By: James M. Burns
Affinity Insurance Brokerage: A Primer on Compensation to Unlicensed Parties
Affinity insurance brokerage, a sales model whereby an insurance producer gains access to potential insureds through a sponsoring organization, typically an unlicensed entity, is nothing new. Trade associations, fraternal societies and clubs of all sorts have for decades entered into arrangements with licensed insurance producers permitting or encouraging the sale of insurance products to the sponsoring organization’s members. Given that all United States jurisdictions regulate the ability of producers to share compensation with unlicensed parties, compensation issues typically become a tricky regulatory challenge in affinity relationships.
The advent of the internet as an insurance sales platform, including the exploding world of Insuretech, presents even greater challenges in parsing the regulatory treatment of compensation to unlicensed parties. Internet affinity sales models can include a new generation of unlicensed tech participants in the chain. Indeed, traditional producer licensing requirements present unique challenges when applied to the range of Insuretech and internet affinity programs.
This article will address the current state of regulations governing compensation to unlicensed parties in the affinity brokerage context and the application of such rules to the fast-paced world of Insuretech and internet-based insurance sales.
KEY LICENSING CONCEPTS
a. The Producer Licensing Model Act
The activities and licensure requirements of insurance producers are regulated at the state level, and each state’s statutes and regulations vary. While this can present a challenge to insurance producers who transact business in multiple jurisdictions, there is some degree of uniformity among state insurance producer licensing laws due to efforts of the National Association of Insurance Commissioners (“NAIC”), an organization governed by the chief insurance regulators from all fifty states. The NAIC has promulgated a series of “Model Laws,” including a “Producer Licensing Model Act” (“PLMA”) which streamlines the statutory language relating to qualifications and procedures for insurance producer licensing. Today, the insurance producer laws of most states are based upon, if not identical to, the PLMA (Model 218).
The insurance producer laws of the State of New York are one example of those which are based on the PLMA. They are also some of the most stringent insurance producer laws in the country. The New York State Department of Financial Services (“NYDFS”) has produced the most extensive body of regulatory authority on topics such as of the sale of insurance, referrals of insurance and insurance commission splitting by licensed and non-licensed entities. As such, reference to New York’s insurance law and regulatory guidance will be made herein.
b. Insurance “Producers”
An insurance producer is, in its simplest terms, an intermediary between an insurance company and a consumer. It can be a person, a firm, an association or a corporation. The term “producer” has subsumed the definitions of an insurance “agent,” traditionally a sales representative of an insurance company, and insurance “broker,” traditionally a representative of an insured. The NYDFS defines an insurance producer 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.”
c. Activities Requiring Licensure
As a general rule, a person or entity may not act as an insurance producer without having authority to do so by virtue of a license issued and in force in the state in which he, she or it transacts business. The activities that require licensure include the sale, solicitation and negotiation of insurance.
The “sale,” “solicitation” and “negotiation” of insurance are defined by the PLMA. To “sell” insurance means to exchange a contract of insurance by any means, for money or its equivalent, on behalf of an insurance company. To “solicit” means to attempt to sell insurance or asking or urging a person to apply for a particular kind of insurance from a particular company. “Negotiate” means the act of conferring directly with or offering advice directly to a purchaser or prospective purchaser of a particular contract or insurance concerning any of the substantive benefits, terms or conditions of the contract, provided that the person engaged in that act either sells insurance or obtains insurance from insurers for purchasers.
Unlicensed entities are prohibited from engaging in these “producer” activities. Moreover, the licensed entity may bear regulatory responsibility for allowing an unlicensed affinity partner to engage in licensed activities (See related article in this newsletter entitled “Lockton Affinity - NJDOBI Consent Order”).
While only a licensed producer may sell, solicit or negotiate insurance, unlicensed entities may, and often do, still play a supporting role in insurance transactions. This is most commonly done through affinity relationships. An affinity relationship is an agreement to market insurance to members of a select group, such as a club or association, with which the sponsor has some form of relationship or connection. The affinity agreement is typically made between a licensee and an unlicensed party, the sponsor. In exchange for some form of compensation, the unlicensed party will provide the licensee with access to potential insureds. Under some circumstances, the non-licensee may also be compensated for encouraging potential insureds to transact with the licensee. Although affinity relationships have existed for decades in the insurance industry, there remains a vast uncharted territory as to the regulatory issues they create. The most significant of these issues is how the non-licensed party may be compensated for its role in the affinity relationship. The PLMA prohibits non-licensees from engaging in, and, as it follows, receiving compensation for, the sale, solicitation or negotiation of insurance. However, it expressly permits a producer to pay or assign “commissions, service fees, brokerages or other valuable consideration” to persons who do not sell, solicit or negotiate insurance…”
a. Advertising and Hosting Relationships
Unlicensed entities are permitted to “advertise” insurance. As defined by the NYDFS, “advertising” is the passive provision of information regarding a specific insurance product or service without recommending, endorsing or promoting that product or service. An example of an insurance advertisement by a non-licensee would be its maintenance of a passive website containing information about specific insurance products or services. It could also be an internet banner, tile, hypertext link, frame or embedded link stating the name of an insurance company or a blanket statement such as, “interested in insurance?” A questionnaire gauging interest in insurance may also qualify as an advertisement, so long as it does not reference the name of a particular licensee.
While an advertisement may lead a customer to or link to a website where an insurance solicitation takes place, an advertisement cannot be framed by recommendations, endorsements or promotions. An advertisement must also be clearly delineated as such, and is subject to all applicable statutory and regulatory guidelines and restrictions.
A non-licensee may receive compensation calculated in any manner, including flat fees and fees based on amount of insurance produced, for the advertisement of insurance.
b. Referrals and Product Endorsements
Unlicensed entities are also permitted, in certain jurisdictions and under certain circumstances, to make “referrals” of potential insurance customers to licensed entities. The NYDFS defines a “referral” as an advertisement that is framed by a recommendation, endorsement or promotion, by a non-licensee of the insurance product or service. An example of a referral is the distribution by a non-licensee of promotional literature providing information about how to purchase insurance through the licensee’s office. Another example is a nonlicensee’s maintenance of a website that endorses a particular insurance product.
In many jurisdictions, and under the PLMA, referrals of insurance are permitted so long as the unlicensed entity: (1) does not discuss specific insurance policy terms and conditions; and (2) is not compensated for the referrals based upon the sale of insurance. In other words, a licensee is free to pay a “finders fee” for a “lead” furnished by a non-licensee, but that fee cannot resemble a commission split.
As long as these two tenets are obeyed, there is no limit to the amount of a referral fee, nor does it matter if the fee is paid each time a referral is made or at intervals to which the parties agree. The method of compensation for a referral fee is also irrelevant – the licensee may make a donation to the non-licensee’s selected charity or enter the non-licensee in a raffle or lottery drawing.
While insurance licensure requirements and rules about commission sharing seem simplistic on their face, in the last several years fines to the tune of millions of dollars have been assessed against licensed and non-licensed entities across the country for violating these laws. The two issues that present the most difficulty – distinguishing between allowable insurance referrals and impermissible solicitations, and determining allowable methods of payment for referrals – have been compounded by the advent of internet affinity sales models and unlicensed tech participants in insurance transactions.
a. Referrals v. Solicitations
In determining whether an insurance transaction constitutes a permissible referral or a solicitation requiring licensure, a state insurance department will look at the totality of the parties’ conduct, focusing on the level of “action” by the non-licensee.
The NYDFS describes solicitation as “to ask for the purpose of receiving,” or “to move to action, to endeavor to obtain by asking.” The term implies a personal petition to a particular individual to do a particular thing. What may be counter- intuitive, however, is that the initiation of contact with a prospective insured is not in itself a solicitation, provided there is no discussion of specific insurance policy terms and conditions and compensation is not based on the purchase of insurance.
Rather, the affirmative “acts” that trigger an unlawful solicitation are the following:
- Discussing specific terms and conditions of insurance;
- Discussing or giving advice about a prospective customer’s specific insurance needs;
- Comparing insurance plans or policies; and
- Offering opinions or recommendations of insurance.
Accordingly, a non-licensee’s contact or meeting with a prospective insured is actually more likely to constitute an impermissible solicitation if a licensee is also involved or present, since it is likely that insurance issues will be discussed.
To use an example from Insuretech, a website hosted by a non-licensee that lists insurance policies, sorting them, for example, by price or rating, may constitute unlawful insurance solicitation. The problem is that the non-licensee’s website is performing the functions of an insurance broker: discussing, comparing, and recommending insurance. This scenario is even more problematic if the website does not list every single policy available to the user, but rather, only the policies of the licensed entities with whom the non-licensee contracts. In that case, the non-licensee is actually petitioning a user to purchase a certain product, in addition to discussing its terms.
b. Compensation for Referrals
A rule of thumb, as explained by the NYDFS, is that a referral fee paid to a non-licensee only where the “introduction bears fruit,” is a payment impermissibly tied to the “sale” of insurance.
To draw on the above example, say the website maintained by the non-licensee does not perform any activities that could be considered impermissible solicitations. Assume also that the site does not allow a user to enter his or her information onto the site, but transfers the user to the website of a licensed entity in order enroll in an insurance program. Both the non-licensee and licensee may still be subject to penalties for compensating the non-licensee referrals based on the sale of insurance.
The logic is that the non-licensee is the sole actor engaging with the user up to the moment the user clicks the link to the licensee’s website to purchase a plan. In other words, the nonlicensee is fully setting up the sale. It is arguable that the user who clicks on the link to enroll, and then fills out and submits the application on the licensee’s site, is not simply a potential lead, but rather a person who has already made the decision to purchase coverage.
As the internet and Insuretech distribution models continue to disrupt and reorganize insurance distribution patterns, licensees and unlicensed participants are urged to closely monitor the compliance aspects of affinity programs.
For questions about this article, please contact James M. Burns, Esq. at 973-533-0777. Genova Burns acknowledges the assistance of Gioia Topazio, Esq. in the preparation of this article.