OGC Op. No. 08-08-05
The Office of General Counsel issued the following opinion on August 26, 2008 representing the position of the New York State Insurance Department.
RE: Charitable entity consultant
May a licensed life insurance producer compensate a consultant, who is an expert in charitable organizations, to consult with a prospective insured about selecting a charity to receive all or a portion of the benefits under a life insurance policy?
It depends on the facts. If the consultant is not an agent or representative of the charity, or a licensed consultant within the meaning of the New York Insurance Law, then the consultant may refer insureds to—and be paid a referral fee by—an insurance agent or broker, as long as the consultant is not soliciting or negotiating insurance, or providing advice or other insurance services, and the referral fee comports with the exception set forth in Insurance Law § 2114(a)(4) (McKinney 2006 and Supp. 2008). But because the facts presented do not state with any specificity the services to be provided by the consultant, the Insurance Department’s Office of General Counsel (“OGC”) cannot opine at this time about whether the producer may lawfully pay the consultant a fee.
The inquirer reports that he represents a licensed insurance producer that intends to utilize the services of a consultant who would provide guidance to prospective insureds by helping them select a third-party charity that is willing to accept a designation as a beneficiary of a life insurance policy to be sold by the producer. The consultant will match the objectives of a given insured with the objectives of a charity. The consultant will also: advise about prospective charities that need funding, limit the pool of potential insureds to those the consultant already knows, and recommend charities that are interested in the pool of potential insureds. In turn, the producer will provide a reasonable fee to the consultant. The inquirer states that the consultant would be acting as an independent contractor, and not as an employee of the licensed insurance agent or broker.
The general rule for purchases of insurance on the life of another is set forth in Insurance Law § 3205(b)(2). That subsection prohibits any person from procuring or causing to be procured “insurance upon the person of another unless the benefits under such insurance are payable to the named insured, to a personal representative of the insured, or to a person having an insurable interest in the named insured.”
At its most basic, the insurable interest requirement is intended to ensure that an individual’s life may not be insured by someone who will benefit solely from that individual’s death, so as not to create motive for murder or harm. See Kenneth Black, Jr. & Harold D. Skipper, Jr., Life & Health Insurance 197-200 (13th ed. 2000). Stated differently, the person proposing to obtain insurance on another’s life must ordinarily expect to benefit financially from the insured’s continued survival or lose financially upon his or her death. Examples of situations generally understood to produce an insurable interest are: (1) family and marital relationships, (2) creditor-debtor relationships, and (3) business relationships based on a substantial pecuniary interest.
However, Insurance Law § 3205(b)(3) creates an insurable interest in a charitable organization with respect to its donors.1 The purpose of the statute is described in a letter dated July 1, 1996, from the Superintendent of Insurance to the Governor’s Counsel:
It appears that the intent of the bill is to permit donors to enter into long term gift giving arrangements which result in posthumous endowments to the religious charitable and educational organizations. In essence, the bill confers these charitable, religious and educational corporations with an insurable interest in the lives of their donors. This would expand the definition of insurable interest and presumably permit these organizations to solicit potential donors to enter into long term gift giving programs…The bill would permit direct solicitiation by Department licensees. Thus, a licensed insurance agent can assist in the procurement of a new life insurance policy on the life of the donor, and the charitable organization would be the policyowner and beneficiary.
1995-1996 NYS Insurance Department Legislative Diary, Volume 5, Page 103.
This amendment to Insurance Law § 3205(b) enables charitable, educational or religious organizations formed pursuant to the New York Not-for-Profit Corporation Law (N-PCL) § 201(b) (McKinney 2005) to obtain life insurance policies on the lives of their donors more easily by simplifying the procurement process. The provision allows for the direct solicitation of these entities by licensees of the Insurance Department, and thereby eliminates, in the charitable donation context, the intervening step of requiring the donor to first purchase the policy and then transfer the policy to the organization.
Insurance Law § 3205(b)(3), as described above, presently reads:
Notwithstanding the provisions of paragraphs one and two of the subsection, a Type-B charitable, educational or religious corporation formed pursuant to paragraph (b) of section two hundred one of the not-for-profit corporation law, or its agent, may procure or cause to be procured, directly or by assignment or otherwise, a contract of life insurance upon the person of another and may designate itself or cause to have itself designated as the beneficiary of such contract.
Based on the facts provided, it is unclear whether the consultant is an agent or representative of a Type-B charitable, educational, or religious corporation formed pursuant to NPL § 201(b), which would allow the consultant to solicit insurance on behalf of the charity. Nor does the inquirer state with any particularity, apart from mentioning that the consultant will “advise about charities,” “limit the pool of insureds,” and “recommend charities,” whether the consultant is, or will be, doing those duties that require an insurance consultant license (e.g., providing advice about an insurance policy). See Insurance Law § 2107.
If the consultant is not an agent or representative of the charity, nor required to be a licensed consultant within the meaning of the Insurance Law, then the consultant may still refer insureds to—and be paid by—an insurance producer, see Insurance Law § 2114(a), provided that the consultant is not: soliciting insurance, negotiating insurance, holding herself out to be an insurance consultant, or otherwise engaging in activities that require licensing. See Insurance Law §§ 2101 and 2102; see also OGC Opinion dated March 8, 2007.
There is a difference between a permissible referral and an unlawful solicitation.2 A person requires a license to solicit insurance. See Insurance Law § 2102. However, the extent that a referral by an unlicensed entity is permissible is set forth in Insurance Law § 2114(a), which applies to life and accident and health insurance, and prohibits an insurance agent from sharing commissions with any other person except another licensed life insurance agent of the insurer. That provision reads as follows:
(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.
However, Insurance Law § 2114(a)(4) sets forth an exception to the general prohibition, and permits an agent to pay a referral fee to someone who is not an insurance agent or broker, provided that the referrer does not discuss specific policy terms and conditions with the potential insured, and the compensation for the referral is not based on the purchase of insurance.
Similarly, an insurance broker may share commissions with—or pay other compensation to—another insurance broker, as long as each broker is licensed to sell the same lines of insurance.3 See OGC Opinions dated August 6, 2001 and July 21, 2008. If, however, the recipient is not so licensed, the Superintendent could find that the broker acted in an “untrustworthy” manner under Insurance Law § 2110(a)(4), for which the broker’s license may be revoked or suspended, or for which penalties may be imposed pursuant to Insurance Law § 2127.
In this present circumstance, it is unclear whether the consultant will require a license; rather, that will depend on the extent to which the consultant interacts with the potential insured before the producer places the insurance. If an unlicensed consultant narrows the pool of potential insureds and solicits them on behalf of the broker or otherwise provides insurance advice, then the consultant, unless appropriately licensed, would stand in violation of the Insurance Law. Further, the producer would also run afoul of the Insurance Law by sharing commissions with that person. See OGC Opinions dated August 6, 2001 and July 21, 2008. However, if after the producer has solicited the insured the consultant merely provides to the insured information that is limited to a charity’s purpose and need for funding, then the consultant would appear to be acting outside the scope of the Insurance Law. But because the facts provided in connection with the present inquiry do not indicate with specificity the services to be provided by the consultant, OGC cannot render an opinion as to whether the producer may pay the consultant a fee.
For further information you may contact Senior Attorney Sapna S. Maloor at the New York City Office.
1 Insurance Law § 3205(b)(3) was enacted by N.Y. Laws of 1996, ch. 510, § 1, eff. Aug 8, 1996, and amended (to eliminate the five year “sunset” provision of the original) by N.Y. Laws of 2001, ch. 146
2 “Solicitation” is defined in Insurance Law § 2101(o) as “attempting to sell insurance or asking or urging a person to apply for a particular kind of insurance from a particular licensed insurer, fraternal benefit society or health maintenance organization.”
3 An exception, not applicable here, is set forth in Insurance Law § 2128 and New York Compilation of Codes, Rules and Regulations, title 11, §§ 29.1 – 29.6 (Regulation 87), which prohibit, under certain circumstances, the acceptance of commissions arising from insurance coverages or services placed on behalf of a New York governmental entity.