OGC Op. No. 10-09-10

The Office of General Counsel issued the following opinion on September 27, 2010, representing the position of the New York State Insurance Department.

Re: Commission Sharing

Question Presented:

May a licensed property/casualty insurance broker share commission with an insured’s affiliated entity, which is not licensed as an insurance agent or broker, for assisting the licensed insurance broker in placing coverage for the insured?

Conclusion:

No. A licensed property/casualty insurance broker may not share commission with an affiliated entity of an insured, because such payment would constitute a rebate or an inducement to purchase insurance in violation of New York Insurance Law § 2324 (McKinney 2006). Additionally, such an entity would be acting as an insurance agent or broker without a license, in violation of Insurance Law
§ 2102. Furthermore, a licensed insurance broker that shares commission with an entity under such circumstances may be found to have demonstrated untrustworthiness pursuant to Insurance Law §2110(a)(4)(C), which could result in suspension or revocation of the insurance broker’s license.

Facts:

An attorney represents an insurance broker that “has been placing coverage through an insurer which has been ceding some of the risk to a reinsurer, which is a captive of the insured.” The attorney reported that “[t]he insured and its captive have been reevaluating the arrangements and have proposed that, instead of having the captive reinsure a portion of the risk, the captive would receive a fee for assisting in the placement of the insurance (but the primary insurer would not cede any of the risk to the captive). The captive’s regulator has indicated that it is acceptable for the captive to receive a fee (including part of the commission) in connection with the sale of the insurance to the insured.” The attorney also reported that “[t]he primary insurer has indicated [that] it cannot pay the captive directly, so for the captive to receive any fee in the transaction, the broker would have to pay the fee.” Thus, the captive insurer requests a share of the broker’s commission for assisting in the placement of the primary insurance. The attorney further stated that the primary insurer is a property/casualty insurer. This analysis assumes that the captive insurer is not licensed as an insurance producer in New York.

Analysis:

Insurance Law § 2101 provides the definitions of, inter alia, “insurance agent” and “insurance broker.” Insurance Law § 2101(a) defines an “insurance agent” to mean, in relevant part, “any authorized or acknowledged agent of an insurer . . . who acts as such in the solicitation of, negotiation for, or sale of, an insurance contract, other than as a licensed insurance broker[.]” The statute provides exceptions to the definition of “insurance agent,” none of which are relevant here. Further, Insurance Law § 2101(c) defines an “insurance broker” to mean

any person, firm, association or corporation who or which for any compensation, commission or other thing of value acts or aids in any manner in soliciting, negotiating or selling, any insurance or annuity contract or in placing risks or taking out insurance, on behalf of an insured other than himself, herself or itself or on behalf of any licensed insurance broker . . . .

The statute also provides exceptions to the definition of “insurance broker,” which are irrelevant here.

Soliciting, negotiating, and selling insurance are acts that define the roles of an insurance agent and broker, for which proper licensure is required. Insurance Law § 2102(a)(1) and (e)(1) are relevant to your inquiry, and read as follows:

(a)(1) No person, firm, association or corporation shall act as an insurance producer ¹ 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.

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(e)(1) No person shall accept any commission, service fee, brokerage or other valuable consideration for selling, soliciting or negotiating insurance in this state if that person is required to be licensed under this article and is not so licensed.

The captive insurer at issue here presumably is not a licensed insurance agent or broker. Thus, the captive insurer would be acting as an insurance producer without a license, in violation of Insurance Law § 2102(a)(1) if it has accepted commission in connection with the transaction. Therefore, the captive insurer may not accept commission or other payment for the placement of insurance made by the licensed insurance broker, because doing so is prohibited by Insurance Law § 2102(e)(1). Further, a licensed insurance broker that shares commission or otherwise compensates the captive insurer under these circumstances may be found to have demonstrated untrustworthiness pursuant to § 2110(a)(4)(C), which could result in suspension or revocation of the insurance broker’s license.

In addition, the licensed insurance broker in this instance may not share commission with the captive insurer, because the captive insurer is an affiliated entity of the insured, and any payment to the captive insurer would violate Insurance Law § 2324. The relevant parts of Insurance Law § 2324 read as follows:

(a) 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.

(b) Within the meaning of subsection (a) hereof, the sharing of a commission with the insured shall be deemed to include any case in which a licensed insurance agent or a licensed insurance broker which is a subsidiary corporation of, or a corporation affiliated with, any corporation insured, received commissions for the negotiation or procurement of any policy or contract of insurance for the insured.

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(f) Any person or corporation violating the provisions of this section shall, in addition to all other penalties provided by law, pay to the people of this state as a penalty the sum of five hundred dollars for each such violation. (Emphasis added.)

Thus, Insurance Law § 2324(a) prohibits the licensed insurance broker in this instance from sharing his commission with the captive insurer, because such payment, which is not specified in the policy, would constitute an indirect payment to the insured as a rebate or an inducement to purchase insurance. The statute also prohibits the captive insurer from accepting such payment. ² Violating Insurance Law § 2324 may subject both the licensed insurance broker and the captive insurer to penalty, pursuant to subsection (f) of that statute. See also the New York State Insurance Department’s Office of General Counsel Opinion No. 06-12-04 (December 6, 2006) (commission-sharing with non-appointed insurance agent, who was related to the insured, violated Insurance Law).

The current arrangement of placing reinsurance with the captive insurer also violates the Insurance Law, if the insured purchases coverage from the primary insurer specifically because the primary insurer transfers its risk to the insured’s affiliate. Such arrangement would constitute a rebate or inducement to purchase insurance, in violation of Insurance Law § 2324, for which penalties may apply.

For further information you may contact Associate Attorney Sally Geisel at the New York City Office.

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¹ An “insurance producer” is defined in Insurance Law § 2101(k) as “an insurance agent, insurance broker, reinsurance intermediary, excess lines broker, or any other person required to be licensed under the laws of this state to sell, solicit or negotiate insurance.”

² Even if the captive insurer were licensed as an insurance agent or broker, it would still violate the statute, because Insurance Law § 2324(b) prohibits commission-sharing with a licensed insurance agent or broker that is an affiliate of the insured, unless the commission earned on the affiliated business does not exceed five percent of the total net commissions or underwriting fees received by the captive insurer (as the licensed producer) during the calendar year. Hence, commission-sharing with the captive insurer under these circumstances violates Insurance Law § 2324, regardless of whether the captive insurer is licensed under Insurance Law § 2102.