Insurance Circular Letter No. 6 (2018)

June 6, 2018

STATUTORY AND REGULATORY REFERENCES: Insurance Law §§ 2101, 2119, and 4224(a); 11 NYCRR 30 (Insurance Regulation 194)

I. Discussion

The purpose of this circular letter is to provide guidance to all authorized life insurance companies and fraternal benefit societies (“insurers”), licensed insurance agents, and licensed insurance brokers regarding the payment of fees to an insurance agent or broker by clients in connection with the sale of a life insurance policy or annuity contract in New York where the agent or broker is also providing investment advice or other services to the client incident to the sale but is not receiving commission from the insurer.

The Department of Financial Services (“Department”) has become aware of insurance agents who are selling deferred variable annuities under a fee-based arrangement pursuant to which the agents also provide investment advice or similar services to the clients. In some cases, the insurance agents also are registered investment advisors. These insurance agents are compensated in a variety of ways, including the payment by the client of a fixed fee. In certain cases, the insurer pays no commission to the insurance agent and the only compensation that the agent receives is from the client.

Insurance Law § 2119(a)(1) allows an insurance agent, broker, or consultant to receive compensation for examining, appraising, reviewing, or evaluating an insurance policy or annuity contract or for making recommendations or giving advice if the compensation is based upon a written memorandum signed by the party to be charged and specifying or clearly defining the amount or extent of the compensation. Insurance Law § 2119(b) prohibits an insurance agent or broker from receiving any compensation as result of the sale of insurance or annuities from any person for whom the broker or agent has performed any related consulting service for which the broker or agent received or contracted to receive a fee within the preceding 12 months, unless the compensation is provided for in the written memorandum.

Insurance Law § 2119(c) permits an insurance broker also to receive compensation from an insured or prospective insured for or on account of the sale, solicitation, or negotiation of an insurance policy or annuity contract in New York if the compensation is based upon a written memorandum signed by party to be charged and specifying or clearly defining the amount or extent of the compensation. However, an insurance agent may not charge a service fee under Insurance Law § 2119(c) or any other section of the Insurance Law for or on account of the sale, solicitation, or negotiation of an insurance policy or annuity contract in New York and may only be compensated by the insurer. See OGC Opinion No. 08-07-11 (July 16, 2008).

In some of the situations that have come to the Department’s attention, the insurance agents providing the investment or other advice are not receiving commissions from insurers and assert that the fee they are receiving from the client is for the investment or other advice they are providing to the client and not for the sale of the annuity. These agents claim that they are being compensated for the advice in accordance with Insurance Law § 2119(a) and are not receiving any compensation for the sale of the annuity contract. They also assert that the agent’s fee for providing advice would be the same regardless of whether the client purchases an annuity.

The Department disagrees. These insurance agents are not merely providing advice. They also are selling the client an annuity contract. Once an insurance agent obtains a quote from an insurer or takes an application for an annuity contract, that agent is no longer simply engaging in examining, appraising, reviewing, or evaluating an insurance policy or annuity contract, making recommendations or giving advice regarding the policy or contract for which a fee may be charged under § 2119(a)(1). See OGC Opinion No. 08-04-03 (April 1, 2008). The sale of an annuity contract is not included in § 2119(a)(1). See OGC Opinion No. 08-07-11 (July 16, 2008). Rather, the agent is engaged in soliciting, negotiating, or selling the annuity contract, which are activities for which the advisor is acting as an agent of the insurer. It is untenable for agents who are not receiving commissions from insurers to assert that the fees they charge for providing advice do not also encompass the sale of insurance when it occurs. Without receiving compensation from insurers, the agents would not be helping clients obtain annuity contracts if the agents were not being compensated in some other manner - namely, by the fees from the clients.

While an insurance agent may not charge a fee for selling insurance or annuity contracts, an advisor who is licensed as an insurance broker in New York may charge a client a fee for such a sale in accordance with Insurance Law § 2119(c). The fee should be reasonable, and the insurance broker should not charge like clients different amounts for the same services. See Circular Letter No. 9 (2006).

If an advisor is licensed as both an insurance agent and an insurance broker, then the advisor’s role for each type of insurance or annuity contract it sells should be clearly defined in the agreement between the advisor and the insurer. An advisor with both licenses may not arbitrarily decide whether the advisor is acting as an agent or a broker depending on the client and the insurance product the advisor is selling. The advisor would violate Insurance Law § 4224(c) if it arbitrarily decided when to act as an agent or broker and therefore when to charge a client service fee, because the advisor would be offering an impermissible inducement whenever it chose not to charge a client a service fee. The agency agreement between the advisor and the insurer it represents should set forth the circumstances and types of transactions under which the insurance agent is acting as an agent for the insurer. If the agreement does not clearly define the circumstances, then the Department will consider the advisor to be the insurer’s agent under all circumstances.

II. Conclusion

An advisor licensed as an insurance agent who provides investment advice or similar services to a client for a fee and also sells deferred variable annuities to the client but does not receive appropriate separate compensation from the insurer violates the Insurance Law because only an advisor licensed as an insurance broker may charge a client a fee for insurance sales under Insurance Law § 2119(c). If an advisor is licensed as both an insurance agent and an insurance broker, then the advisor’s role for each insurance policy or annuity contract it sells for each insurer must be clearly defined in a written agreement with the insurer. Otherwise, the Department will in all circumstances consider the advisor to be an agent of the insurer who cannot receive fees under Insurance Law § 2119(c).

Please direct any questions or comments regarding this circular letter to Joana Lucashuk, Supervising Attorney, at (212) 480-2125 or [email protected].