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 September 15, 2006, representing the position of the New York State Insurance Department.

RE: Referrals

Question Presented:

1) May a nonlicensee, who recommends a licensed insurance broker to prospective insureds by either placing phone calls to such prospective insureds or providing the broker’s name to prospective insureds who contact nonlicensee, be compensated by the insurance broker based upon insurance sales generated from such activities?

2) May a nonlicensee who maintains a hyperlink on nonlicensee’s website to the website of a licensed insurance broker be compensated by the insurance broker based upon insurance sales generated from such activities?

3) May a nonlicensee who distributes the broker’s advertising material through the mail be compensated by the insurance broker based upon insurance sales generated from such activities?

4) May an excess line broker compensate a nonlicensee based upon sales of insurance issued by a particular unauthorized insurer in the excess line market as a result of the nonlicensee engaging in any of the above activities?

Conclusion:

1) The nonlicensee may be compensated for recommending a licensed insurance broker to prospective insureds by either placing phone calls to such prospective insureds or providing broker’s name to prospective insureds who contact non-license provided the referrals do not include a discussion of specific insurance policy terms and conditions and the compensation for the referrals is not based on whether a sale is made.

2) The nonlicensee may be compensated in any manner for maintaining a hyperlink on nonlicensee’s website that passively advertises insurance broker provided such link does not contain or is not framed by, and the nonlicensee does not otherwise make, any recommendations, endorsements or promotions of the insurance or the broker.

3) If the nonlicensee merely passively distributes the broker’s advertising material through a mailing and makes no recommendation or any other statement about the broker or the insurance, nonlicensee may be compensated in any manner.

4) Pursuant to N.Y. Ins. Law §§ 2117 and 2122, the nonlicensee would be prohibited from engaging in the activities listed above to call attention to the unauthorized insurer and the insurance it provides. N.Y. Ins. Law § 2117 (McKinney 2006) specifically prohibits any person, firm, association or corporation in this State from aiding the sale of insurance by an unauthorized insurer. N.Y. Ins. Law § 2122 (McKinney 2006) prohibits any insurance agent, insurance broker or other person from calling attention to an unauthorized insurer by advertisements or public announcements in this state whether via the Internet or other means. Thus, the insurance broker may not compensate the nonlicensee in any manner for such activities.

Facts:

Broker is a licensed property/casualty broker and a licensed excess line broker. Nonlicensee may be one of the following: financial planner, real estate agent, real estate attorney, estate planning attorney, certified public accountant (CPA) and/or any other type of advisor.

Nonlicensee would place phone calls to prospective insureds to inform them of Broker’s services; inform prospective insureds who contact Nonlicensee that a frequent review of their insurance needs is critical and that Broker is "their partner of choice" for obtaining coverage; place a hyper-link to Broker’s website on Nonlicensee’s website; and include Broker’s marketing materials in Nonlicensee’s mailings to prospective insureds. Hereinafter, such actions will be referred to, where relevant, in the collective as "the activities."

Broker will set up an internal system under which Broker will ask insureds how the insureds heard about the Broker. Broker will then compensate Nonlicensee based on a percentage of premium on actual sales generated.

Broker will also negotiate discounted rates with an unauthorized insurer for insurance to be offered by the broker through the excess line market. It is assumed for purposes of this analysis that such insurance includes only those kinds of insurance specified in N.Y. Ins. Law § 2105(a) (McKinnney 2006). Broker will compensate Nonlicensee for bringing the insurance program to the attention of prospective insureds by engaging in the activities stated above in these facts. In the event such compensation is not permissible under the Insurance Law, the inquirer wanted to know if the Nonlicensee can engage in such actions without receiving compensation for but instead be compensated based upon sales of other insurance generated as a result of Nonlicensee’s actions.

Analysis:

In the inquiry letter, the inquirer characterized the activities described above as advertising and argued that as a result, Broker should be permitted to pay Nonlicensee based upon percentage of premium on actual sales generated.

N.Y. Ins. Law § 2102(a)(1) (McKinney 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 2006) as "an insurance agent, insurance broker, reinsurance intermediary, excess line 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) (McKinney 2006), 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 placing phone calls to prospective insureds to inform them of Broker’s services or informing prospective insureds who contact Nonlicensee that they should review their insurance needs and that Broker is "their partner of choice" for obtaining coverage, 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.

N.Y. Ins. Law § 2116 (McKinney 2006) 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 2006) and 2115 (McKinney 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, there is no discussion of specific insurance policy terms and conditions, and the compensation to the nonlicensee for the referral is not based upon the purchase of insurance by the referred person. Here, the broker plans to compensate the nonlicensees for referrals based on a percentage of premiums generated by the referrals and thus compensation is clearly 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. In such instance, the Superintendent may refuse to renew; revoke; or suspend the insurance broker's license. N.Y. Ins. Law § 2110 (McKinney 2006).

The New York Insurance Law applies to the sale of all insurance in New York State, whether done in person or on the Internet. See Opinion of General Counsel No. 04-05-21 (May 24, 2004). Department Circular Letter No. 5 (2001) provides guidance on the application of the Insurance Law to passive advertisements, referrals and solicitations of insurance on the Internet. A passive advertisement, including hyperlinks and banners, on a website does not require an insurance agent or insurance broker license. A passive advertisement on a website is one on which there is no solicitation, negotiation or sale of insurance and which does not contain and is not framed by recommendations, endorsements or promotions of the insurance or the Broker. Examples of the type of hyperlink and banner that the Department would consider to be an advertisement is one that just contains the name of the insurance company or broker, or states "Insurance" or "Interested in Insurance? Opinion of General Counsel No. 03-02-15 (February 13, 2003). See also Department Circular Letter No. 5 (2001), which is available on our website at www.ins.state.ny.us, for more information. As stated in the Circular Letter, if a website passively advertises insurance, ". . . a nonlicensee hosting such advertisements on its website may receive compensation calculated in any manner, including flat fees for such advertisements or fees that are based upon the amount of insurance business produced as a result of such advertisements."

However, where the wording of a hyperlink or banner on a website or the wording that frames it, or the nonlicensee otherwise, recommends, endorses or promotes an insurer, or insurance agent or broker, the hyperlink shall constitute solicitation unless the hyperlink meets the requirements of a referral to a licensed insurance agent or broker. To constitute a referral, the hyperlink must not include a discussion of specific insurance policy terms and conditions and the compensation for the referrals must not be based upon whether a sale is made.

Nonlicensee may, without recommending or otherwise making any statements about Broker or the insurance, passively distribute Broker’s advertising material through a mailing since such acts would not constitute solicitation. See Opinion of General Counsel No. 95-52 (NILS August 1, 1995). Such advertising materials may include, for example, Broker’s brochure or a letter from Broker. Any forms that may be included within such a mailing must be returnable to Broker and not Nonlicensee. Opinion of General Counsel No. 95-24 (NILS May 1, 1995). In addition, Broker may purchase mailing lists from Nonlicensee when such purchase is made for the purpose of insurance solicitation by Broker. See Opinion of General Counsel No. 00-09-02 (September 5, 2000). Non-license may receive compensation calculated in any manner for such services to Broker.

With respect to the inquirer’s question about a nonlicensee that recommends the broker to prospective insureds who contact nonlicensee, the Department answered this question in a previous opinion in response to a question about whether a nonlicensee could be compensated based upon on a percentage of gross premiums generated if the nonlicensee refers one of its clients to the broker. See Opinion of General Counsel No. 06-02-21 (February 8, 2006). In that opinion, the Department stated that such acts constitute referrals that are permissible only if the referrals do not include a discussion of specific insurance policy terms and conditions and the compensation is not based upon whether a sale is made. See N.Y. Ins. Law §§ 2114, 2115 and 2116 (McKinney 2006). The same applies to nonlicensees who place phone calls to prospective insureds to inform them of a broker’s services. See Opinion of General Counsel No. 04-04-20 (April 22, 2004). These activities are not advertisements. Therefore, nonlicensee may not be compensated based upon a percentage premiums generated.

Next, the inquirer asked whether a nonlicensee may be compensated based upon sales generated for an insurance program with discounted rates,1 offered by an unauthorized insurer and available exclusively through the broker, in the excess line market as a result of the nonlicensee engaging in the aforementioned activities. By "discounted" rates, the Department assumed that the inquirer meant that the rates for policies placed through the broker would be lower than the insurer’s usual rates. Since the insurer is unauthorized to do an insurance business in this State, the Department called N.Y. Ins. Law §§ 2117 (McKinney 2006) and 2122 (McKinney 2006). See Opinion of General Counsel No. 05-09-02 (September 1, 2005) to the inquirer’s attention.

N.Y. Ins. Law § 2117 (McKinney Supp. 2005) specifically prohibits any person, firm, association or corporation in this State from aiding the sale of insurance by an unauthorized insurer. N.Y. Ins. Law § 2122 (McKinney 2000) prohibits any insurance agent, insurance broker or other person from calling attention to an unauthorized insurer by advertisements or public announcements in this state whether using the Internet2 or other means. Under the inquirer’s proposal, the nonlicensee would not be merely making a referral to a licensed insurance agent or broker, but would be calling attention to the unauthorized insurer by bringing the discounted program to the attention of the prospective insured. Thus, none of the activities that are specified in the facts above may be conducted by the nonlicensee with respect to the unauthorized insurer, whether the nonlicensee is compensated or not.

Furthermore, an excess line broker is merely permitted to procure policies in the excess line market, but is not permitted to solicit on behalf of an unauthorized insurer. N.Y. Ins. Law § 2117 specifically exempts from the prohibitions contained in the section, any person acting within the scope of authority of N.Y. Ins. Law § 2105. However, since N.Y. Ins. Law § 2105 (McKinney 2006) only authorizes a licensed excess line broker to procure insurance, the prohibition in N.Y. Ins. Law § 2117 against soliciting insurance on behalf of an unauthorized insurer is applicable to an excess line broker.

Finally, the limitation that a nonlicensee may not be compensated for referrals based upon the sale of insurance is applicable to any sales of insurance that results from the referral by a nonlicensee. Moreover, since a referral may not include a discussion of policy terms and conditions, a nonlicensee may not recommend a particular policy to potential insureds. Thus, the inquirer’s proposal for nonlicensees to refer potential insureds to the broker for one kind or policy of insurance and compensating the nonlicensee based upon sales of other kinds or policies of insurance by broker is not permitted under the Insurance Law.

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


1 It must be noted that if the discounted rates were being offered in the authorized market, the insurer would be in violation of Article 23 for having deviated from its filed rates. Rate filing is not required for an unauthorized insurer operating in the excess line market. However, the excess line broker could be in violation of N.Y. Ins. Law § 2324 (McKinney 2006) with respect to the “discounted rates” negotiated by and available only through the broker.

2 A nonlicensee may maintain a passive website to advertise an unauthorized insurer and its insurance provided the website includes a conspicuous disclaimer that the insurance is not available in New York State and provided the insurance is not sold in New York State. A website is passive if it does not include mention of the policy terms and conditions or any recommendations, endorsements or promotions; or solicitation negotiation or selling of the insurance of the unauthorized insurer. However, since under these facts, it is proposed that the insurance be sold in New York State through the excess line market, the option of advertising with a passive website is not applicable.