OGC Opinion No. 09-02-08
The Office of General Counsel issued the following opinion on February 23, 2009, representing the position of the New York State Insurance Department.
RE: Sharing Commissions with Non-Licensees
May a licensed insurance broker share commissions with a non-licensee limited liability company (“LLC”) or its non-licensee member, where the LLC is owned by the licensed insurance broker, another licensed insurance broker and a non-licensee member, and the commissions result from referrals by the unlicensed member to the licensed insurance brokers?
No. The licensed insurance brokers may not share commissions with the LLC or the non-licensee member of the LLC. However, the non-licensee member may share in the overall profits and losses of the LLC, provided the LLC is licensed as an insurance broker engaged in a bona fide insurance business and not created merely as a mechanism for sharing commissions with non-licensees.
The inquirer reports that two New York licensed insurance brokers propose to form a LLC to be owned by the licensed brokers and an unlicensed business entity that provides referrals to the brokers. The unlicensed entity currently owns several companies, which, among other things, provide services for trial lawyers, including administrative support, banking and marketing services. The proposed LLC would be seventy-five percent (75%) owned by the two licensed brokers and twenty-five percent (25%) owned by the unlicensed entity. Initially, the commissions earned from the referrals will be the LLC’s only source of income, but other income generated from the sale of insurance is anticipated as the business evolves. Specifically, the inquirer states that “[m]uch of the income will be from doors opened by the non-licensed member.” The insurance business will be placed through the proposed LLC, and the net income derived from insurance sales is to be split among the LLC members based upon their respective ownership percentages. The proposed LLC is expected to have an office, employees and expenses including payroll, rent, equipment and office supplies.
The inquirer asks whether the unlicensed entity needs to be licensed by the Insurance Department in order to share in the commissions earned from the sale of insurance by the licensed brokers.
Pursuant to the provisions of Insurance Law § 2102, no person, including an entity, may act as an insurance producer unless appropriately licensed by the Department. Specifically, Insurance Law § 2102(a)(1) reads as follows:
No person, firm, association or corporation shall act as an insurance producer or insurance adjuster in this state without having the authority to do so by virtue of a license issued and in force pursuant to the provisions of this chapter.
Insurance Law §2101(k), in turn, defines an insurance producer, in pertinent part, as follows:
In this article, “insurance producer” means 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 . . . .
Insurance Law §§ 2114, 2115 and 2116, which proscribe the payment of commissions to unlicensed persons or entities, are also relevant to the inquiry. Insurance Law § 2116, for example, states as follows:
No insurer authorized to do business in this state, and no officer, agent or representative thereof, shall pay any money or give anything of value to any person, firm, association or corporation for or because of his or its acting in this state as an insurance broker, unless such person, firm, association or corporation is authorized to act by virtue of a license issued or renewed pursuant to the provisions of section two thousand one hundred four of this article. For the purposes of this section, “acting as an insurance broker” shall not include the referral of a person to a licensed insurance agent or broker that does not include a discussion of the specific insurance policy terms and conditions and where the compensation for referral is not based upon the purchase of insurance by such person.
Insurance Law § 2114 and 2115 contain similar language with respect to life, accident and health insurance agents, and property/casualty insurance agents, respectively. Further, a licensed insurance broker who shares commissions with an unlicensed person may be found by the Superintendent to be acting in an “untrustworthy” manner pursuant to Insurance Law § 2110(a)(4)(C).
The provisions of Insurance Law §§ 2114, 2115 and 2116 allow compensation for referrals to a licensed agent or broker. Specifically, these exceptions allow the payment of compensation for referrals where there is no discussion of specific insurance policy terms and conditions, and where the compensation for the referral is not based upon the purchase of insurance. But where an insurance producer bases a non-licensee’s referral compensation in any way upon the amount of commissions received by the insurance producer, the arrangement is not a referral within the meaning of Insurance Law § 2114, 2115, or 2116. See Opinion of Office of General Counsel (“OGC Opinion) No. 08-04-25 (April 17, 2008). In such an instance, the non-licensee would be acting as an insurance broker or agent without a license, in violation of Insurance Law § 2102. See id. Thus, it is clear that under the facts presented, the non-licensee LLC or its unlicensed member may not be compensated for referrals made to one of the licensed insurance brokers if the compensation is based upon the commissions earned by the broker.
Although the Insurance Law has not been specifically amended to provide for licensing LLCs, it is the Department’s view that such entities can be licensed under the Insurance Law. See OGC Opinion No. 06-01-13 (January 10, 2006). An LLC seeking a producer’s license may include an unlicensed member, provided that the LLC has named at lease one natural person as a sub-licensee to act on behalf of the LLC. See OGC Opinion No. 06-01-13 (January 10, 2006). But neither the Insurance Law nor the regulations promulgated thereunder prohibit a person or entity not licensed by the Insurance Department from owning an interest in a licensed agency or brokerage firm.
The Department also has opined that while unlicensed persons or entities may not share in commissions earned by a licensed producer, such persons or entities may share in the overall profits of the business. See OGC Opinion No. 08-05-03 (May 6, 2008); OGC Opinion No. 06-01-13 (January 10, 2006). The sharing of such profits may be based upon an ownership interest specified in the LLC’s operating agreement, but may not in any way be based upon a percentage of the gross commissions earned by the LLC. See OGC Opinion No. 07-07-25 (July 26, 2007).
Moreover, the term “overall profits” includes the gross income earned from commissions in the ordinary course of business, minus operating expenses. See OGC Opinion No. 08-05-03 (May 6, 2008); OGC Opinion No. 06-01-13 (January 10, 2006). And, any such LLC must be formed for the purpose of engaging an insurance business as a going concern (i.e., with employees and other significant expenses), and not merely as a shell mechanism created for the purpose of sharing commissions with a non-licensee. See OGC Opinion No. 08-05-03 (May 6, 2008); OGC Opinion No. 07-07-25 (July 26, 2007). For instance, an LLC whose only source of income is from commissions generated from referrals of the non-licensee member, or that has few or no business expenses (such as salaries of employees or office rent) may be found to constitute a shell mechanism created for the purpose of illegally sharing commissions with a non-licensee.
In sum, the licensed brokers about which the inquirer asks are prohibited from sharing commissions with either a non-licensee LLC and/ or its non-licensee members. A non-licensee member of the proposed LLC, however, may receive compensation for referrals on the basis of the net profits of the business, but only if the proposed LLC operates as a legitimate insurance producer duly licensed pursuant to the Insurance Law.
For further information you may contact Associate Counsel Bradley F. Rice at the Albany Office.