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 has issued the following opinion on June 18, 2007 representing the position of the New York State Insurance Department.

Re: Payment by insurance producer of referral fees to non-licensees.

Question Presented:

Would it violate the New York Insurance Law if a licensed insurance broker offered to compensate only clients of the broker that referred persons to the insurance broker for the purpose of purchasing insurance, and the clients were only compensated if the referred person, in fact, purchased insurance from the broker?

Conclusion:

Yes. The payment of a referral fee by the broker would violate either Insurance Law § 2324 (McKinney 2006) or Insurance Law § 4224(c), each of which is an anti-rebating statute. Moreover, this program would provide a basis for the Superintendent to refuse to renew, revoke, or suspend the license of the licensee who implemented it, because the licensee would demonstrate untrustworthiness by facilitating unlicensed activities by compensating the non-licensees, since the referrals do not comply with Insurance Law §§ 2114, 2115 or 2116.

Facts:

The inquirer reports that the inquirer is a licensed insurance broker and that the inquirer wants to know whether the inquirer's proposed marketing/advertising program constitutes rebating that violates the Insurance Law. The inquirer wishes to target the inquirer's current clients with a marketing/advertising program in which the inquirer would provide a $50 credit toward the referring client’s next insurance payment on a current insurance policy where the client referred to the inquirer a new client, who had not purchased insurance from the inquirer's firm during the previous three years.

Analysis:

Insurance Law § 2102 generally prohibits the sale of insurance without a license. According to Insurance Law § 2102(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 “an 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.)

As stated above, Insurance Law § 2102 requires a person to be licensed to receive compensation for referring clients; however, Insurance Law § 2116 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.)1

Accordingly, pursuant to Insurance Law §§ 2114, 2115, and 2116, an insurance agent or broker may compensate an unlicensed person who makes a referral to the insurance agent or broker only if the referral does not include a discussion of a specific insurance policy terms and conditions, and the compensation for the referral is not based on the purchase of insurance by the person so referred.

Here, the inquirer would provide the $50 credit to current insured clients only if the referred person purchases insurance from the inquirer. Given that circumstance, the inquirer's proposal fails to come within the referral exception provided in Insurance Law §§ 2114, 2115, and 2116. Therefore, the non-licensees would be acting as brokers without a license, in violation of Insurance Law § 2102(a)(1). Moreover, that would open the door for the Superintendent to conclude that the broker who accepted such referrals has facilitated unlicensed activities, and thus demonstrated untrustworthiness. In that case, the Superintendent, pursuant to Insurance Law § 2110,2 could refuse to renew, or suspend or revoke the broker’s license upon a finding that the broker has demonstrated untrustworthiness and/or that the broker knowingly accepted insurance business from an individual who is not licensed.

Even if the inquirer were to modify the referral process to meet the above requirements of the Insurance Law, payment for the referral constitutes a rebate in violation of either Insurance Law §§ 2324 or 4224 because it is only available to the inquirer's insurance clients, and they are receiving rebates on their premiums. Insurance Law § 2324, which applies to most property/casualty insurance contracts, states in pertinent part:

No authorized insurer, no licensed insurance agent, no licensed insurance broker, and no employee or other representative of any such insurer, agent or broker shall make, procure or negotiate any contract of insurance other than as plainly expressed in the policy or other written contract issued or to be issued as evidence thereof, or shall directly or indirectly, by giving or sharing a commission or in any manner whatsoever, pay or allow or either as an inducement to the making of insurance or after insurance has been effected, ay rebate from the premium which is specified in the policy, or any special favor or advantage in the dividends or other benefit to accrue thereon, or shall give or offer to give any valuable consideration or inducement of any kind, directly or indirectly, which is not specified in such policy or contract, other than any article of merchandise not exceeding fifteen dollars in value which shall have conspicuously stamped or printed thereon the advertisement of the insurer, agent or broker, or shall give, sell or purchase, or offer to give, sell or purchase, as an inducement to the making of such insurance or in connection therewith, any stock, bond or other securities or any dividends or profits accrued thereon, no shall the insured, his agent or representative knowingly receive directly or indirectly, any such rebate or special favor or advantage, provided, however, a licensed insurance agent or a licensed insurance broker may retain the usual commission or underwriting fee on insurance placed on his own property or risks, if the aggregate of such commissions or underwriting fees will not exceed five percent of the total net commissions or underwriting fees received by such licensed insurance agent or insurance broker during the calendar year.

Ins. Law § 2324(a). Insurance Law § 4224, which applies to most life insurance, accident and health insurance and annuities, similarly states in pertinent part:

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.

Ins. Law § 4224(c).

Thus, a broker subject to the provisions of either Insurance Law §§ 4224 or 2324(a) may not induce the sale of insurance by offering valuable consideration unless it is specified in the policy or contract. There is no indication here, however, that payment of the $50 is stated anywhere in the insurance contract. In addition, Insurance Law § 2324(a) provides a limited exception to the prohibition against offering valuable consideration, and permits distribution of a “keepsake” item that does not exceed $15 in value, and that is designed to keep the name of the insurer or producer before the customer by embossing the insurer’s or producer’s name on the item. But, the $50 credit exceeds the amount of a permissible “keepsake,” and there is no indication that it is designed to keep the name of the insurer or producer before the customer.

For further information one may contact Senior Attorney Susan A. Dess, at the New York City Office.

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1 Insurance Law § 2115, which applies to insurance agents, and Insurance Law § 2114, which applies to life and accident and health insurance agents, have provisions similar to Insurance Law § 2116. The referral provisions of these three sections are due to expire on September 10, 2007, unless the Legislature extends these provisions, as it has in the past.

2 Insurance Law § 2110 states in relevant part:

(a) The superintendent may refuse to renew, revoke, or may suspend for a period the superintendent determines the license of any insurance producer, insurance consultant or adjuster, if, after notice and hearing, the superintendent determines that the licensee or any sub-licensee has:

(1) violated any insurance laws, or violated any regulation, subpoena or order of the superintendent of insurance or of another state's insurance commissioner, or has violated any law in the course of his dealings in such capacity;

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(C) demonstrated untrustworthiness; or

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(12) knowingly accepted insurance business from an individual who is not licensed;

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