The Office of General Counsel issued the following opinion on February 1, 2007 representing the position of the New York State Insurance Department.
Re: Use of Commissions as Security for a Promissory Note
May an insurance agency or its owner enter into a transaction that contemplates the use of future commissions as a security on a promissory note?
No provision of the New York Insurance Law, nor any Insurance Department regulation, prohibits the use of future commissions as a security for a promissory note.
Mr. A, the owner of an insurance agency would like to sell his insurance agency to Mr. B. Mr. B would like to pay for a portion of the sale with a promissory note that will be secured by Mr. B's future commissions. The inquirer asks whether the Insurance Law prohibits this type of security.
N.Y. Ins. Law § 2114 (McKinney's 2007) prohibits life, accident and health insurance agents from sharing commissions, and reads in pertinent part as follows:
(a)(1) 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 or of such society or to an insurance broker licensed under subparagraph (A) of paragraph one of subsection (b) of section two thousand one hundred four of this article, and except to a person described in paragraph two or three of subsection (a) of section two thousand one hundred one of this article1.
In other words, N.Y. Ins. Law. § 2114 generally prohibits insurance agents from sharing their commissions with unlicensed persons for success in obtaining a new insurance policy, annuity or contract. However, in the present scenario, the commissions will not be used as compensation for procuring new policies, but rather as security for a promissory note. Neither the N.Y. Ins. Law nor and Insurance Department regulation prohibits the use of commissions in this fashion.
For further information you may contact Principal Attorney Paul Zuckerman at the New York City office.
1 N.Y. Ins. Law § 2115 contains similar provisions for property/casualty insurance agents and § 2116 for insurance brokers.