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 June 27, 2007, representing the position of the New York State Insurance Department.

Re: Sharing Commissions with Religious Organization

Questions Presented:

1) May an insurance agent have an informal arrangement with a group whereby the agent pledges to give to charity commissions earned from the sale of insurance to clients referred to the agent by members of the group?

2) May the agent advertise to a potential client that the commissions earned from that sale of insurance will be donated to charity?

Conclusions:

1) Yes.  Based on the facts provided, an insurance agent would not violate New York Insurance Law  § 2115 — which prohibits a licensed agent from sharing commissions with an unlicensed entity — if the agent were, in accordance with the informal arrangement, to donate commissions from referrals every time that the agent sold a policy pursuant to such referrals.  Nor would the referring group member be acting as an insurance agent without a license in violation of New York Insurance Law      § 2102(a)(1). 

2) No.  An insurance agent may not advertise to potential clients that the agent’s commissions will be donated to charity, since the agent would be making an unlawful inducement in violation of Insurance Law §§ 2324 or 4224.

Facts:

The inquirer reports that he is an insurance agent who attends a Bible study group.  The study group includes, among others, attorneys, accountants and insurance agents.  Some members of the study group have established an informal arrangement whereby they refer clients to each other and donate any compensation derived from the referrals to a non-profit ministry.  The inquirer would like to take part in this arrangement by donating to the ministry any commissions he receives from placing insurance for clients referred by group members.  He notes that referring members would not be paid for the referrals, nor would any clients receive monetary compensation.  However, under the arrangement he proposes, the clients and referring members would know that he intends to donate his commissions to charity.  We assume that the ministry is not a party to the arrangement, either directly or indirectly.

Analysis:

The inquiry does not specify whether the inquirer is an agent that sells life, accident and health, or property/casualty insurance.  For the purposes of this opinion, we presume that he is a property/casualty agent.  However, please note that the prohibitions set forth in Insurance Law § 2115 are similar to those found in Insurance Law §§ 2114 and 2116, which apply to life and accident and health agents, and insurance brokers, respectively.

Commission-sharing agreement

New York Insurance Law § 2102(a)(1) (McKinney 2006) prohibits a person, firm, association or corporation from acting as an insurance agent or broker without a license.  Insurance Law § 2115, in turn, prohibits a licensed property/casualty agent from sharing commissions or other compensation with an unlicensed entity “for acting as [an] insurance agent.”  Insurance Law § 2115(a)(1) provides:

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….

However, Insurance Law § 2115(a)(1) also specifically exempts certain referral activities from being considered “acting as [an] insurance agent”:

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.1

Thus, where a non-licensee makes a referral to a licensed agent or broker and the licensee compensates the non-licensee for the referral, the non-licensee is not considered to be “acting as [an] insurance agent” without a license, provided that the referral does not include a discussion of the insurance policy terms and conditions, and the agent or broker does not condition the referral compensation on an actual sale of insurance.  In addition, if those conditions are met, the agent’s or broker’s payment to the non-licensee does not violate Insurance Law § 2115.  Paying a referral fee on a per-policy-sold basis does, however, violate Insurance Law § 2115(a)(1).

In this case, the inquirer indicates that the Bible study members would not receive any fees for referring clients to him.  Thus, the only flow of money (your commissions) is between the inquirer (the licensed agent) and the non-profit ministry.  The ministry is not being paid the commissions “for acting as [an] insurance agent,” but simply receives them as charitable donations.  However, because the inquirer has an informal arrangement with the study group members to donate his commission on referred clients to the ministry, the other members of the study group receive an indirect, albeit intangible, thing of value whenever they refer clients to him – namely, a sense of contentment from knowing that their referral benefits a charity they support.  If this intangible benefit counts as “compensation” for purposes of Insurance Law § 2115(a)(1), then under this proposed arrangement a group member who refers a client to the inquirer would be “acting as [an] insurance agent” without a license in violation of that provision and Insurance Law § 2102(a)(1), and the inquirer would be making a payment to an unlicensed person for acting as an insurance agent in violation of Insurance Law § 2115(a)(1), as well as demonstrating untrustworthiness under Insurance Law § 2110.

But on the facts that the inquirer presents, apart from a sense of contentment, no tangible benefits inure, either directly or indirectly, to the members of the study group or the group itself when he donates to the ministry commissions earned on study-group-referred clients.  Therefore, under the circumstances described here, the Department does not consider the donations to be “compensation” within the meaning of Insurance Law § 2115, provided that there is no arrangement or other relationship, direct or indirect, between the ministry and the Bible study members (or the group) on the one hand, or the ministry and the agent, on the other.

Charitable contributions as inducement

Insurance Law § 2324, which pertains to most property/casualty insurance, prohibits the offering of any rebates or inducements, either directly or indirectly, not specified in the policy, other than an article of merchandise, or “keepsake,” not exceeding $15 in value, in connection with the sale of insurance, provided that such rebate or inducement is not specified in the policy.2  Insurance Law        § 2324(a) provides:

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 offer to pay or allow to the insured or to any employee of the insured, either as an inducement to the making of insurance or after insurance has been effected, any 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, nor 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.

In a recent opinion, the Department’s Office of General Counsel opined that, while nothing precludes an agent or broker from making charitable contributions, advertising those contributions as an incentive for new insurance business constitutes an offer of an intangible benefit or inducement that violates Insurance Law §§ 2324.  See General Counsel Opinion dated March 12, 2007.  Thus, on these facts, the term “inducement of any kind, directly or indirectly” contained in Insurance Law § 2324(a) sweeps more broadly than the term “compensation” contained in Insurance Law § 2115(a)(1); the intangible sense of contentment derived from knowing one’s actions benefit a charity under the circumstances described here does not implicate the latter term but does implicate the former term.  Because, in the scenario that the inquirer presents, a potential client knows that the agent’s commission will be given to a charity, the charitable donations are an incentive for new insurance business, and as such constitute an improper inducement that violates Insurance Law § 2324.

For further information you may contact, Assistant Attorney Sapna S. Maloor at the New York City Office.

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1  The referral provisions of Insurance Law §§ 2114, 2115, and 2116 are due to expire on September 10, 2007, however, the legislature has approved a bill that extends these provisions until September 10, 2009.  The bill has been, or soon will be, sent to the Governor’s office for his signature.

2  Insurance Law § 4224 applies similar prohibitions to life insurance, accident and health insurance, and annuity contracts, but does not contain the $15 “keepsake” exception.