The Office of General Counsel issued the following opinion on May 10, 2007, representing the position of the New York State Insurance Department.
Re: Boat Inspection Fees
May an insurance agent that receives referrals of business from a boat dealer hire the dealer to perform a pre-insurance inspection of a referred persons boat for a fee that it collects from the person and remits to the dealer?
No. Under these facts, an insurance agent that receives referrals of business from a boat dealer may not hire the dealer to perform a pre-insurance inspection of the referred persons boat for a fee that it collects from the person and remits to the dealer.
The inquirer reports that his client is licensed as an insurance agent and broker. In its capacity as an agent, it markets property/casualty insurance coverage for boats. A boat dealer sometimes refers customers that require boat insurance to the agent, but the agent does not pay the dealer a referral fee. A boat must be inspected for insurance to be issued, however, and the insurance agent does not have staff members capable of performing boat inspections. Thus, the agent is considering retaining the boat dealer to perform the inspections for prospective insureds referred by the dealer. In addition to collecting the premium for the policy, the agent would charge prospective insureds a one-time inspection fee of $50 and then remit the fee to the dealer. The inquirer reports that the $50 fee is not conditioned upon the purchase of insurance, but that the inspection is required before the insurer will provide insurance coverage. Without the boat inspection, the coverage is not placed.
There are several problems with the proposed arrangement. First, an agent may not charge an insured a fee. As a general rule, agents represent insurers, and, consequently, may receive compensation only from insurers. An agents compensation generally stems from an insurers filed or manual rate (the gross amount the insurer may charge under the law), which incorporates commissions payable to agents. Accordingly, any additional compensation (e.g., fees, service fees, or origination fees) paid by insureds directly to agents generally violates the rate filing and approval provisions of the Insurance Law. N.Y. Ins. Law § 2119 (McKinney 2006) authorizes only a broker to charge service fees, and then only subject to a written compensation agreement.
Under the arrangement proposed, once a boat buyer referred by the dealer decided to enter into an insurance contract, the agent would direct the buyer to the boat dealer to perform the required inspection. The agent would receive payment for the inspection, which it would then forward to the boat dealer. This arrangement would violate the bar on an agent receiving a fee from an insured.
In addition, for a boat dealer who makes a referral to an agent then to inspect the boat and be paid an inspection fee by the agent would violate Insurance Law § 2102 and § 2115(a)(1). Insurance Law § 2102 prohibits a person from acting as an insurance agent or broker without a license:
(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.1
Ins. Law § 2102.
Insurance Law § 2115(a), which applies to property/casualty insurance agents, sets forth a limited exemption from Insurance Law § 2102 for certain referrals and bars licensed agents from paying compensation for referrals by unlicensed persons except where the exemption applies.2 It states:
(1) No insurer doing business in this state, and no agent or other representative thereof, except as provided in subsection (b) hereof, shall pay any commission or other compensation to any person, firm, association or corporation for acting as insurance agent in this state, except to a licensed insurance agent of such insurer or to a person described in paragraph two or four of subsection (a) of section two thousand one hundred one of this article or except as provided in subsection (c) of this section. For the purposes of this section, "acting as insurance agent" shall not include the referral of a person to a licensed insurance agent or broker that does not include a discussion of specific insurance policy terms and conditions and where the compensation for referral is not based upon the purchase of insurance by such person.
Insurance Law § 2115(a)(1) thus permits an unlicensed person to make a referral to a licensed insurance agent or broker without violating Insurance Law § 2102, and permits the agent to pay for the referral, provided that there is no discussion of specific insurance policy terms and conditions and that the compensation is not based upon the purchase of insurance by the referred person. 3
Here, however, even though there is apparently no discussion of specific insurance policy terms and conditions, the compensation is in fact based upon the purchase of insurance by the referred boat buyer. The boat inspection is ordered only after the buyer decides to obtain insurance through the agent, and the agent requires the buyer to use the referring boat dealer to inspect the boat. Under this arrangement, the agent is de facto compensating an unlicensed person for a referral based upon the purchase of insurance in violation of Insurance Law § 2115(a)(1), and the dealer is acting as an insurance agent without a license in violation of Insurance Law § 2102.
To remedy these problems, the prospective insured must have the option of using an inspector of his or her choice. The agent may provide the boat buyer with a list of boat inspectors, and the boat dealer who made the referral may be included on this list. If the boat buyer chooses the boat dealer to perform the inspection, however, the boat dealer must be paid for the inspection directly by the boat buyer, not via the agent, and there can be no discussion of specific insurance policy terms and conditions. Alternatively, the insurer itself may select the boat inspector and pay for the inspection.
In this inquiry, the inquirer characterized the payment of the inspection fee to the boat dealer as proper payment of administrative expenses related to an insurance program. The inquirer cited an opinion by the Department that said that a broker may reimburse a trade association up to the amount it spent on actual administrative expenses related to the insurance programs, as long as those services were normally performed by an insurer, agent or broker. Opinion of General Counsel No. 06-03-06 (March 9, 2006). This inquiry is distinguishable, however, because in the situation the opinion addresses, the broker reimbursed the trade association for the actual expenses of services provided that would otherwise be performed by the broker. In this inquiry, the boat inspector would make a profit from the boat inspections, and inspections are not services normally provided by an agent.
Thus, under these facts, an insurance agent that receives referrals of business from a boat dealer may not hire the dealer to inspect the referred persons boat for a fee that it collects from the person and remits to the dealer. This arrangement violates the Insurance Law because Insurance Law § 2119 authorizes only a broker, not an agent, to charge an insured a fee; the agents payment of the fee to the referring dealer would violate Insurance Law § 2115(a)(1); and the boat dealers referral would violate Insurance Law § 2102.
For further information you may contact Senior Attorney Elizabeth Barrett at the New York City Office.
1 Insurance producer as defined in Insurance Law § 2101(k) includes an insurance agent or broker.
2 See also Insurance Law § 2116, which applies to insurance brokers, and Insurance Law § 2114, which applies to life and accident and health insurance agents, provisions that both contain similar language.
3 Please note that Insurance Law §§ 2114, 2115, and 2116 will expire on September 10, 2007, if not extended by the Legislature.