OGC Opinion No. 06-06-13
The Office of General Counsel issued the following opinion on June 28, 2006 representing the position of the New York State Insurance Department.
RE: Referral Fees
Question Presented:
1. May an insurance agent or broker compensate its client or make a donation to the insured's selected charity in return for the client providing a referral?
2. Does N.Y. Insurance Law limit the amount of compensation for a referral?
Conclusion:
1. Although the Insurance Law allows an insurance agent or broker to compensate a person in return for a referral pursuant to N.Y. Ins. Law §§ 2114, 2115 and 2116 (McKinney 2006) the referral may not include a discussion of specific insurance policy terms and conditions and the compensation for the referral may not be based on the sale of insurance. The method of compensation for a referral is irrelevant. However, such compensation may not be limited to those clients who have made referrals. Compensating only clients for referrals would violate N.Y. Ins. Law § 2324 or § 4224 (McKinney 2006).
2. No, the Insurance Law does not limit the amount of compensation for a referral.
Facts:
An agent inquired whether an agency is allowed to give a thank-you gift to a client who has made referrals to the agency. The agent considered sending five dollar gas cards to the client or ten dollar donations to the client's selected charity. The agent further inquired about entering clients who have made referrals into a raffle or lottery drawing for a chance to win a larger prize.
Analysis:
N.Y. Ins. Law § 2102 (McKinney 2006) states in pertinent part:
(a)(1) No person, firm, association or corporation shall act as an insurance producer or insurance adjuster in this state without having authority to do so by virtue of a license issued and in force pursuant to the provisions of this chapter.1
N.Y. Ins. Law § 2114 (McKinney 2006) applies to life and accident and health insurance and annuity contracts and states in relevant part:
(a)(1) No insurer or fraternal benefit society doing business in this state shall pay any commission or other compensation to any person, firm or corporation, for any services in obtaining in this state any new contract of life insurance or any new annuity contract, except to a licensed life insurance agent of such insurer or of such society or to an insurance broker licensed under subparagraph (A) of paragraph one of subsection (b) of section two thousand one hundred four of this article, 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.3
Thus the prohibition against a non-licensee acting as an insurance agent or broker allows a limited exception for referrals to non-licensees under certain circumstances. A non-licensee may make a referral to a licensed insurance agent or broker provided that the non-licensee does not discuss specific policy terms with the referred person, and is not compensated based upon whether a sale is successful. The Insurance Law does not limit the amount of compensation that may be given to a non-licensee for such referrals. See Opinion of General Counsel No. 06-01-14 (January 10, 2006).
In terms of compensating only clients for referrals, the following two sections apply: N.Y. Ins. Law § 2324(a) (McKinney 2006), which applies to property/casualty insurance, provides in pertinent part:2
No authorized insurer, no licensed insurance agent, no licensed insurance broker, and no employee or other representative of any such insurer, agent or broker shall make, procure or negotiate any contract of insurance other than as plainly expressed in the policy or other written contract issued or to be issued as evidence thereof, or shall directly or indirectly, by giving or sharing a commission or in any manner whatsoever, pay or allow or offer to pay or allow to the insured or to any employee of the insured, either as an inducement to the making of insurance or after insurance has been effected, any rebate from the premium which is specified in the policy, or any special favor or advantage in the dividends or other benefit to accrue thereon, or shall give or offer to give any valuable consideration or inducement of any kind, directly or indirectly, which is not specified in such policy or contract, other than any article of merchandise not exceeding fifteen dollars in value which shall have conspicuously stamped or printed thereon the advertisement of the insurer, agent or broker, or shall give, sell or purchase, or offer to give, sell or purchase, as an inducement to the making of such insurance or in connection therewith, any stock, bond or other securities or any dividends or profits accrued thereon, nor shall the insured, his agent or representative knowingly receive directly or indirectly, any such rebate or special favor or advantage, provided, however, a licensed insurance agent or a licensed insurance broker may retain the usual commission or underwriting fee on insurance placed on his own property or risks, if the aggregate of such commissions or underwriting fees will not exceed five percent of the total net commissions or underwriting fees received by such licensed insurance agent or insurance broker during the calendar year.
Additionally, N.Y. Ins. Law § 4224(c) (McKinney 2006), which applies to life and accident and health insurance and annuity contracts, provides, in pertinent part:
No such life insurance company and no such savings and insurance bank and no officer, agent, solicitor or representative thereof and no such insurer doing in this state the business of accident and health insurance and no officer, agent, solicitor or representative thereof, and no licensed insurance broker and no employee or other representative of any such insurer, agent or broker, shall pay, allow or give, or offer to pay, allow or give, directly or indirectly, as an inducement to any person to insure, or shall give, sell or purchase, or offer to give, sell or purchase, as such inducement, or interdependent with any policy of life insurance or annuity contract or policy of accident and health insurance, any stocks, bonds, or other securities, or any dividends or profits accruing or to accrue thereon, or any valuable consideration or inducement whatever not specified in such policy or contract; nor shall any person in this state knowingly receive as such inducement, any rebate of premium or policy fee or any special favor or advantage in the dividends or other benefits to accrue on any such policy or contract, or knowingly receive any paid employment or contract for services of any kind, or any valuable consideration or inducement whatever which is not specified in such policy or contract.
The item of merchandise contemplated by § 2324 with respect to property/casualty insurance is a "keepsake" item that does not exceed $15 in value as long as the name of the insurance agent or broker is stamped thereon. No similar exception exists for life, accident and health insurance, and annuity contracts under § 4224. Therefore, monetary compensation, raffle tickets or gifts (other than the keepsake exception for property/casualty insurance) are inappropriate forms of inducement under § 2324 and §4224.
Compensating only clients for referrals would be considered an inducement and in turn would violate § 2324 or §4224. The form or nature of compensation be it cash, raffle, a donation or otherwise, is irrelevant. The compensation may not be limited to or dependent upon one's status as a client or potential client.
Please review the Department's Office of General Counsel opinions at our web site (www.ins.state.ny.us) for further discussion on this issue. In particular, Opinion of General Counsel No. 03-10-30 (October 31, 2003), No. 05-05-33 (May 31, 2005) and No. 06-04-15 (April 25, 2006) may be of interest.
For further information you may contact Principal Attorney Paul A. Zuckerman at the New York City office.
1 'Insurance producer' as defined in N.Y. Ins. Law § 2101 (McKinney's 2006), includes insurance agent or broker.
2 See also N.Y. Insurance law § 2115, which applies to property/casualty insurance agents, and § 2116, which applies to insurance brokers.
3 This provision is effective until September 10, 2007 pending further extension by the legislature. Similar provisions in § 2115 and § 2116 are also effective until September 10, 2007 pending extension by the legislature.