OGC Op. No. 07-05-15

The Office of General Counsel issued the following opinion on May 24, 2007, representing the position of the New York State Insurance Department.

RE: Referrals and Rebates

Question Presenteds:

1) May an insurance agent or broker give gifts to existing or potential clients, such as meals, greens fees and other items as a “thank you” for their business?

2) May an insurance agent or broker conduct informational seminars regarding insurance and provide refreshments at such events?

3) May an insurance agent or broker pay a referral fee to an insured as a “thank you” for a referral if the referral does not include a discussion of specific insurance policy terms and conditions, and the compensation for the referral is not based on whether a sale is made?

4) May an insurance agent or broker pay a referral fee to another insurance agent or broker?

5) Does the Insurance Law limit the amount of, or restrict the form of, compensation that may be given for a referral?

Conclusions:

1) No. N.Y. Ins. Law § 4224(c) (McKinney 2007) prohibits an insurer, agent or broker from giving a gift of any value to clients in connection with life or accident and health insurance policies or annuities that is not specified in the policy or contract. In connection with property/casualty insurance, Insurance Law § 2324(a) prohibits an insurer, agent or broker from giving anything of value to a client or prospective client that is not specified in the contract, except for an item that has a value of no more than $15.00 and that contains a conspicuously printed or stamped advertisement of the insurer, agent or broker.

2) Yes. An insurance agent or broker may conduct informational seminars regarding insurance, and provide refreshments at such events, provided that the seminars are open to the general public, without regard to insured status, and no obligation is imposed upon attendees to apply for or purchase insurance.

3) Yes. Pursuant to Insurance Law §§ 2114, 2115 and 2116, an insurance agent or broker may compensate an unlicensed person, including an insured, who makes a referral to the insurance agent or broker provided the referral does not include a discussion of specific insurance policy terms and conditions, and the compensation for the referral is not based on whether a sale is made.

4) Yes. Subject to the exception for insurance placed for governmental entities discussed below, insurance agents and insurance brokers may share commissions with other insurance agents or brokers, provided that each is licensed to sell the particular kind of insurance (and if an agent, the agent is appointed by the insurer for such kind of insurance). However, an insurance agent or broker that is not licensed to sell a particular kind of insurance, or an insurance agent that is not appointed by a particular insurer to sell that kind of insurance, may not receive any share of the commissions for a sale of such kind of insurance or insurance placed with the particular insurer. Nevertheless, such an agent or broker may receive payment for a referral, subject to the conditions specified above, except if the subject of the referral is a governmental entity.

5) No. The Insurance Law does not limit the amount of, or restrict the form of compensation that may be given for a referral made pursuant to the requirements of Insurance Law §§ 2114, 2115 and 2116.

Facts:

The inquiry is of a general nature, without reference to particular facts.

Analysis:

I. Rebates/Inducements

Insurance Law § 4224(c), which applies to life insurance, accident and health insurance, and annuities, and Insurance Law § 2324, which applies to most other kinds or types of insurance, prohibit, among other things, an insurer, insurance agent or insurance broker from offering an insured or potential insured an inducement or valuable consideration not specified in the insurance policy. Contrary to the assertions made by the inquirer, the scope of these provisions encompasses both prospective and existing clients. Moreover, these statutes pertain to compensation of any kind, and are not limited to monetary compensation.

Notwithstanding its general terms, Insurance Law § 2324 permits an insurer, insurance agent or insurance broker to distribute an item of merchandise to clients or prospective clients that does not exceed $15.00 in value, and that is designed to keep the name of the insurer, agent or broker before the customer by conspicuously stamping or printing the insurer’s, agent’s or broker’s name on the item – commonly referred to by the Department as a “keepsake.” Gift cards, gift certificates, tickets to special events, meals, and greens fees and other golfing-related expenses do not meet the “keepsake” criteria specified by the statute. And, with respect to life insurance, accident and health insurance, and annuities, any gift to a current or prospective insured could be construed as an unlawful rebate or inducement that violates Insurance Law § 4224, since that section does not set forth any “keepsake” exception.

In addition, although nothing prohibits an insurance agent or broker from discussing business with an insured or prospective insured over a meal or while golfing, an insurance agent or broker may not pay the costs of the insured’s or prospective insured’s meal, greens fees and other golfing-related expenses, as such would constitute an improper inducement or rebate that runs afoul of Insurance Law § 2324 or 4224.

An insurance agent or broker may conduct informational seminars regarding insurance and provide refreshments at such events without violating Insurance Law §§ 2324 or 4224, provided that the seminars are open to the general public without regard to insured status, and no obligation is imposed upon attendees to apply for or purchase insurance. Opinion of General Counsel No. 01-04-23 (April 26, 2001).

II. Referrals

Pursuant to Insurance Law §§ 2114, 2115 and 2116, an insurance agent or broker may compensate an unlicensed person who makes a referral to the insurance agent or broker only if the referral does not include a discussion of specific insurance policy terms and conditions, and the compensation for the referral is not based on whether a sale is made.

The Insurance Law does not prohibit licensed insurance agents or brokers from paying referral compensation to insureds, provided the referral otherwise meets the applicable statutory requirements discussed above. However, an agent or broker may not limit paying compensation to only insureds or prospective insureds, as such conduct could be construed as an inducement or rebate that violates Insurance Law § 2324 or 4224. For instance, as compensation for a referral, an agent or broker may not limit entry to a raffle only to current and prospective insureds. The raffle must be open to the public, and may not be tied to the sale or solicitation of insurance. Opinion of General Counsel No. 06-02-13 (February 16, 2006).

With respect to referrals from other agents or brokers, an agent or broker may under certain circumstances compensate a licensed insurance broker or insurance agent by sharing your commissions with the agent or broker. Subject to the exception for insurance placed for governmental entities discussed below, insurance agents and insurance brokers may share commissions with other insurance agents or brokers, provided that each is licensed to sell the particular kinds of insurance and, if an agent, the agent is appointed by the insurer for those kinds of insurance.

However, an insurance agent or broker not licensed to sell a particular kind of insurance, or an insurance agent not appointed by a particular insurer for such kind of insurance, may not receive any share of the commissions for a sale of such kind of insurance or insurance placed with the particular insurer, respectively, since such agent or broker would be acting without the appropriate license. Ins. Law §§ 2114, 2115 and 2116; see also Opinion of General Counsel No. 05-02-27 (February 23, 2005). But in such instances, the insurance agent or broker may receive payment for a referral (except for insurance placed for governmental entities) provided that the referral does not include a discussion of specific insurance policy terms and conditions, and the compensation for the referral is not based on whether a sale is made.

With regard to insurance coverage placed or rendered on behalf of governmental entities, Insurance Law § 2128 and N.Y. Comp. Codes R. & Regs. tit. 11 §§ 29.1-29.6 (2002) (Regulation 87) prohibit an insurance agent or broker from receiving any commissions or fees or shares, unless the insurance agent or broker actually placed the insurance coverage on behalf of, or rendered insurance services to, the governmental entity. Insurance Law § 2128 reads, in pertinent part, as follows:

Thus, an insurance agent or broker may not receive a referral fee or any compensation for referring a governmental entity to another licensed insurance agent or broker.

The Insurance Law does not limit the amount of or restrict the form of compensation that may be given for a referral. In fact, Insurance Law § 2114, 2115, and 2116 are silent on this point.

However, Section 305 of the federal Gramm-Leach-Bliley Act (codified at 12 U.S.C.A § 1831x) requires the federal banking agencies¹ to promulgate joint regulations that provide, among other things, standards in regard to referrals of insurance made by employees of banks. In accordance with this statutory mandate, the Board of Governors of the Federal Reserve System promulgated 12 C.F.R. § 208.85 (Regulation H), which states, in relevant part, as follows:

(b) Referrals. Any person who accepts deposits from the public in an area where such transactions are routinely conducted in the bank may refer a consumer who seeks to purchase an insurance product or annuity to a qualified person who sells that product only if the person making the referral receives no more than a one-time, nominal fee of a fixed dollar amount for each referral that does not depend on whether the referral results in a transaction.

The other federal banking agencies and the National Credit Union Administration adopted the same provision with respect to the banking institutions under their jurisdiction. See 12 C.F.R. §§ 14.50, 343.50, 536.50 and 701.21.

For further information you may contact Senior Attorney Brenda Gibbs at the Albany Office.

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¹ Pursuant to 12 U.S.C. § 1813(z), the term "federal banking agency" means the Comptroller of the Currency, the Director of the Office of Thrift Supervision, the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation.