OGC Opinion No. 07-06-16

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 § 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:

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:

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:

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

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.

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:

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