Referrals are a great way to acquire business. Providing a monetary incentive to get those referrals can increase the number of those referrals. However, for the unsuspecting insurance agent or broker, this can be a potential minefield given that some jurisdictions have placed restrictions on who can collect these fees and the conditions surrounding these fees. Insurance agents and brokers need to be aware of these rules to avoid facing fines or, worse, losing their licenses.
Here are examples of the rules in three jurisdictions—New York, Pennsylvania, and Illinois. Determine the rules in the jurisdictions in which you are licensed, especially as it pertains to referral fees to non-licensees.
Related: Read July's Avoiding E&O column, "Bull's-Eye on Your Back"
Significantly, New York, Illinois, and Pennsylvania prohibit paying or splitting any insurance policy commissions whatsoever with a non-licensee who provides referrals. See New York Insurance Law § 2114(a)(1)-(3); NY Ins. Law § 2115(a)(1); NY Ins. Law § 2116; 215 ILCS 5/500-80; 40 P.S. § 310.72(a).
2. Referral Fees to Non-Licensees
The specifics concerning the permissible payment of referral fees to non-licensees in our three exemplar jurisdictions are set forth below. One commonality is that the referral fee cannot be conditioned or based upon on the purchase of insurance.
Related: Read "The "M" Word"
- New York: In New York, the general provisions governing referral fees are found in the New York Insurance Law §§ 2114, 2215, and 2116. All of the New York referral fee provisions have a sunset provision (expiration date) of Sept. 10, 2014, although the provisions may be renewed. Similar language in all three laws cited above allows referral fees to be paid to a non-licensee, provided any discussion between the non-licensee and potential customer “does not include a discussion of specific policy terms and conditions and where the compensation for referral is not based upon the purchase of insurance by such a person.”
- Pennsylvania: In Pennsylvania, the governing statute is 40 P.S. § 310.72. The statute in Pennsylvania is similar to that of New York in that the referring party cannot discuss specific terms and conditions of the insurance contract with the potential customer:
An insurance entity or licensee may pay a fee to a person that is not a licensee for referring to a licensee persons that are interested in purchasing insurance if the referring person does not discuss specific terms and conditions of a contract of insurance. 40 P.S. § 310.72(a)
Additionally, unlike New York and Illinois, Pennsylvania provides a further limitation in that referral fees for personal lines insurance are restricted to a one-time nominal fee for each referral:
…in the case of referrals for insurance that is primarily for personal, family or household use, the referring person receives no more than a one-time nominal fee for a fixed dollar amount for each referral that does not depend on whether the referral results in a sale. 40 P.S. § 310.72(b)(2).
- Illinois: Insurance agents and brokers in Illinois can turn to a recent insurance department bulletin for guidance on referral fees to non-licensees. Andrew Boron, Illinois Director of Insurance, issued a bulletin dated Dec. 19, 2012 discussing referral fees in relevant part:
…a producer may pay a referral fee to a non-licensed person as long as that person does not sell, solicit, or negotiate insurance as defined by 215 ILCS 5/500-10, or perform any other duty that would require a license as defined by 215 ILCS 5/500-30. If a producer chooses to pay a referral fee to a non-licensed person, the payment may not be conditioned on the purchase of insurance nor may the purchase of insurance be a factor in determining the amount of the referral fee.
3. Regulatory loss control tips
These referral fee regulations in these three states provide a clear example of some of the reasons insurance agents and brokers need to be fully aware of the rules in their particular state. Although all three appear the same, there are small distinctions. The devil is in the details. Insurance agents and brokers, especially those who operate in multiple jurisdictions, need to be mindful of these distinctions.
Related: Read "'Little' FTC Acts"
Fortunately, insurance agents and brokers have a number of resources to turn to for help in this area:
- Consult insurance departments, including any insurance department-issued bulletins for referral fee information
- Consult with insurance agents and brokers associations at the state level for guidance
- Speak with your E&O attorney or your E&O insurer for help with understanding and implementing any referral fee regulations.