New York State Seal
STATE OF NEW YORK
INSURANCE DEPARTMENT
ONE COMMERCE PLAZA
ALBANY, NEW YORK 12257

Andrew M. Cuomo
Governor

James J. Wrynn
Superintendent

OGC Op. No. 11-02-09

The Office of General Counsel issued the following opinion on February 9, 2011, representing the position of the New York State Insurance Department.

Re: Chamber of Commerce Licensed Subsidiary – “Marketing Fees”

Questions Presented:

1. May a licensed insurance producer that is a wholly-owned subsidiary of a chamber of commerce pay a “marketing fee” to another chamber of commerce based on the number of certificates issued under that chamber’s group policy?

2. May a licensed insurance producer that is a wholly-owned subsidiary of a chamber of commerce pay a “marketing fee” to another chamber based upon the producer’s sale of individual and group policies directly to that chamber’s membership?

Conclusions:

1. No. A licensed insurance producer may not compensate a chamber that is a group policyholder of a life or accident and health insurance policy in the form of a “marketing fee” based on the number of certificates issued under the group policy. However, a producer may reimburse a chamber for actual administrative expenses where the payment is equivalent to the costs of rendering services, and the producer normally would perform those services.

2. No. A licensed insurance producer that is a wholly-owned subsidiary of a chamber of commerce may not pay a “marketing fee” to another chamber based on the producer’s sale of individual and group policies directly to that chamber’s membership. However, the licensed producer may compensate the chamber for a referral where there is no discussion of specific insurance policy terms and conditions, and where the compensation for the referral is not based upon the purchase of insurance.

Facts:

The inquirer reports that ABC, Inc. is a New York-licensed life and accident and health insurance producer and wholly-owned subsidiary of the XYZ Chamber that, among other things, services the XYZ Chamber’s needs with respect to individual and group health insurance plans for its members and their employees. ABC, Inc. also sells insurance to non-affiliated New York chambers, and offers individual and group health insurance plans to the general public.

The inquirer asks whether ABC, Inc. may pay another chamber, which is a non-licensee, a “marketing fee” to reimburse the other chamber for promotional expenses related to the marketing of health insurance programs to the chamber’s membership based on the number of certificates sold. The inquirer has advised the Department that the other chamber’s role would be limited to distribution of informational materials at chamber events, newsletters and “e-blasts” specifically directed toward the chamber’s membership. The other chamber may also distribute the producer’s marketing materials at chamber-sponsored events or seminars focusing on a particular health-care issue, but will not discuss particulars of any insurance, including terms or rates.

Analysis:

1. Compensation to a Chamber as a Group Policyholder

The inquirer has asked whether ABC, Inc. may compensate an unlicensed non-affiliated chamber for marketing and promotional activities related to the sale of group health insurance certificates to the chamber’s membership and whether such compensation may be based on the number of certificates sold.

Insurance Law § 2102(a)(1) prohibits any person, firm, association or corporation from acting as an insurance producer or an insurance adjuster in this state without a license issued by the Department. Insurance Law 2102(a)(1) states as follows:

(a)(1) No person, firm, association or corporation shall act as an insurance producer or insurance adjuster in this state without having the authority to do so by virtue of a license issued and in force pursuant to the provisions of this chapter.

Further, Insurance Law § 2102(e)(1) states that “no person shall accept any commission, service fee, brokerage or other valuable consideration for selling, soliciting or negotiating insurance in this state” without a duly-issued license from the Insurance Department.

Insurance Law § 2101(k), in turn, defines an “insurance producer” as “an insurance agent, insurance broker, reinsurance intermediary, excess line broker, or any other person required to be licensed under the laws of this state to sell, solicit or negotiate insurance.” Further, Insurance Law § 2101(a) defines “insurance agent” in relevant part as follows:

(a) In this article “insurance agent” means any authorized or acknowledged agent of an insurer, fraternal benefit society or health maintenance organization issued a certificate of authority pursuant to article forty-four of the public health law, and any sub-agent or other representative of such an agent, who acts as such in the solicitation of, negotiation for, or sale of, an insurance, health maintenance or organization or annuity contract….

In addition, Insurance Law § 2101(c) defines “insurance broker” in relevant part as follows:

(c) In this article “insurance broker” means 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….

Thus, if a group policyholder engages in any activities that would constitute acting as an insurance producer without a license, the group policyholder is in violation of Insurance Law § 2102, unless an exception applies. Likewise, if the producer compensates the group policyholder for activities that would constitute acting as an insurance producer without a license, the producer runs afoul of the Insurance Law, unless an exception applies.

Two relevant exceptions that permit a group policyholder to assist in the administration of the group policy, such as assisting in the enrollment of new insureds under the group policy, are set forth in Insurance Law § 2101(k)(6) and (7). But those exceptions apply only when the group policyholder or its employees do not receive compensation. Specifically, the exceptions state that they extend to:

(k)(6) a person who secures and furnishes information for the purpose of group life insurance, group property/casualty insurance, group annuities, group or blanket accident and health insurance; or for the purpose of enrolling individuals under plans, issuing certificates under plans or otherwise assisting in administering plans . . . , where no commission is paid to the person for the service; [or]

(7) an employer or association or its officers, directors, employees, or the trustees of an employee trust plan, to the extent that the employers, officers, employees, directors or trustees are engaged in the administration or operation of a program of employee benefits for the employer's or association's own employees or the employees of its subsidiaries or affiliates, which program involves the use of insurance issued by an insurer, fraternal benefit society or health maintenance organization, as long as the employers, associations, officers, directors, employees or trustees are not in any manner compensated, directly or indirectly, by the company issuing the contracts;…

This exception would allow a chamber that is a group policyholder under which its members or their employees may obtain certificates of insurance to bring that group policy to the attention of its members and to direct interested parties to the producer of record on the policy or to assist in enrollment. Further, notwithstanding the prohibition set forth in these statutes against the paying of commissions, a producer may compensate an association for actual administrative expenses to the extent that the fee paid by a producer does not exceed the association’s cost for the program, and as long as those services would normally be performed by the insurer, agent or broker. See Opinion of Office of General Counsel (“OGC Opinion”) No. 06-03-06 (March 9, 2006) and OGC Opinion No. 03-10-09 (October 16, 2003). But the statute would not allow the producer to compensate the chamber based upon sales.

Insurance Law §§ 2114, which proscribes the payment of commissions to unlicensed persons or entities with respect to life and accident and health insurance agents, sets forth a limited exception for referrals. Insurance Law § 2114 states in pertinent part as follows:

(a)(1) No insurer authorized to do business in this state, and no officer, agent or representative thereof, shall pay any money or give anything 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 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 the specific insurance policy terms and conditions and where the compensation for referral is not based upon the purchase of insurance by such person.

(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 contains similar language with respect to property/casualty insurance agents. Further, a licensed insurance broker who shares commissions with an unlicensed person may be found by the Superintendent to be acting in an “untrustworthy” manner pursuant to Insurance Law § 2110(a)(4)(C).

The provisions of Insurance Law §§ 2114, 2115 and 2116 allow compensation for referrals to a licensed agent or broker where there is no discussion of specific insurance policy terms and conditions, and where the compensation for the referral is not based upon the purchase of insurance. But this exception does not apply to these facts because the compensation contemplated is based upon the sale of insurance. See OGC Opinion No. 08-04-25 (April 17, 2008). Also, the referral exception does not apply to referrals of group members by the group policyholders to the producer of record on the group policy because the compensation would constitute an unlawful rebate or inducement to the group policyholder in violation of Insurance Law § 4224. See OGC Opinion 06-03-06 (March 9, 2006).

In sum, a licensed insurance producer may not compensate a chamber that is a group policyholder of a life or accident and health insurance policy in the form of a “marketing fee” based on the number of certificates issued under the group policy. However, a producer may reimburse a chamber for actual administrative expenses where the payment is equivalent to the cost of rendering services, and the producer normally would perform those services. And, the producer may pay the chamber a referral fee provided there is no discussion of specific insurance policy terms and conditions, and the compensation for the referral is not based upon the purchase of insurance

2. Compensation to a Chamber that is not a Group Policyholder

The inquirer next asks whether ABC, Inc. may pay a “marketing fee” to another chamber based upon the producer’s sale of individual and group policies directly to that chamber’s membership where that chamber is not a group policyholder.

If the chamber is not a group policyholder under any policy insuring members of the chamber or a chamber member’s employees, a licensed insurance producer may compensate the chamber for referring the chamber’s members to the producer if the referral constitutes a referral within the meaning of Insurance Law §§ 2114, 2115 or 2116. Specifically, as stated above, the referral may not include a discussion of specific insurance policy terms and conditions, and the compensation for the referral may not be based upon the purchase of insurance. Thus, provided that their content does not include any discussion of the terms or conditions of insurance, and the chamber does not receive compensation based upon sales of insurance, the email blasts, newsletter material and materials distributed by the chamber at chamber events may constitute valid referrals within the meaning of Insurance Law §§ 2114, 2115 or 2116.

For further information, you may communicate with Associate Counsel Bradley F. Rice at the Albany office.