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

OGC Op. No. 09-04-11

The Office of General Counsel issued the following opinion on April 22, 2009, representing the position of the New York State Insurance Department.

Re: Payment of referral fees to unlicensed credit union employees

Questions Presented:

1. May a broker pay referral fees to an unlicensed employee of a federal credit union?

2. May a broker pay an unlicensed employee a referral fee that is contingent upon the broker being able to provide the prospective insured with an insurance quote?

3. May a broker pay an unlicensed employee a referral fee that is contingent upon the sale of the policy?

4. May a broker pay an unlicensed employee a referral fee based upon the number of employees where the unlicensed employee refers the employer to the broker? (For example, $20 for an employer with 5 or less employees; $50 for 5-25 employees.)

Conclusions:

1. Yes. Pursuant to N.Y. Ins. Law § 2116 (McKinney 2006), a broker may compensate an unlicensed employee for referrals, provided that the unlicensed employee does not engage in discussions with the potential insureds regarding policy terms and conditions, and the payment of referral fees is not contingent upon the referred person purchasing a policy.

2. Yes. A broker may pay an unlicensed employee a referral fee that is contingent upon the broker being given the opportunity to present the prospect with a quote, provided that the unlicensed employee does not discuss specific insurance policy terms and conditions, and the unlicensed employee is not compensated based upon whether an actual sale is made.

3. No. A broker may not compensate an unlicensed employee for a referral that is contingent upon the sale of a policy.

4. Yes. Nothing in the Insurance Law or regulations promulgated thereunder prohibits a broker from paying different amounts of referral fees according to the number of prospects referred by the unlicensed credit union employee. However, the National Credit Union Administration (“NCUA”) has adopted rules governing the compensation of federal credit union employees for referrals.

Facts:

The inquirer is the Vice President of Administration for the ABC Insurance Agency. The inquirer seeks answers to additional questions that relate to a previous opinion issued to the inquirer by the Insurance Department’s Office of General Counsel (“OGC”) on September 28, 2005, regarding the payment of referral fees. Specifically, the inquirer asks whether a broker may pay an unlicensed employee referral fees, whether payment of the referral fees may be contingent upon the broker being able to provide a quote or to write a policy, and whether the amount of the fee may vary depending on the size of the prospective insured.

During a conversation with the Insurance Department regarding the inquiry, the inquirer acknowledged that the ABC Insurance Agency is owned by a credit union, and that the unlicensed employees to whom ABC wishes to pay referral fees are employees of the credit union. The inquirer reports that the insurance agency sells property/casualty insurance.

The fourth question, as set forth above, initially asked whether a broker may compensate the unlicensed employee based upon the size of the prospect being referred. In clarifying the question, the inquirer provides the following example: whether an unlicensed credit union employee may receive greater compensation for referring a person who has contact with an employer, thereby enabling the agency to market its policies to the employer’s employees (but not the employer itself).

For purposes of this opinion, the Department assumes that the policies would be written on an individual, and not group basis. The Department also assumes that the credit union employee would be acting with the knowledge and consent of the credit union.

Analysis:

Insurance Law § 2116 is germane to this inquiry. That statute permits an unlicensed person or entity to make a referral under limited circumstances, and reads as follows:

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 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.1 (Emphasis added.)

1. Payment of a referral fee to an unlicensed federal credit union employee

Pursuant to the exemption in Insurance Law § 2116, an insurance broker may compensate an unlicensed employee for referrals, provided that the compensation is not contingent upon whether the prospect purchases a policy, and so long as the unlicensed employee does not discuss with the prospect any specific policy terms and conditions. See OGC Opinion No. 06-04-15 (April 25, 2006). Accordingly, in response to the first question, a broker may lawfully pay a referral fee to an unlicensed federal credit union employee.

2. Payment of a referral fee that is contingent upon being able to provide an insurance quote

The inquirer next asks whether a broker may lawfully pay a referral fee to an unlicensed federal credit union employee contingent upon the broker merely providing an insurance quote. Nothing in the Insurance Law or regulations promulgated thereunder prohibits a broker from paying to an unlicensed federal credit union employee a referral fee that is contingent upon the broker having an opportunity to provide the prospect with a quote. That particular contingency is not the equivalent of payment that is based on a sale, which would violate Insurance Law § 2116. Therefore, the unlicensed employee may receive compensation for such a referral, as long as no policy terms and conditions are discussed. See OGC Opinion No. 05-09-25 (Sept. 28, 2005).

3. Payment of a referral fee that is contingent upon the sale of the policy

The third question asks whether a broker may lawfully pay an unlicensed employee a referral fee contingent upon the sale of a policy. OGC has consistently opined that a non-licensee may not receive compensation for any referrals that are contingent upon the prospect purchasing a policy. See e.g., OGC Opinion No. 08-04-25 (Apr. 17, 2008); OGC Opinion No. 07-04-14 (Apr. 27, 2007); OGC Opinion No. 06-11-23 (Nov. 29, 2006). Moreover, if a broker compensates an unlicensed employee for referrals in a manner that violates the Insurance Law, the Superintendent of Insurance could find that the broker acted in an untrustworthy manner by facilitating such unlawful activities of the unlicensed employee. See N.Y. Ins. Law § 2110(a)(4); OGC Opinion No. 07-06-16 (June 18, 2007). Upon a finding of untrustworthiness under Insurance Law § 2110(a)(12) (knowingly accepting insurance business from an individual who is not licensed), the Superintendent may revoke, suspend, or refuse to renew an insurance broker’s license pursuant to Insurance Law § 2110(a)(4)(C).

4. Payment of a referral fee based upon the size of the prospect being referred

Lastly, the inquirer asks about the payment of a referral fee based upon the size of the prospect referred. The Insurance Law and regulations promulgated thereunder are silent as to whether a broker may pay to unlicensed employees differing amounts of referral fees according to the number of prospects referred. However, as stated above, the NCUA has adopted rules governing the compensation of federal credit union employees for referrals. Therefore, the inquirer may wish to e-mail the NCUA at ogcmail@ncua.gov to obtain further information regarding the payment of referral fees to federal credit union employees.

For further information you may contact Senior Attorney Camielle A. Campbell at the New York City office.

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1 Insurance Law § 2115, which address the commissions of property/casualty insurance agents, and Insurance Law § 2114, which regulates commissions of life, accident and health insurance agents, set forth similar exemptions.