OGC Opinion No. 07-05-07

The Office of General Counsel issued the following opinion on May 14, 2007 representing the position of the New York State Insurance Department.

Re: Gift Cards to Customer Service Representatives

Question Presented:

May a managing general agent ("MGA") pay compensation in the form of gift cards to unlicensed employees of an insurance agency based on premiums generated by the agency?

Conclusion:

No. An MGA may not pay any compensation, including in the form of gift cards, to unlicensed employees of an insurance agency based on premiums generated by the agency, because the compensation is "directly dependent upon the amount of business done" within the meaning of N.Y. Ins. Law § 2101(a)(1) (McKinney 2006).

Facts:

The inquirer reports that his company is an MGA1 that manages Praetorian Insurance Company, which offers workers’ compensation coverage through independent agencies in New York State. For purposes of the inquiry, the Department assumes that both the company and these independent agencies to which the inquirer refers are in fact licensed insurance agents.

The inquirer would like to offer gift cards in $25 increments to the independent agencies’ personnel, such as customer service representatives,2 and administrative/clerical people, for meeting certain "production" goals. These gift cards would be awarded based on premiums generated by each agency.

Analysis:

The inquirer reports that the company, as an MGA, sells workers’ compensation coverage through independent insurance agents. Every insurance agent must be licensed as such pursuant to Insurance Law § 2102(a)(1). That statute states:

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.

An "insurance producer," in turn, is defined under Insurance Law § 2101(k) as "an insurance agent, insurance broker, reinsurance intermediary, excess lines broker, or any other person required to be licensed under the laws of this state to sell, solicit or negotiate insurance."

The inquirer asks whether his company may compensate employees of an insurance agent based on the amount of business generated. Insurance Law § 2101 sets forth the definition of "insurance agent" but provides an exemption for employees of the agent, so long as they are not compensated for services "directly dependent upon the amount of business done." Specifically, Insurance Law § 2101(a)(1) reads 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 organization or annuity contract, other than as a licensed insurance broker, except that such term shall not include:

(1) any regular salaried officer or employee of a licensed insurer, fraternal benefit society or health maintenance organization or of a licensed insurance agent, who does not solicit or accept from the public, outside of an office of such insurer, health maintenance organization or agent, applications or orders for any such contract, if such officer or employee does not receive a commission or other compensation for his services which commission or other compensation is directly dependent upon the amount of business done. (Emphasis added.)

In the scenario presented here, an MGA would offer gift cards to unlicensed agency personnel for meeting certain "production" goals based on premiums generated. In other words, unlicensed agency personnel would receive compensation "directly dependent upon the amount of business done." But because Insurance Law § 2101(a)(1) permits only a licensed employee to be so compensated, an MGA may not pay any compensation, including in the form of gift cards, to unlicensed employees of an insurance agency based on premiums generated by the agency. The fact that the compensation takes the form of gift cards is of no consequence, inasmuch as Insurance Law § 2101(a)(1) only addresses the basis for the compensation (i.e., the amount of business done), and not the form of compensation.

Nor may an MGA pay any compensation to an unlicensed person for acting as a property/casualty agent pursuant to Insurance Law § 2115(a)(1). That statute reads in relevant part as follows:

No insurer 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 acting as insurance agent in this state, except to a licensed insurance agent of such insurer...

Consequently, an agent who offers compensation dependent on the amount of business done runs afoul of Insurance Law § 2115(a)(1) for paying commissions or other compensation to unlicensed individuals.3 Moreover, that agent could be found by the Superintendent to be acting in an untrustworthy manner pursuant to Insurance Law § 2110. In addition, any unlicensed employee of an insurance agency who accepts such compensation would violate Insurance Law § 2102(a)(1), which requires that all persons acting as insurance producers in this state to be licensed.

For further information you may contact Senior Attorney Elizabeth Barrett at the New York City Office.

1 It is unclear whether the inquirer is using the term MGA in the technical sense of N.Y. Comp. Codes R. & Regs. tit. 11, §§ 33.0 - 33.6 (2003), which requires MGAs to register as such with the Department, but for present purposes, such distinction is not relevant.

2 Although the Insurance Law does not use the term "customer service representative," the Department assumes that in using that term, the inquirer is referring to unlicensed in-office employees or officers of an insurance agent or broker.

3 Insurance Law § 2114 contains similar provisions for life, accident and health insurance agents, and Insurance Law § 2116 for insurance brokers.