New York State Seal
STATE OF NEW YORK
INSURANCE DEPARTMENT
ONE COMMERCE PLAZA
ALBANY, NEW YORK 12257

Eliot Spitzer
Governor

Eric R. Dinallo
Superintendent

The Office of General Counsel issued the following opinion on July 2, 2007, representing the position of the New York State Insurance Department.

RE: Revoked License – Entitlement to Commissions

Question Presented:

In connection with policies that have already been placed, may an insurance broker pay contractually agreed upon earned commissions as well as future commissions based on automatic renewals to an insurance broker who is under investigation for alleged violations of the Insurance Law?

Conclusion:

Yes. In connection with policies that have already been placed, an insurance broker may pay contractually agreed upon earned commissions as well as future commissions based on automatic renewals to an insurance broker who is under investigation for alleged violations of the Insurance Law. In fact, an insurance broker may continue to pay such commissions even after revocation of the broker’s license.

Facts:

The inquirer reported that his agency purchased another agency that had contracts with a few employees who were licensed as insurance brokers. Those contracts provide for payment of commissions on renewal policies to the broker employees. The inquirer stated that his agency has honored those agreements. The inquirer submitted this inquiry after he read a newspaper article that noted that one of those brokers was arrested for allegedly stealing money from an insurance customer by collecting premiums without providing insurance coverage and issuing forged insurance cards. According to the inquirer, the broker is no longer with the purchased agency, and does not place any new business with or for his agency. The inquirer asked whether he may continue to pay commissions to the broker on policies that have already been placed.

Analysis:

A license revocation does not extinguish a broker’s right to receive commissions earned while licensed, including commissions from automatic renewals. Opinion of General Counsel No. 02-04-18 (April 11, 2002). As the Insurance Department noted in Opinion of General Counsel No. 02-04-18 (April 11, 2002), New York courts have generally held that absent an agreement to the contrary,1 a licensed insurance agent or broker earns its commission when it brings about the relationship of insurer and insured. See Hamond v. Risk Specialists, 210 A.D.2d 202 (2d Dep’t 1994); Western Nat. Ins. Co. v. Haph Brokerage, 277 A.D. 6 (1st Dep’t 1950), aff’d, 302 N.Y. 678 (1951). Moreover, N.Y. Ins. Law § 2102(e)(2) (McKinney 2006) provides that “[r]enewal or other deferred commissions may be paid to a person or other entity for selling, soliciting or negotiating insurance in this state if the person or other entity was required to be licensed under [the Insurance Law] and was so licensed at that time.”

Thus, in connection with policies that have already been placed, an insurance broker may pay contractually agreed upon earned commissions as well as future commissions based on automatic renewals to an insurance broker who is under investigation for alleged violations of the Insurance Law. In fact, an insurance broker may continue to pay such commissions even after revocation of the broker’s license.

However, Insurance Law § 2102(a)(1) prohibits any person, firm, association or corporation from acting as an insurance broker in this state without a license. Thus, an agency may not (other than in the circumstances described in the preceding paragraph) share commissions with, or accept any insurance business (including increased/changed coverages on existing policies) from, a nonlicensee, including a person who has had an insurance license revoked. Nor may an agency allow or otherwise aid such a person to engage in any activities that would constitute acting as an insurance broker, as defined by Insurance Law § 2101(c). If an agency were to fail to heed these prohibitions, the Superintendent might determine that the agency acted in an “untrustworthy” manner by compensating a nonlicensee and facilitating unlicensed activities. See Insurance Law § 2110 (a)(4)(c). In addition, the Superintendent could find that the agency violated Insurance Law § 2110(a)(12) by knowingly accepting insurance business from an unlicensed individual. Upon a finding of untrustworthiness and/or that the agency knowingly accepted insurance business from unlicensed individuals, the Superintendent could refuse to renew, or suspend or revoke, the agency’s license.

For further information you may contact Senior Attorney Brenda Gibbs at the Albany Office.

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1 Note that I cannot offer an opinion regarding the terms of the agreement to which you have referred, since I have not received a copy of the agreement.  In any event, contract interpretation is a matter best left to the courts.