The Office of General Counsel issued the following informal opinion on November 21, 2006, representing the position of the New York State Insurance Department.
Re: Broker Payments to Marketing Company for Referrals
1. May an un-licensed marketing company, who refers its commercial contacts to an insurance broker, be compensated by the broker for referral through a flat fee contingent on insurance sales?
2. What is the maximum amount of compensation allowed for referral to a licensed agent or broker?
1. No. The New York Insurance Law allows compensation to an unlicensed person that has made a referral to a licensed insurance agent or broker only when there is no discussion of specific insurance terms and conditions, and the compensation to the unlicensed person for the referral is not based upon the purchase of insurance.
2. While the Insurance Law does not set a maximum limit on compensation for permissible referrals, such compensation should be reasonable.
The inquirer would like to enter into an agreement with a marketing company, where he would pay a certain amount per referral to that company, as well as an additional fee that would be contingent upon sales. The inquirer states that the marketing company will solicit prospective clients through their lists and contacts.
An insurance broker is defined in N.Y. Ins. Law § 2101(c) (McKinney 2006) 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).
N.Y. Ins. Law § 2102(a)(1) states:
No person, firm, association or corporation shall act as an insurance producer or insurance1 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.
However, N.Y. Ins. Law § 2116 (McKinney 2006) provides, in pertinent 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.2
Thus, the prohibition against a non-licensee acting as an insurance agent or broker allows a limited exception for referrals to non-licensees under certain circumstances. Pursuant to N.Y. Ins. Law § 2116, an insurance broker may compensate a non-licensee for referrals provided that the non-licensee, in making the referral, does not discuss any specific insurance policy terms and conditions, and the compensation for referral is not based upon the purchase of insurance. Here, the broker plans to compensate the nonlicensee for referrals that are based upon the purchase of insurance, which is prohibited. Please note that the above exception in § 2116 will expire on September 10, 2007 unless the legislature extends it.
The inquirer also requested information concerning the maximum limit of compensation that may be paid to a non-licensee for referrals based on sales. As mentioned above, an insurance broker may not compensate a non-licensee based on sales. In terms of compensation for permissible referrals, the Insurance Law does not mandate a maximum or minimum fee. However, such fee should be reasonable.
For further information you may contact Associate Attorney D. Monica Marsh at the New York City Office.
1 N.Y. Ins. Law § 2101(k) defines an insurance producer 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.
2 See N.Y. Ins. Law §§ 2114 and 2115 (also expire 9/10/2007), which contain similar provisions with respect to insurance agents.