September 21, 2006
Re: Insurance Premium Finance Agencies -- Payments to Insurance Brokers
Your letter dated June 20, 2006 to Gene Brooks seeks confirmation from the New York State Banking Department (the "Department") that the premium finance arrangement described in your letter is consistent with Article XII-B of the New York Banking Law. Specifically, you seek confirmation that, when your client, an insurance broker, performs services in connection with the referral of premium finance agreements to a licensed premium finance agency, the consideration paid by the premium finance company to the broker is not prohibited under Article XII-B.
For the reasons that follow below, the Department concurs that, where an insurance broker performs services in connection with the referral of premium finance agreements to a licensed premium finance agency and the consideration paid by the premium finance company to the broker is reasonable in relation to the services performed, the payment should not be considered to be prohibited under Article XII-B. However, where an insurance broker performs services in connection With the referral of premium finance agreements to a licensed premium finance agency and the consideration paid by the premium finance company to the broker exceeds what is reasonable in relation to the services performed, the payment is prohibited under Article XII-B. The reasonableness of the consideration is a question of fact that depends on all the pertinent facts and circumstances (including the scope of the services, costs incurred by the broker, what a third-party service provider might charge, other industry practices, etc.) and cannot be answered for the scenario you posed based upon the descriptions in your letter.
The arrangement you describe in your letter is essentially the following:
- In addition to selling an insurance contract to an insured, your client, a broker that is not licensed as a premium finance agency under Section 555, may assist in the financing of the insurance contract premium by referring the insured to a premium finance agency that may enter into a premium finance agreement with the insured.
- The broker's agreement with the premium finance agency calls for the broker to perform certain services for the premium finance company, such as preparing paperwork and applications for premium finance agreements and reviewing insurance policy terms and conditions and providing warranties to the premium finance company thereon that are relied upon by the premium finance agency.
- Payments for the services are made quarterly, regardless of whether any premium finance agreements are consummated, and the fee is adjusted annually.
- No separate consideration is paid for any referral activity that is associated with the services that are performed.
The nature of the services to be rendered and the compensation therefor raises questions about whether the proposed services and compensation are, in essence, "inducements" or otherwise prohibited under Section 566(2)(a) of Article Xll-B of the Banking Law. If the facts of this arrangement indicate that no actual services would be performed by the broker or that the compensation paid is disproportionate to the services actually performed, the premium finance agency would be deemed to be circumventing the legislative purposes acting in contravention of the prohibitions against inducements set forth in Section 566(2)(a) of the Banking Law.
Section 566(2)(a) of the Banking law generally prohibits payments of any rebate of the service charge or other inducement valued over one dollar to an agent or broker for the referral of business and reads as follows:
No premium finance agency, and no employee of such an agency shall pay, allow or offer to payor allow in any manner whatsoever to an insurance agent or broker, or any employee of an insurance agent or broker, or to any other person, either as an inducement to the financing of any insurance policy with the premium finance agency or after any such policy has been financed, any rebate whatsoever, either from the service charge for financing specified in the premium finance agreement or otherwise, or shall give or offer to give any valuable consideration or inducement of any kind directly or indirectly, other than an article of merchandise not exceeding one dollar in value which shall have thereon the advertisement of the premium finance agency... (Emphasis added.)
Although premium finance agencies are prohibited from making payments to any other person as an inducement to financing or from paying any rebate whatsoever after an insurance policy has been financed, the arrangement proposed in your letter ostensibly seeks to confine payments to other services performed by the broker when the premium finance agreement is referred to the premium finance company. The amount of consideration, the methodology by which it is set and the nature of the services actually performed, among other factors, will influence whether the consideration paid by the premium finance company mayor may not be a payment prohibited by Section 566(2)(a). All the facts and circumstances must be considered to determine whether the proposed service agreement payments are, in essence, "inducements" or are otherwise prohibited under Section 566(2)(a) of the Banking Law. From the information provided in your letter, it is not possible to make that determination.
I trust the foregoing is responsive to your inquiry.
Very truly yours,
Alan M. Weinberg