New York State Seal
STATE OF NEW YORK
INSURANCE DEPARTMENT
25 BEAVER STREET
NEW YORK, NEW YORK 10004

David A. Paterson
Governor

Eric R. Dinallo
Superintendent

The Office of General Counsel issued the following opinion on May 6, 2008, representing the position of the New York State Insurance.

Re: Agency Ownership

Questions Presented:

1. May an individual who is not a licensed agent, and is a convicted felon, be a partner with a licensed agent in an insurance agency?

2. How is the term “overall profits” defined?

3. Is it permissible for a non-licensed partner to share in income derived from the overall commissions received less agency expenses, adjusted periodically to reflect net commission income?

4. May the non-licensed partner receive a weekly salary equal to that of the licensed partner, and may the non-licensed partner participate in the same 401(k) or other retirement plan as the licensed partner?

Conclusions:

1. A person who is not a licensed agent may be partners with a licensed agent in an insurance agency. However, 18 U.S.C.A. § 1033(e) (West 2001) precludes an individual who has been convicted of any criminal felony involving dishonesty or a breach of trust from engagement in the business of insurance or participation in the business of insurance without the written consent of any insurance regulatory official authorized to regulate the insurer.

2. The term “overall profits” is defined as the gross income earned in the ordinary course of business, minus operating expenses.

3. No. Pursuant to N.Y. Ins. Law §§ 2114(a), 2115(a), and 2116 (McKinney 2006), an unlicensed producer who owns an interest in an insurance provider may not share the commissions earned by the agency, nor may that person perform acts that only a licensed agent or broker may perform. However, a non-licensee that owns an interest in an insurance provider may share in the overall profits of the business.

4. Neither the Insurance Law nor the regulations promulgated thereunder set forth how an insurance agency shall apportion salaries, or run a retirement plan such as a 401(k) plan, other than to provide that salaries may only be apportioned to non-licensed persons out of the overall profits of the business and not out of shared commissions.

Facts:

A scenario is reported where a licensed insurance agent owned an insurance agency and was convicted of a felony. Neither the agent’s license nor the agency’s licenses were renewed during this period. The formerly licensed agent has reconstituted the agency with a partner who is a licensed agent. The formerly licensed agent is uninvolved in activities that require a license, but works in the agency in an undisclosed capacity. All of the agency’s income is derived from commissions. A written partnership or operating agreement is not available for the Insurance Department’s review. The inquirer asks whether this arrangement passes legal muster.

Analysis:

Insurance Law § 2102(a)(1), which concerns the licensing of agents, brokers, reinsurance intermediaries and adjusters, is relevant to your inquiry. That statute reads as follows:

No person, firm, association or corporation shall act as an insurance agent, insurance broker, reinsurance intermediary 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 § 2114 applies to compensation to agents for life and accident and health insurance. In pertinent part, that statute provides:

(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.

(3) No insurer, fraternal benefit society or health maintenance organization doing business in this state and no agent or other representative thereof shall pay any commission or other compensation to any person, firm, association or corporation for services in soliciting, negotiating or selling in this state any new contract of accident or health insurance or any new health maintenance organization contract, except to a licensed accident and health insurance agent of such insurer, such society or health maintenance organization, or to a licensed insurance broker of this state, and except to a person described in paragraph two or three of subsection (a) of section two thousand one hundred one of this article.

(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.

Insurance Law § 2115(a) applies to compensation to agents for all other kinds of insurance other than as specified in Insurance Law § 2114. The statute 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 an 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. 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.

Insurance Law § 2116 applies to compensation for brokers:

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 an 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.

In response to the first query, an unlicensed person may be a partner with a licensed agent in an insurance agency. Neither the Insurance Law nor the regulations promulgated thereunder prohibit a person or entity not licensed by the Department from owning an interest in a corporate insurance agent or broker. See Office of General Counsel (“O.G.C.”) Opinion No. 07-09-14 (September 17, 2007). Similarly, neither the Insurance Law nor the regulations promulgated thereunder preclude agency ownership by a convicted felon.1

However, 18 U.S.C.A. § 1033 applies to crimes by or affecting persons engaged in the business of insurance. That statute provides:

(e)(1)(A) Any individual who has been convicted of any criminal felony involving dishonesty or a breach of trust, or who has been convicted of an offense under this section, and who willfully engages in the business of insurance whose activities affect interstate commerce or participates in such business, shall be fined as provided in this title or imprisoned not more than 5 years, or both.

* * *

(2) A person described in paragraph (1)(A) may engage in the business of insurance or participate in such business if such person has the written consent of any insurance regulatory official authorized to regulate the insurer, which consent refers to this subsection.

Therefore, an individual who has been convicted of a felony involving dishonesty or a breach of trust may not engage in or participate in the business of insurance without the written consent of the Department.2 See O.G.C. Opinion No. 05-05-16 (May 10, 2005); O.G.C. Opinion No. 04-04-16 (April 20, 2004). Without such consent, the unlicensed partner would stand in violation of 18 U.S.C.A. § 1033.

Because the inquirer has not provided the Department with any information about the nature of the felony here or whether the convicted felon at issue received the required written consent, the Department’s Office of General Counsel cannot provide an opinion as to whether the unlicensed person may lawfully serve as a partner in the insurance agency.

Further, in the absence of written consent, the licensed agent in the partnership runs the risk of having his license non-renewed, suspended or revoked by the Superintendent upon a determination of “untrustworthiness” within the meaning of Insurance Law § 2110 (a)

(4)(C), because the agent would be knowingly facilitating the involvement of a felon in the insurance business. See O.G.C. Opinion No. 07-07-25 (July 26, 2007).

In response to the second and third queries, pursuant to Insurance Law §§ 2114(a), 2115(a), and 2116, an unlicensed person who owns an interest in an insurance producer may not directly share a percentage of the commissions earned by the producer. Nor may such person perform acts that only a licensed agent or broker may perform. See N.Y. Ins. Law § 2102.3 However, a non-licensee that owns an interest in an insurance agent or broker may share in the overall profits of the business. The term “overall profits” means the gross income earned in the ordinary course of business, minus operating expenses. See O.G.C. Opinion No. 07-09-14 (September 17, 2007); O.G.C. Opinion No. 04-08-11 (August 18, 2004).

The Department has previously opined that profits or losses of a limited liability corporation (“LLC”) may be shared by members based on an ownership interest specified in the LLC’s operating agreement, provided that such methodology is not based upon sales of insurance. See O.G.C. Opinion No. 07-07-25 (July 26, 2007); O.G.C. Opinion No. 05-03-03 (March 8, 2005). However, an operating agreement that permits a non-licensed partner of the LLC to share in agency profits may not be adjusted to reflect commission income. The Department also has opined that any such LLC must be formed for the purpose of engaging in an insurance business as a going concern (i.e., with employees and other significant expenses), and not as a shell mechanism for sharing commissions with a non-licensee. See O.G.C. Opinion No. 07-07-25 (July 26, 2007); O.G.C. Opinion No. 05-03-03 (March 8, 2005).

It is unclear based on the fact pattern presented here whether the agency at issue is run in a manner consistent with the Insurance Law, and not as a “shell mechanism.” If the inquirer were to provide the Department with a copy of a written partnership or operating agreement, that might shed some light on the matter, but the inquirer indicated that no such written agreements exist. Nor is it clear from the fact pattern presented what types of work the unlicensed partner performs at the agency, and whether such activities overlap with functions that only a licensed person may perform.

In response to the fourth query, neither the Insurance Law nor the regulations promulgated thereunder set forth how an insurance agency shall apportion salaries, or run a retirement plan such as a 401(k) plan. However, the funding of salaries and retirement plans must be apportioned out of the overall profits of the business, and not out of shared commissions.

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

___________________________________________________________________________________________________

1 Insurance Law § 2111(a)(3) bars a corporation or partnership from knowingly permitting any person whose license has been revoked by this state or any other state or territory from being a shareholder or partner in such corporation or partnership, other than without the prior written approval of the superintendent. However, under the facts presented here, the unlicensed partner did not have his license revoked.

2 18 U.S.C.A. § 1033(f)(2) defines the term insurer as “any entity the business activity of which is the writing of insurance or the reinsuring of risks, and includes any person who acts as, or is, an officer, director, agent, or employee of that business.”

3 A non-licensed owner of an insurance agent or broker may make referrals to the agent or broker pursuant to Insurance Law § 2114, 2115 or 2116, provided that there is no discussion of specific insurance policy terms and conditions, and the compensation for the referrals is not based upon whether a sale is made. See O.G.C. Opinion No. 06-01-13 (January 10, 2006).