New York State Seal
STATE OF NEW YORK
INSURANCE DEPARTMENT
25 BEAVER STREET
NEW YORK, NEW YORK 10004

George E. Pataki
Governor

Howard Mills
Superintendent

The Office of General Counsel issued the following opinion on September 19, 2006 representing the position of the New York State Insurance Department.

Re: Rebates and Inducements

Questions Presented

1. May a life insurance agent agree with a prospective insured to invest in a business in which that prospective insured is invested as a condition of the sale of a life insurance policy?

2. May two different life insurance agents share a commission generated by the sale of a life insurance policy?

3. As a requirement of purchasing a life insurance policy, may the prospective insured require the life insurance agent who executed the sale to split the sales commission with another agent?

Conclusions

1. By agreeing with the prospective insured to invest in a business in which the prospective insured is invested as a condition of the sale of the life insurance policy, both the prospective insured and the insurance agent are violating N.Y. Ins. Law § 4224(c) (McKinney Supp. 2006).

2. Pursuant to N.Y. Ins. Law § 2114(a)(1) (McKinney’s 2006), life insurance agents may share a commission generated by the sale of one life insurance policy provided that each one is an appointed agent of the life insurance company that issued the insurance policy.

3. No, requiring that one life insurance agent be compensated from the commission earned by another life insurance agent as a condition of purchasing a life insurance policy is an inducement that is prohibited pursuant to N.Y. Ins. Law § 4224(c) (McKinney Supp. 2006).

Facts

The inquirer is a retired insurance agent who was solicited by two different life insurance agents. After the first life insurance agent contacted the inquirer, for many weeks he failed to follow-up in any way. Later, a second life insurance agent, who apparently has no association with the first life insurance agent, contacted the inquirer. The second life insurance agent followed up by shopping the market for products and presenting possible products to the inquirer; however, so far, the inquirer has not purchased anything.

After the second life insurance agent contacted the inquirer, the first life insurance agent followed up by contacting the inquirer again. The inquirer explained to the first life insurance agent that the inquirer was currently working with the second agent to identify an appropriate product. The inquirer advised both agents that the inquirer would only buy a life insurance contract if the life insurance agent who sold it to the inquirer agreed to split his commission with the other agent. Initially both life insurance agents agreed, but subsequent to this initial verbal agreement, the second life insurance agent indicated that he wanted the entire commission for himself because he said that finding an appropriate life insurance policy to suit the inquirer’s situation, will require him to "pull some strings", though the inquirer did not explain what that phrase meant.

Furthermore, as part of the sale, the inquirer required that the life insurance agents must invest in a company in which the inquirer is investing. The inquirer wants to know if the requirement of this investment as part of the sale of the life insurance policy would be considered a rebate.

The second life insurance agent said he will invest as directed. The first insurance agent said he first needs to investigate the company. The investment transaction would not be part of the life insurance policy sales contract.

Analysis

N.Y. Ins. Law § 4224(c) (McKinney Supp. 2006) states:

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.]

An insurance agent or broker subject to the provisions of N.Y. Ins. Law § 4224(c) (McKinney Supp. 2003), may not provide " . . . an inducement to any person . . . or any valuable consideration or inducement whatever not specified in such policy or contract; . . . " in connection with the sale of life insurance. Therefore, an insurance agent selling life insurance may not agree to invest in a particular company as a condition of the sale of the life insurance policy because this investment constitutes valuable consideration and is an unlawful inducement in violation of N.Y. Ins. Law § 4224(c) (McKinney Supp. 2006). Furthermore, if an insured’s purchase of a life insurance policy is contingent upon the insured’s demand that two life insurance agents agree to split the commission from the sale of this life insurance policy, the agent’s agreement would also be considered to be an inducement that is prohibited pursuant to N.Y. Ins. Law § 4224(c) (McKinney Supp. 2006).

N.Y. Ins. Law § 2114(a)(1) (McKinney’s 2006) states:

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 . . . .

Pursuant to N.Y. Ins. Law § 2114(a)(1) (McKinney’s 2006), two life insurance agents may agree to split the commission on a life insurance policy only if each one is an agent of the life insurance company that issued the insurance policy. However, as discussed above, pursuant to N.Y. Ins. Law § 4224(c) (McKinney Supp. 2006), the insured may not condition his or her purchase of insurance on such an agreement to split the commission.

The inquirer did not clarify what the inquirer thought the agent meant when he said that he may have to "pull a few strings" to obtain a policy suitable to the inquirer’s situation. Pursuant to N.Y. Ins. Law § 2110(a)(4)(A) and (C) (McKinney Supp. 2006), an insurance agent may be subject to revocation or suspension of his or her insurance license if the licensee has ". . . used fraudulent, coercive or dishonest practices;" or " . . . demonstrated untrustworthiness."

For further information one may contact Senior Attorney Susan A. Dess at the New York City Office.