The Office of General Counsel issued the following opinion on March 9, 2006, representing the position of the New York State Insurance Department.
RE: Referrals for Trade Associations
1. May a group policyholder be compensated for referring members of the group to an insurance broker for life and accident and health insurance?
2. May a trade association be reimbursed by an insurance broker for administrative expenses related to its group insurance programs?
1. A group policyholder may not be compensated for referring members of the group to a broker as this would violate N.Y. Ins. Law § 4224 (McKinney 2000 & 2006 Supp).
2. A trade association may be reimbursed up to the amount it expended on actual administrative expenses, so long as those services would normally be performed by an insurer, agent or broker.
The inquirer is a broker who has been approached by his client, a trade association. The association is the group policyholder of life, disability, and accidental death and dismemberment insurance policies. It wishes to market the various policies to its group members and wishes to be reimbursed for its marketing campaign. It wants the inquirer, as the broker, to pay it a referral fee for each group member who purchases insurance in the group. If this is unacceptable, it wishes to know how it can be compensated for its marketing.
A non licensed person may not receive a referral fee based on the placement of insurance, as this would be a violation of N.Y. Ins. Law § 2102, which prohibits a person from acting as an insurance agent or broker without a license. N.Y. Ins. Law § 2116 (McKinney's Supp. 2006) allows the payment of a referral fee to a non-licensed person if there is no discussion of the specific terms and conditions of the policy, and the compensation is not based on the purchase of insurance. However N.Y. Ins. Law § 4224(c) (McKinney's Supp. 2006) states:
(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. (emphasis added).
Any referral fee paid to the trade association would constitute an unlawful rebate, as the trade association is the actual insured.
The Department issued an informal opinion that remains valid, which appeared in the Bulletin of the New York State Insurance Department in April 1997, on the subject of the payment of fees by insurance producers to professional associations. The Department opined that an association may be compensated for actual administrative expenses to the extent the fees paid by a broker does not exceed the cost to the association of the program, and as long as those services would normally be performed by the insurer, agent, or broker. Thus, the association may be compensated for its actual expenses that it spent on administrative services related to the insurance programs.
For further information please contact Principal Attorney Paul A. Zuckerman at the New York City Office.