New York State Seal
STATE OF NEW YORK
INSURANCE DEPARTMENT

25 BEAVER STREET
NEW YORK, NEW YORK 10004

Eliot Spitzer
Governor
Eric R. Dinallo
Acting Superintendent

The Office of General Counsel issued the following opinion on April 10, 2007, representing the position of the New York State Insurance Department.

RE: Commission and Expenses

Questions Presented:

1) A general agent receives from an insurer 99% of qualifying first year premium on an individual life insurance policy that was produced by another licensed life insurance agent or broker, in accordance with New York Insurance Law § 4228(d)(5)(C) (McKinney 2007). How much of that payment may the general agent share with the producing agent or broker?

2) A general agent is the producer of an individual life insurance policy. What percentage of the qualifying first year premium may the insurer pay the general agent?

3) What is the maximum commission or fee that may be paid to an insurance agent or broker for the sale of health insurance?

4) A corporation is properly licensed as an insurance agent to solicit, negotiate and sell life insurance and health insurance in New York. The agency’s president is also licensed, independently from the agency, to produce life insurance and health insurance business.

a) May the president act in his individual capacity as an agent to produce life insurance business and place the coverage through his agency, which would then act as general agent, thereby allowing the agency to receive 99% of qualifying first year premium?

b) May the president act in his individual capacity as a broker to produce health insurance business and place coverage through his agency that would be acting as the insurer’s general agent, thereby obtaining additional compensation from the insurer, which has contractually agreed to pay its general agents a fee for service beyond the commission when an outside broker produces the business?

Conclusions:

1) Insurance Law § 4228(d)(5) does not limit the amount that a general agent may share with a producing agent or broker in this situation.

2) The insurer may not pay to the general agent that has itself produced the business more than 91% of the qualifying first year premium on an individual life insurance policy, pursuant to Insurance Law § 4228(d)(5)(A).

3) The maximum commission or fee that a health maintenance organization (HMO) may pay to an insurance broker is 4% of the premium, pursuant to New York Compilation of Codes Rules & Regulations title 11, § 52.42(e) (Regulation 62). Although there is no stated maximum commission or fee that may be paid for producing business for other Insurance Law Article 43 corporations (non-profit medical and indemnity and health and hospital service corporations), payments are restricted by the Insurance Law § 4309 overall expense limitation and the Insurance Law § 4308 filed rates, which must include the commissions payable to agents and brokers pursuant to Insurance Law § 4312. Insurance Law Article 42 group accident and health insurance corporations are restricted in the amount of commissions and fees they may pay by the commission and fee rates they file with the Department pursuant to Insurance Law § 4235(h). Additionally, an insurer of individual and small group policies may only charge the community rate approved by the Superintendent and is bound to apply the same commission scale for all its small group cases, pursuant to 11 NYCRR § 360.11 (Regulation 145).

4.a) No. The agency president may not act in his individual capacity as an agent to produce life insurance business that he places through his own agency, which would then act as the general agent in the transaction, in order to receive 99% of qualifying first year premium. The Department would consider such course an attempt to evade Insurance Law § 4228(d)(5) and cause for disciplinary action under Insurance Law § 2110.

b) Other than the 4%-of-premium maximum imposed on HMOs, the Insurance Law does not specifically limit the amount of commission payable by an Insurance Law Article 42 or 43 corporation. Hence, the commissions and other fees payable are a matter of contractual agreement between the insurer and the producer, limited only by the Department’s approval of the filings. However, the Department would consider it untrustworthy behavior and grounds for disciplinary action under Insurance Law § 2110 if it had been concealed from the insurer that the “outside” producer was actually the agency’s president.

Facts:

A president and sublicensee of an agency that is licensed in New York as a life insurance and health insurance agent and property/casualty insurance broker is also licensed individually as a life insurance and health insurance agent. He made several inquiries regarding the receipt of commissions, fees, and expense allowances by general agents and producers of life and health insurance, as restated herein.

Analysis:

Questions 1 and 2: Compensation on production of individual life insurance business

The amount that a general agent may share with a producing agent or broker where the general agent receives from an insurer 99% of qualifying first year premium on an individual life insurance policy that was produced by another licensed life insurance agent or broker is not specified in Insurance Law § 4228(d)(5), which states in relevant part:

(d) A company may pay agents and brokers as it sees fit for the sale and service of policies and contracts. However:

* * *

(5) With respect to premiums and considerations recorded within a period of twelve consecutive months on business written by any agent or broker, no company shall pay or permit to be paid to an agent or broker expense allowance greater than the excess, if any, of the sum of:

(A) ninety-one percent of all qualifying first year premiums;

* * *

(C) … With respect to premiums and considerations recorded within a period of twelve consecutive months on business written under the supervision of any general agent, no company shall pay or permit to be paid to a general agent, on business not personally produced by such general agent, expense allowances greater than the excess, if any of the sum of

(D) ninety-nine percent of all qualifying first year premiums;

* * *

(F) . . . . over the sum of commissions paid pursuant to paragraphs one, two and four of this subsection, and any goods and services provided to such general agent by the company[.]

However, as Insurance Law §4228 (d)(5)(A) states, an insurer may not pay to a general agent that has itself produced the business more than 91% of the qualifying first year premium.

Question 3: Compensation on production of health insurance business

11 NYCRR § 52.42(e) (Regulation 62) authorizes health maintenance organizations (HMOs) to pay commissions and fees to insurance brokers for producing business but limits the amount payable to 4%:

Commissions or fees payable by health maintenance organizations to an insurance broker as authorized by 10 NYCRR Part 98. A health maintenance organization (HMO) issued a certificate of authority pursuant to article 44 of the Public Health Law, HMO operated as a line of business of a health service corporation licensed under article 43 of the Insurance Law and having a certificate of authority pursuant to article 44 of the Public Health Law, or HMO organized prior to the enactment of article 44 of the Public Health Law which has a license from the Superintendent of Insurance as a health service corporation pursuant to article 43 of the Insurance Law and a certificate of need as a health facility from the Commissioner of Health pursuant to article 28 of the Public Health Law, may, as authorized by 10 NYCRR Part 98, pay commissions or fees to a licensed insurance broker. Such authority to pay commissions or fees by a corporation, other than a corporation solely holding a certificate of authority from the Commissioner of Health, shall be restricted to its HMO operation only. No licensed insurance broker shall receive such commissions or fees from an HMO, unless the HMO has filed the actual rate to be paid and included the anticipated expenses for such payments to insurance brokers in its application to amend its community premium rates pursuant to the provisions of section 4308 of the Insurance Law. Such rate shall be incorporated into the HMO's premium rate manual. The actual rate per annum may not exceed four percent of the HMO's approved premium for the contract sold.

Although the Insurance Law does not limit the commissions or fees payable for producing business for non-HMO Insurance Law Article 43 corporations (non-profit medical and indemnity and health and hospital service corporations), payments are restricted by the Insurance Law §4309 overall expense limitations and the corporations’ Insurance Law § 4308(b) rate filings, which must include the commission payable to agents and brokers pursuant to Insurance Law § 4312(a).

Insurance Law § 4309 prescribes the maximum amounts payable by Article 43 corporations as producer expenses as follows:

Limitation of expenses

(a) No corporation subject to the provisions of this article shall, during any one year, disburse more than the percentages hereafter prescribed of the aggregate amount of the premiums received during such year as expenditures for expenses, which, for the purposes of this article, shall include all expenses paid or incurred by the corporation which do not constitute benefit payments made to or on behalf of persons covered under contracts issued by such corporations:

(1) For hospital service corporations: fifteen per centum reduced by one per centum for each five million dollars or fraction thereof above one million dollars of premiums received to ten per centum.

(2) All other corporations: twenty per centum reduced by one per centum for each five million dollars or fraction thereof above one million dollars of premiums received to fifteen per centum except that for any corporation which derives more than fifty per centum of its premiums received from the sale of contracts which provide hospital service benefits: seventeen and one-half per centum reduced by one per centum for each five million dollars or fraction thereof above one million dollars of premiums received to twelve and one-half per centum.

(3) Upon written application, the superintendent may waive the limitations in paragraph one or two of this subsection for any corporation which has not attained the level of enrollment which it needs to attain a break-even position. The break-even position is attained when the amount of annual losses and expenses incurred by the corporation is equal to the amount of premiums earned during this period. Such corporation shall be subject to such limitations in the calendar year following the year in which it attains a break-even position.

(b) If any such corporation shall in any calendar year make or incur expenses as hereinabove defined in excess of its expense limit the superintendent may, upon written application of such corporation and a showing that such corporation has taken steps in accordance with a plan submitted by the corporation and approved by the superintendent which will enable it to comply with the provisions of this section during the next calendar year, suspend the expense limit for such corporation for the calendar year in which the excess was incurred but the superintendent shall not suspend the expense limit for any such corporation for more than two calendar years in succession.

Likewise, Insurance Law § 4308 curtails commission and other producer fees by requiring non-HMO Article 43 corporations to file their rates, which are subject to the Superintendent’s approval. Insurance Law § 4308(b) states in pertinent part:

No corporation subject to the provisions of this article shall enter into any contract unless and until it shall have filed with the superintendent a schedule of the premiums or, if appropriate, rating formula from which premiums are determined, to be paid under the contracts and shall have obtained the superintendent's approval thereof. . . .

The rate filings must include the cost of commission pursuant to Insurance Law § 4312(a), which provides:

(1) Every corporation subject to the provisions of this article may employ solicitors or accept business from agents and brokers on a commission basis, but all solicitors shall be paid on a salary basis only. It is expressly provided such solicitors are exempt from obtaining a license. Commissions shall be included in the corporation's rate manual and rate filings and commissions payable by health maintenance organizations organized under this article or health maintenance organizations operating as a line of business of corporations organized under this article shall continue to be subject to existing regulations governing commissions payable by health maintenance organizations.

(2) Any corporation exercising the authority granted in paragraph one of this subsection shall provide to the superintendent at the time a corporation commences the use of agents and brokers on a commission basis, a detailed plan explaining the purpose for which agents and brokers are to be utilized, the lines of business or products where agents and brokers are to be utilized, the commission scales to be employed in compensating such agents and brokers, and such other information as required by the superintendent.

Insurance Law Article 42 group accident and health insurance corporations are restricted in the amount of commissions and fees they may pay by the rates they file with the Superintendent pursuant to Insurance Law § 4235(h)(1), which states:

Each domestic insurer and each foreign or alien insurer doing business in this state shall file with the superintendent its schedules of premium rates, rules and classification of risks for use in connection with the issuance of its policies of group accident, group health or group accident and health insurance, and of its rates of commissions, compensation or other fees or allowances to agents and brokers pertaining to the solicitation or sale of such insurance and of such fees or allowances, exclusive of amounts payable to persons who are in the regular employ of the insurer, other than as agent or broker to any individuals, firms or corporations pertaining to such class of business, whether transacted within or without the state.

Additionally, an insurer of individual and small group policies may only charge the community rate approved by the Superintendent and must apply the same commission scale for all its small group cases, pursuant to 11 NYCRR § 360.11 (Regulation 145), which states in pertinent part:

Community rates applicable to commercial insurers, Article 43 Corporations, and HMOs

* * *

(f) An insurer may only charge a small group or an individual the community rate as approved by the superintendent.

* * *

(k) Commissions and marketing practices in the small group market must be uniformly applied to all size cases. If an insurer pays commissions on any small group case, then that insurer must pay commissions on all small group cases, using the same commission scale. The commission scale must pay a flat percentage of premium or a percentage which decreases as premium increases or a flat dollar amount per person or a flat dollar amount per case. Payment of commissions or other scales compensation based on loss ratio or in any way reflecting or dependent upon the experience of any case or group of cases and payment of no commissions or reduced commissions on cases below a specified size are prohibited practices. An insurer is not prohibited from selecting, appointing or using the services of agents or brokers in accordance with its normal selection practice. However, the use of agents or brokers cannot be limited to a certain size market, such as, cases of ten or more lives. An insurer must notify every licensed agent or broker with whom it does business of current commission practices, revised if necessary to comply with this subdivision, by March 1, 2001 and at least annually thereafter.

Question 4: Acting in individual capacity as agent or broker

An agency president may not act in his individual capacity as an agent to produce life insurance business that he places through his own agency, which would then act as the general agent in the transaction in order to receive 99% of qualifying first year premium. The Department would consider such course of action an attempt to evade Insurance Law § 4228(d)(5) and cause for disciplinary action under Insurance Law § 2110.

However, other than the 4%-of-premium maximum imposed on HMOs, the Insurance Law does not specifically limit the amount of commission payable by an Insurance Law Article 42 or 43 corporation. Hence, the commissions and other fees payable for the sale of insurance are a matter of contractual agreement between the insurer and the producer, limited only by the Department’s approval of the filings. The Department would consider it untrustworthy behavior and grounds for disciplinary action under Insurance Law § 2110, however, if it were concealed from the insurer that the producing agent (or broker) was actually the agency’s (or brokerage firm’s) president.

For further information you may contact Associate Attorney Sally Geisel at the New York City Office.