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 February 8, 2006 representing the position of the New York State Insurance Department.

RE: Referrals

Question Presented:

May an insurance broker compensate a non-licensee for referrals based on a percentage of gross premiums generated by the referrals of the non-licensee?

Conclusion:

No. Referrals from non-licensees, and compensation for such referrals, are permissible only if the referrals do not include a discussion of specific insurance policy terms and conditions and the compensation for referrals is not based on whether a sale is made. Compensation for referrals based on premiums is compensation based upon whether a sale is made.

Facts:

A licensed insurance broker would like to compensate nonlicensees for referrals based upon a percentage of the premium generated from such referrals. Such nonlicensees would include financial planners, real estate agents, real estate attorneys, estate planning attorneys, CPAs and/or any other type of advisor. In some cases, the nonlicensee would refer the client to the insurance broker after the client mentions his or her need for insurance. In other cases, the nonlicensee may have a legal duty to mention the need for insurance to the client.

Analysis:

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

(a)(1) 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.

An insurance producer is defined in N.Y. Ins. Law § 2101(k) (McKinney Supp. 2006) as "an 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."

An insurance broker is defined in N.Y. Ins. Law § 2101(c), in relevant part, as follows:

(c) 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 . . . (emphasis added).

By making a referral to an insurance broker for compensation, regardless of whether the nonlicensee or the potential insured raised the topic of insurance, a nonlicensee would be acting as an insurance broker without an insurance producer license, unless the referral is made pursuant to N.Y. Ins. Law § 2116 (McKinney Supp. 2006), which provides, in relevant part, 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 her 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 purposes of this section, "acting as an insurance broker" shall not include the referral of a person to a licensed insurance agent or broker that does not include a specific discussion of specific insurance policy terms and conditions and where the compensation for referral is not based upon the purchase of insurance by such persons.

N.Y. Ins. Law §§ 2114 (McKinney Supp. 2006) and 2115 (McKinney Supp. 2006) contain provisions with respect to life, accident and health insurance agents; and property/casualty insurance agents, respectively.

Thus, N.Y. Ins. Law §§ 2114, 2115 or 2116, prohibit an insurer or any agent of an insurer from compensating an unlicensed person for acting as an insurance agent or insurance broker unless the compensation is for a referral to a licensed insurance agent or broker; and if there is no discussion of specific insurance policy terms and conditions, and the compensation to the non-licensee for the referral is not based upon the purchase of insurance by the referred person. Here, the broker plans to compensate the non-licensees for referrals based on a percentage of premiums generated by the referrals which clearly are referrals based upon the purchase of insurance.

Therefore, because the nonlicensees would not be making referrals pursuant to N.Y. Ins. Law §§ 2114, 2115 or 2116 and would instead be would be acting as brokers without a license, the Superintendent may determine that the broker is acting in an untrustworthy manner by paying such nonlicensees and facilitating the unlicensed activities. As a result, the Superintendent may refuse to renew, revoke, or suspend the insurance broker's license.

Finally, the inquirer requests a formal opinion of the Office of General Counsel of the New York State Insurance Department, but the Office of General Counsel only issues informal opinions.

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