OGC Opinion No. 08-07-10

The Office of General Counsel issued the following opinion on July 17, 2008, representing the position of the New York State Insurance Department.

RE: Restoration company’s payment of referral fees to insurance agent or broker

Questions Presented:

1. May a restoration company pay referral fees to an insurance agent or broker for referring projects, such as fire, flood, or “puffback” damage?

2. Would the legality of the fee depend on whether it is described as a “commission” rather than “referral fee,” or depend on its monetary value?

Conclusions:

1. No. A restoration company that pays an insurance agent or broker fees for referring projects may run afoul of the commercial bribing and commercial bribe receiving statutes of the N.Y. Penal Law §§ 180.00-180.08 (McKinney 1999). Also, an agent or broker who receives a referral fee from a restoration company without the consent of the insurer or the insured may violate his/her fiduciary obligations to the principal.

2. No. Under the scenario described below, such fees would not fall within the purview of commissions. It is the payment of the fee to the broker that may be unlawful or that may present a conflict of interest; the amount of the fee or how the fee is identified is immaterial.

Facts:

The inquirer is the marketing director for a New York restoration company. The inquirer states that the restoration company does not represent public adjusters and that the company is an approved vendor for most insurance companies. The inquirer asks whether it is lawful to offer to pay an insurance agent or broker, or an employee of the agent or broker who handles claims, a referral fee for “leads.” The inquirer indicates that in order to secure business for the restoration company, the inquirer would like to pursue the business of paying fees to agents and brokers for referring work, specifically, with respect to fire, flood, or “puffback” damage.

The inquirer also asks whether the legality of the proposed business would depend on whether the inquirer describes the fee as a “commission” or a “referral fee,” and whether the size of the monetary value of the “gift” to the agent or broker is relevant.

Analysis:

Nothing in the Insurance Law or regulations promulgated thereunder specifically prohibits a restoration company from paying an agent or broker a referral fee. However, a court of competent jurisdiction might find that a restoration company that pays, or agrees to pay, a referral fee to an agent or broker without the consent of the insurer or the insured violates Penal Law § 180.00. That statute, which governs commercial bribing, reads as follows:

Moreover, by accepting the referral fee, the agent or broker might be guilty of commercial bribe receiving pursuant to Penal Law § 180.05,² which prohibits an agent or fiduciary from receiving, without the principal’s consent, a benefit from another person that may influence the agent’s or fiduciary’s conduct in relation to the principal’s affairs. Penal Law § 180.05 reads as follows:

Further, under the common law principle of agency, an “agent” owes a duty of undivided loyalty to its “principal.” See Office of General Counsel (“OGC”) Opinion No. 97-9 (NILS) (Jan. 28, 1997). See also Compsolve, Inc., v. Neighbor 18 Misc.3d 1104(A) (N.Y. Sup. Ct. Erie County 2007). Further, unless otherwise agreed, an agent has a duty to refrain from acting in a manner that conflicts with the interests of the principal in matters in which the agent is employed. Compsolve, Inc., 18 Misc.3d at 3. Here, an insurance agent is the “agent” of the insurer, and an insurance broker is the “agent” of the insured.³ See OGC Opinion No. 97-9 (NILS) (Jan. 28, 1997). It follows, therefore, that by accepting or agreeing to accept a referral fee from a restoration company without the consent of the insurer or the insured, the agent or broker may be acting contrary to the interests of the insurer or insured, respectively. Id. The insurer is unlikely to consent to the referral fee because the restorative company may inflate its price to cover the referral fee, which would result in higher costs to the insurer for indemnifying the insured. Likewise, the insured likely would not consent to the broker receiving a referral fee from the restoration company because the insurer may pass on the inflated cost from the restoration company to the insured through increased premiums.

In addition, if an agent or broker accepts a referral fee from a restoration company without the consent of the insurer or insured, the Superintendent may find that the agent or broker has demonstrated “untrustworthiness” within the meaning of Insurance Law § 2110(a). As such, the Superintendent may refuse to renew, or revoke or suspend the agent’s or broker’s license, if after notice and hearing, the Superintendent finds that the agent or broker has demonstrated untrustworthiness. See Ins. Law § 2110(a)(1) and (4)(C).

Finally, the fee paid to an insurance agent or broker under the circumstances described may not properly be called a “commission.” For insurance purposes, a “commission” is defined as “a fee paid to an insurance salesperson as a percentage of the premium generated by a sold insurance policy.” See Barron’s Dictionary of Insurance Terms 97 (4th ed. 2000). In any event, the name attributed to the fee is not determinative; it is the payment and acceptance of such a fee that may violate the Penal Law, or compromise an insurance agent or broker’s duty of undivided loyalty to its principal.

For further information you may contact Senior Attorney Camielle A. Campbell at the New York City office.

¹ Penal Law § 180.03, which is felonious commercial bribing, also contains a similar provision, except that it applies where the value of the benefit being conferred exceeds one thousand dollars and causes economic harm to the employer or principal in an amount exceeding two hundred fifty dollars.

² Penal Law § 180.08 contains a similar provision but applies where the amount that the agent agrees to accept exceeds one thousand dollars and causes economic harm to the employer or principal in excess of two hundred fifty dollars. Violation of this provision is a class E felony.

³ Insurance Law § 2101 defines an “insurance agent” as one who is authorized to act as an agent of an insurer, and defines “insurance broker” as one who acts on behalf of an insured to negotiate, solicit or place insurance.