Re: Article XII-B of the New York Banking Law
Your letter dated April 11, 2008 to the New York State Banking Department (the "Department"), has been referred to me for response. In your letter you stated that your firm represents a marketing company which seeks to do business with a premium finance company licensed by the Department. You further stated that your client "would simply assist in arranging premium finance transactions between the premium finance company and insurance agents or brokers' customers, similar to the arrangement set forth in the NYS Banking Department Staff Interpretation dated February 6, 2006." You indicate that the finance company proposes to pay a percentage fee to your client based upon the actual volume of premium finance transactions generated or a flat fee for your client's services, regardless of whether any premium finance agreements are consummated, with the understanding that the fee will be adjusted annually or semi-annually. This adjustment will be based upon actual services performed by your client, which would ostensibly be related to the volume of premium finance transactions previously generated.
You seek the Department's opinion as to whether the proposed fee arrangements between your client and the premium finance company violate Section 566(2)(a) of Article XII-B of the Banking Law.
As to your question, a premium finance agency generally cannot compensate a "Premium Finance Arranger", if such payments can be viewed as "inducements" for the "Premium Finance Arranger" to place contracts with the premium finance agency. This prohibition is clearly stated in Section 566(2)(a) of the Banking Law, which in part, states:
No premium finance agency, and no employee of such an agency shall pay, allow or offer to pay or 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 ....
However, if the payments to the "Premium Finance Arranger" can be viewed as payments for actual services provided, then such payments would not be considered "inducements" and therefore, not a violation of Section 566(2)(a) of the Banking Law. In your letter you listed a number of illustrative services including:
(i) communicating and securing appointments with insurance agents and brokers to discuss and understand their premium financing needs;
(ii) collecting data from the agency or brokerage, including the types of business they tend to finance (e.g., personal lines vs. commercial lines); amount of premiums financed; number of employees and the amount of property and casualty insurance they write or broker;
(iii) using the information collected, determining if the agency or brokerage would be a good fit for the premium finance company.
Although the following is not an exhaustive list, they are factors that might be considered in determining whether a payment to a "Premium Finance Arranger" is for "actual services performed" or a mere "inducement": (i) Is there some rational relationship between the services performed and the compensation received; (ii) In light of the market rate for similar services, is the compensation fair; (iii) has the premium finance agency "shopped around" in order to determine whether the payment demanded or negotiated by the "Premium Finance Arranger" is the going rate.
If the services provided by your client are legitimate and the compensation by the premium finance company is reasonable then there appears to be no problem.
See also the Department's Opinion Letter dated February 6, 2006, which you cited in your letter.
I trust the foregoing is responsive to your inquiry.
Very truly yours,
Orinthia E. Perkins