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

David A. Paterson
Governor

James J. Wrynn
Superintendent

OGC Op. No. 10-11-01

The Office of General Counsel issued the following opinion on November 4, 2010 representing the position of the New York State Insurance Department.

Re: Disclosure of Compensation Paid to Employees or Sublicensees

Question presented:

Does an insurance producer satisfy the producer compensation disclosure requirements set forth in Regulation 194 by disclosing only the compensation that the producer pays to its individual employees or sublicensees?

Conclusion:

No. A producer that is a business entity, such as a corporation or partnership, and that sells insurance contracts through its employees or sublicensees, is the producer “selling an insurance contract” for purposes of § 30.3(a) of Regulation 194. The producer is therefore required to provide disclosure of compensation it receives pursuant to Regulation 194. The producer need not separately disclose the compensation it pays to its individual employees (whether licensed or not) or sublicensees. Only one set of disclosures per transaction is required.

Facts:

The inquirer states that he represents an authorized insurer. The authorized insurer, through its insurance agency ABC Insurance Agency, Inc. (“ABC”), also represents other insurers in the sale of homeowners insurance and commercial insurance. ABC has entered into contracts with those insurers that reflect the parties’ intent to keep information about ABC’s compensation confidential. Accordingly, the inquirer asks whether ABC must disclose its compensation, or whether ABC could satisfy the producer compensation disclosure requirements set forth in Regulation 194 by disclosing only the compensation that it pays to its individual employees or sublicensees.

Analysis:

Regulation 194 was promulgated on January 25, 2010 and takes effect on January 1, 2011. Regulation 194 is intended to provide a means to address the potential conflicts of interest that arise due to the incentive-based compensation an insurer pays to its producers in the least invasive manner possible – by requiring that insurance producers make certain disclosures to insurance customers about the producer’s role in the insurance transaction and their compensation arrangements with insurers. Specifically, the regulation requires an insurance producer to disclose its role in the transaction, that the producer will receive compensation from the insurer based upon the sale of the policy, that the compensation paid by insurers may vary, and that the purchaser may obtain from the producer, upon request, information about the compensation the producer expects to receive from the sale of the policy. The regulation also requires that upon the customer’s request, the producer disclose the amount of compensation for the policy selected and any alternative quotes presented. The required disclosures will help producers and consumers manage the potential conflicts that arise from producer compensation because they allow insurance customers to request information about the compensation for the insurance policy and alternative policies quoted.

The inquirer asks whether an insurance producer would satisfy the Regulation 194 requirements by disclosing only the compensation that the producer pays to its individual employees or sublicensees.

Section 30.3 of Regulation 194 states that “an insurance producer selling an insurance contract” must disclose producer compensation to an insured. The exceptions to disclosure apply: (1) to the placement of reinsurance; (2) to the placement of insurance with a captive insurer; (3) if there is no direct sales or solicitation contact with the purchaser; (4) if the person does not need to be licensed for the purposes of that sale; or (5) to renewals. A producer that is a business entity, such as a corporation or partnership, and that sells insurance contracts through its employees or sublicensees, is the producer “selling an insurance contract” for purposes of § 30.3(a) of Regulation 194. The producer is therefore required to provide disclosure of compensation it receives pursuant to Regulation 194. The producer need not separately disclose the compensation it pays to its individual employees (whether licensed or not) or sublicensees. Only one set of disclosures per transaction is required.

As stated above, Regulation 194 was promulgated to address the potential conflicts of interest that arise due to the differences in the amount of compensation an insurer pays to its producers. To the extent that ABC has entered into agreements with insurers that require the parties to keep confidential information about ABC’s compensation, ABC and the insurers with whom it contracts must amend those agreements prior to January 1, 2011.

For further information, you may contact Senior Attorney Sapna Maloor at the New York City Office.