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 31, 2007, representing the position of the New York State Insurance Department.

Co-Production of a Life Insurance Policy

Questions Presented:

1. May a duly appointed insurance agent be a co-producer of a life insurance policy, and thus share the commission with another agent?

2. Under the circumstances described below, would the sharing of the commission violate N.Y. Ins. Law Law § 4224(c) (McKinney 2006), which prohibits illegal inducements in connection with the sale of a life insurance policy?

Conclusions:

Yes. A duly appointed and licensed life insurance agent may share a commission with another insurance agent if at the time of the solicitation, negotiation and sale of the policy, the latter was a licensed agent of the insurer that wrote the policy. A life insurance agent who shares a commission with a non-appointed agent runs afoul of N.Y. Ins. Law § 2114 (McKinney 2006).

No. Under the circumstances described below, the sharing of the commission would not violate N.Y. Ins. Law Law § 4224(c) (McKinney 2006).

Facts:

A licensed life insurance agent in New York, duly appointed by an insurer, is co-producing a life insurance policy in conjunction with another New York licensed life insurance agent similarly appointed by the same insurer. Both are to receive a commission directly from the insurer. The policy is to be sold to the sole shareholder of a corporation, which does not sell insurance. One of the agents is an employee of the corporation. The two agents wish to split the commission because the employee agent solicited the help of the other agent to obtain access to, the insured, and in so doing, utilize the other agent’s established infrastructure.

Analysis:

N.Y. Ins. Law § 2114 (McKinney 2006) is relevant to the first query. The statute governs the payment of commissions with respect to life, accident and health insurance agents, and permits an insurer to pay commission or compensation only to a licensed life insurance agent of the insurer. In relevant part, § 2114 reads 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 article.

(2) No agent or other representative of any such life insurer or fraternal benefit society shall pay any commission or other compensation to any person for any services of the kind specified in paragraph one hereof, except to a licensed life insurance agent of such insurer or of such society as the case may be.

. . .

(4) Services of the kind specified in this subsection 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.)

N.Y. Ins. Law § 2112 (McKinney 2006) governs certificates of appointment of an insurance producer to act as an agent, and requires that an insurer must file a certificate of appointment for every agent representing the insurer. The statute states:

(a) Every insurer, fraternal benefit society or health maintenance organization doing business in this state shall file a certificate of appointment in such form as the superintendent may prescribe in order to appoint insurance agents to represent such insurer, fraternal benefit society or health maintenance organization.

In tandem, therefore, Insurance Law §§ 2114 and 2112 require that, in order to collect any commission, both insurance agents in the scenario you present must be licensed agents and must be appointed by the insurer prior to commencing any activities that would require an insurance agent license. An unlicensed producer has no right to commissions for activities undertaken without a proper license or prior to obtaining such license. McEvoy v. American Lumbermen’s Mut. Casualty Co. of Illinois, 51 N.Y.S.2d 306, 1944 N.Y. Misc. LEXIS 2505 (Sup. Ct. Queens Co. 1944), aff’d, 269 A.D. 857, 56 N.Y.S.2d 527 (2d Dept. 1945), aff’d, 295 N.Y. 906, 68 N.E.2d 25 (1946); Gutfreund v. DeMian, 227 A.D.2d 234, 642 N.Y.S.2d 294 (1st Dept. 1996).

Provided that both insurance agents here were appointed by the insurance company prior to soliciting or negotiating the insurance, the question arises whether the sharing of the commission between the two agents would constitute a prohibited inducement. See OGC Opinion 06-09-11 (Sept. 19, 2006); OGC Opinion 06-12-04 (Dec. 6, 2006). N.Y. Ins. Law § 4224 (McKinney 2006), which addresses inducements in the sale of life, accident and health insurance policies, reads as follows:

(c) No such life insurance company and no such savings and insurance bank and no officer, agent, solicitor or representative thereof and no such insurer doing in this state the business of accident and health insurance and no officer, agent, solicitor or representative thereof, and no licensed insurance broker and no employee or other representative of any such insurer, agent or broker, shall pay, allow or give, or offer to pay, allow or give, directly or indirectly, as an inducement to any person to insure, or shall give, sell or purchase, or offer to give, sell or purchase, as such inducement, or interdependent with any policy of life insurance or annuity contract or policy of accident and health insurance, any stocks, bonds, or other securities, or any dividends or profits accruing or to accrue thereon, or any valuable consideration or inducement whatever not specified in such policy or contract; nor shall any person in this state knowingly receive as such inducement, any rebate of premium or policy fee or any special favor or advantage in the dividends or other benefits to accrue on any such policy or contract, or knowingly receive any paid employment or contract for services of any kind, or any valuable consideration or inducement whatever which is not specified in such policy or contract.

Thus, an insurance agent or broker subject to the provisions of N.Y. Ins. Law § 4224(c) may not provide "an inducement to any person...or any valuable consideration or inducement whatever not specified in such policy or contract" in connection with the sale of life insurance.

If an insured’s purchase of a life insurance policy is contingent upon, or encouraged by, the insurance agent sharing the commission with another insurance agent, then the agent’s agreement amounts to an unlawful inducement prohibited by N.Y. Ins. Law § 4224(c). But based on the fact pattern presented and the representations made about the circumstances under which the two agents came to be co-producers of the policy, including the fact that the prospective insured’s purchase of the policy is not contingent upon or encouraged by the agent’s sharing the commission with the other agent, there does not appear to be any violation of N.Y. Ins. Law § 4224(c) here.

For further information you may contact Associate Counsel Alexander Tisch at the New York City Office.