OGC Op. No. 08-07-27
The Office of General Counsel issued the following opinion on July 31, 2008, representing the position of the New York State Insurance Department.
RE: Profit Sharing and Ownership of an Insurance Agent Organized as an LLC
1) May a non-resident, nonlicensee individual be a member of an LLC?
2) May a nonlicensee member share in the net profits of an LLC?
3) Is there a limit on the percentage that a nonlicensee member of an LLC may own?
1) Yes. Provided that the LLC has at least one sublicensee in accordance with N.Y. Ins. Law § 2103 (McKinney 2006), the Insurance Law does not place restrictions on who may be nonlicensed owners of the insurance agent.
2) Yes. Nonlicensee members may share in the net profits of the LLC, provided that the percentage of the nonlicensee member’s share is not based on a percentage of the gross commissions of the LLC.
3) No. The Insurance Law does not impose any limits on the percentage that nonlicensee members of the LLC may own.
The inquirer reports that he is considering forming an LLC to conduct business as a licensed life and accident and health insurance agent, and that he would be the named sublicensee. The inquirer states that there will be one or two other members of the LLC, neither of whom will be licensed insurance agents. One of the prospective members is a Nevada resident. The nonlicensees will have administrative roles and will not solicit or sell insurance. The ownership interest of the LLC will be divided equally, and each member will receive a percentage of the net profits based on the member’s ownership interest. The inquirer asks whether the proposed ownership structure of this business entity, or the proposed distribution of the entity’s net profits, would run afoul of the Insurance Law.
Nonlicensee members of an LLC
The New York Limited Liability Company Law was enacted in 1994. N.Y. Ltd. Liab. Co. Law § 102(m) (McKinney 2007) defines a domestic limited liability company as follows:
“[D]omestic limited liability company” mean[s], unless the context otherwise requires, an unincorporated organization of one or more persons having limited liability for the contractual obligations and other liabilities of the business . . . other than a partnership or trust, formed and existing under this chapter and the laws of this state.
The Insurance Law does not specifically address LLCs. For instance, Insurance Law § 2103(a), which concerns the life and accident and health insurance agent line, states:
The superintendent may issue a license to any person, firm or corporation who or which has complied with the requirements of this chapter, authorizing such licensee to act as an insurance agent with respect to the lines of authority for life insurance, variable life and variable annuity products, or accident and health insurance and sickness or any other line of authority deemed to be similar by the superintendent, including for this purpose, health maintenance organization contracts, legal services insurance or with respect to any combination of the above, as specified in such license, on behalf of any insurer, fraternal benefit society or health maintenance organization, which is authorized to do such kind or kinds of insurance or health maintenance organization business in this state.
However, the Insurance Department considers an LLC a hybrid between a firm and a corporation, and recognizes LLCs as entities qualified to be issued the types of licenses authorized under Article 21 of the New York Insurance Law. See Opinion of General Counsel No. 05-03-03 (March 8, 2005).
As for whether nonresident, nonlicensee individuals may be members of the LLC, Insurance Law § 2103(c) states:
Any such license issued to a firm or association shall authorize only the members thereof, named in such license as sub-licensees, to act individually as agents thereunder, and any such license issued to a corporation shall authorize only the officers and directors thereof, named in such license as sub-licensees, to act individually as thereunder.
Thus, provided that the LLC has at least one sublicensee in accordance with Insurance Law § 2103, the Insurance Law does not otherwise restrict who may serve as nonlicensed owners of the insurance agent. The sublicensee must be a member or manager who meets the same requirements that a person seeking to be licensed as an individual for the same kind of license is required to meet. See Opinion of General Counsel 05-03-03 (March 8, 2005); Opinion of General Counsel No. 03‑04‑26 (April 17, 2003).
As there is no requirement in the Insurance Law that the owners of a licensee that is organized as a firm or corporation be New York State residents, there is likewise no requirement in the Insurance Law that any or all members of the LLC be New York State residents. Therefore, the mere fact that one of the members is a Nevada resident does not affect the LLC’s ability to conduct business as a licensed insurance agent.
The inquirer next asks whether a nonlicensee individual may share in the net profits of the firm. The Department has previously opined that a nonlicensee member of an LLC conducting business as a licensed insurance agent may share in the net profits of the LLC, provided that the nonlicensee member’s percentage of the net profits is based on ownership interest or other methodology specified in the LLC’s operating agreement. However, the methodology may not be based upon the commissions earned by the LLC. See Opinion of General Counsel No. 06-01-13 (January 10, 2006); Opinion of General Counsel No. 05-03-03 (March 8, 2005).
Further, pursuant to Insurance Law § 2114, an LLC life and health and accident insurance agent may pay referral fees to the nonlicensee for referrals to the LLC if the referral does not include a discussion of specific insurance policy terms, and the fee is not dependent upon the purchase of insurance by the person being referred. That statute provides 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.
* * *
(2) No agent or other representative of any such life insurer or fraternal benefit society shall pay any commission or other compensation to any person for any services of the kind specified in paragraph one hereof, except to a licensed life insurance agent of such insurer or of such society as the case may be.
* * *
(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.
Insurance Law §§ 2115 and 2116 authorize referral fees to property/casualty insurance agents and brokers, respectively.
Amount of Ownership Interest
Lastly, the inquirer asks whether there is any limitation on the percent of an LLC that a nonlicensee may own. The Insurance Law does not impose any limitations on the ownership of an insurance agency by non-licensee individuals. The Department has opined that a non-licensee individual may own a controlling interest in an insurance agency provided that the non-licensee individual does not share in the commissions of the agency. He or she may only share in the overall net profits of the business as a whole, subject to the restrictions discussed above. Opinion of General Counsel No. 04-08-11 (August 18, 2004).
For further information you may contact Senior Attorney Brenda Gibbs at the Albany Office.