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

Eliot Spitzer
Governor

Eric Dinallo
Superintendent

The Office of General Counsel issued the following opinion on May 23, 2007, representing the position of the New York State Insurance Department.

Re: Licensed insurance brokers compensating non-licensees for insurance referrals

Question Presented:

May a licensed insurance broker compensate non-licensees for insurance referrals upon the placement of insurance, where the compensation is calculated based upon the amount of the commissions that the licensed insurance broker receives, or in accordance with a pre-determined fee?

Conclusion:

No. Pursuant to N.Y. Ins. Law § 2116 (McKinney 2006), a licensed insurance broker may not compensate non-licensees for insurance referrals upon the placement of insurance, where the compensation is either calculated based upon the amount of the commissions that the licensed insurance broker receives, or upon a pre-determined fee.

Facts:

The inquirer reports that he is vice president of ABC, Inc., a benefits consulting firm that is licensed as an insurance broker. The inquirer notes that his firm's employees also are licensed insurance brokers. ABC, Inc. receives insurance referrals from several sources, including but not limited to, real estate brokers, compensation managers, and payroll advisers. The inquirer states that these sources do not provide insurance services or advice to the inquirer's potential clients; nor are the sources employees of the inquirer's company. The inquirer further states that in return for insurance referrals, ABC, Inc. either compensates the non-licensee via a one-time finder's fee in an amount agreed upon in advance, or, as is more often the case, in an amount based upon the commissions that ABC, Inc. receives from the insurers.

Analysis:

N.Y. Ins. Law § 2102(a)(1) (McKinney 2006) prohibits any person, firm, association, or corporation from acting as an insurance producer or insurance adjuster in this state without a license. It states:

(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.

Insurance Law § 2101(k), in turn, defines an "insurance producer" as "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." Further, Insurance Law § 2101(c) defines "insurance broker" in relevant part 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.)

Thus, a non-licensee generally may not receive compensation for a referral to an insurance broker. However, Insurance Law § 21161 sets forth an exception 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 its 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 the purposes of this section, "acting as insurance broker" 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. (Emphasis added.)2

Accordingly, Insurance Law §§ 2114, 2115, and 2116 exempt an unlicensed person from acting as an insurance agent or broker, and provide an exception to the rule that a licensed insurer or any licensed agent of an insurer may not compensate an unlicensed person for acting as an insurance agent or broker, where there is no discussion of specific insurance policy terms and conditions, and the compensation paid to the non-licensee for the referral is not based upon the purchase of insurance by the person being referred. Here, however, ABC, Inc. compensates non-licensees for referrals based upon the sale of insurance. Such arrangement therefore does not come within the exceptions set forth in Insurance Law §§ 2114, 2115, and 2116. Given this circumstance, it is immaterial whether the compensation paid is based upon a predetermined fee or a percentage of the commissions that ABC, Inc. receives from the insurers; in either case, the compensation for the referral is predicated upon the purchase of insurance. 3

Moreover, because under the facts presented the non-licensees are not making lawful referrals but are instead acting as brokers without a license, the Superintendent may determine that ABC, Inc. has acted in an untrustworthy manner, see Insurance Law § 2110(a)(4)(C), by compensating the non-licensees and facilitating unlicensed activities. In addition, the Superintendent may determine that ABC, Inc. violated Insurance Law § 2110(a)(12) by knowingly accepting insurance business from unlicensed individuals. Upon a finding of untrustworthiness and/or that ABC, Inc. knowingly accepted insurance business from unlicensed individuals, the Superintendent may refuse to renew, or may suspend or revoke, ABC, Inc."s licenses.

Inasmuch as the inquirer has indicated that ABC, Inc. has been engaged in conduct that violates the Insurance Law, this office is referring this file to the Insurance Department"s Consumer Services Bureau for further handling. In addition, we ask that the inquirer please confirm in writing within ten (10) days of receipt of this letter that ABC, Inc. has ceased all of its unlawful compensation arrangements with respect to referrals.

For further information you may contact Attorney Joana Lucashuk at the New York City Office.

______________________________________________________________________________________________

1 Insurance Law § 2116 will expire on September 10, 2007, unless extended by the Legislature.

2 Insurance Law § 2114, which applies to life and accident and health insurance agents and brokers, and Insurance Law § 2115, which applies to property/casualty insurance agents, set forth requirements similar to those set forth in Insurance Law § 2116.

3 The Department has published a number of opinions on its website, http://www.ins.state.ny.us, which discuss the permissible parameters for insurance referrals in a variety of situations.  See, e.g., OGC Opinion No. 06-02-21 (Feb. 8, 2006); OGC Opinion No. 06-01-14 (Jan. 10, 2006); OGC Opinion No. 03-11-12 (Nov. 18, 2003); and OGC Opinion 03-10-28 (Oct. 31, 2003).