurance with prospective insureds.

The inquirer and the attorney may become partners with several different marketing persons and, as a result, the inquirer is considering whether to form multiple LLCs; a separate LLC for each relationship between the inquirer, the attorney and a marketing person.

Analysis:

Although the Insurance Law has not been amended to specifically provide for LLCs, the Department views an LLC as a kind of hybrid between a firm and a corporation and as discussed below, recognizes LLCs as entities qualified to be issued the types of licenses authorized under Article 21 of the New York Insurance Law. E.g. Opinion of General Counsel No. 05-03-05 (March 8, 2005). Furthermore, LLCs are subject to the prohibition contained in N.Y. Ins. Law § 2102(a)(1) against acting as an insurance producer without the appropriate insurance license.

N.Y. Ins. Law § 2102(a)(1) (McKinney Supp. 2006) provides as follows:

No 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. 2006) defines an insurance producer, in relevant part, as "[A]n insurance agent, insurance broker, reinsurance intermediary, excess lines broker, or any other person required to be licensed under the laws of this state to sell, solicit or negotiate insurance . . .."

N.Y. Ins. Law § 2101(a) (McKinney Supp. 2006) defines an insurance agent, in relevant part, as follows:

[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 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 . . .. 

Based upon the statutes cited above, an LLC that is not licensed as an insurance agent may not solicit, negotiate or sell an insurance or annuity contract, whether through a member who is a licensed insurance agent or otherwise. Thus, a licensed insurance agent may not conduct insurance agent business in the name of an unlicensed LLC.

N.Y. Ins. Law §§ 2114(a) (McKinney Supp. 2006) prohibits, inter alia, insurers or any agent of an insurer 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. Thus, commissions may not be paid to the LLC unless it is licensed as an insurance agent.

N.Y. Ins. Law § 2114(a) 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, 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.

An LLC seeking to be issued an insurance agent’s license may include a member who is not licensed as an insurance agent provided that the LLC has named a natural person (who meets the same requirements that a person seeking to be licensed as an individual for the same kind of license is required to meet) as its sub-licensee to act individually as its agent. E.g. Opinion of General Counsel No. 05-03-05 (March 8, 2005). We have also opined that a non-member manager of an LLC may also be a sublicensee provided that such individual is otherwise qualified. Opinion of General Counsel No. 02-10-04 (October 10, 2002).

An unlicensed member of the LLC may share in the profits or losses of the LLC, generally calculated by deducting the expenses of the LLC from the commissions received by the LLC. However, an unlicensed member may not be compensated based upon a percentage of the gross commissions earned by the LLC. Such profits or losses may be shared with the members based on ownership interest or other methodology specified in the LLC’s operating agreement provided that such methodology is not based upon sales of insurance.

Although no unlicensed member may act as an insurance agent or broker or otherwise engage in activities that require an insurance license or receive a share of the commissions, N.Y. Ins. Law § 2114(a)(4) (McKinney Supp. 2006), allows unlicensed persons to be compensated for making referrals to a licensed insurance agent or broker 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.

Finally, the Department can not advise the inquirer with regard to whether he should create multiple LLCs so that there would be a separate LLC for each relationship between the inquirer, the attorney and a marketing person. That is a matter that does not concern the Insurance Law.

For further information please contact Assistant Counsel Brenda M. Gibbs at the Albany Office.