Referrals are a great way to acquire business. Providing amonetary incentive to get those referrals can increase the numberof those referrals. However, for the unsuspecting insurance agentor broker, this can be a potential minefield given that somejurisdictions have placed restrictions on who can collect thesefees and the conditions surrounding these fees. Insurance agentsand brokers need to be aware of these rules to avoid facing finesor, worse, losing their licenses.

Here are examples of the rules in three jurisdictions—New York,Pennsylvania, and Illinois. Determine the rules in thejurisdictions in which you are licensed, especially as it pertainsto referral fees to non-licensees.

Related: Read July's Avoiding E&O column, “Bull's-Eye on Your Back“

1. Commissions

Significantly, New York, Illinois, and Pennsylvania prohibitpaying or splitting any insurance policy commissions whatsoeverwith a non-licensee who provides referrals. See New York InsuranceLaw § 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 referralfees to non-licensees in our three exemplar jurisdictions are setforth below. One commonality is that the referral fee cannot beconditioned or based upon on the purchase ofinsurance. 

Related: Read “The “M”Word“

• NewYork: In NewYork, the general provisions governing referral fees are found inthe New York Insurance Law §§ 2114, 2215, and 2116. All of the NewYork referral fee provisions have a sunset provision (expirationdate) of Sept. 10, 2014, although the provisions may be renewed.Similar language in all three laws cited above allows referral feesto be paid to a non-licensee, provided any discussion between thenon-licensee and potential customer “does not include a discussionof specific policy terms and conditions and where the compensationfor referral is not based upon the purchase of insurance by such aperson.”

• Pennsylvania:In Pennsylvania, the governing statute is 40 P.S. § 310.72. Thestatute in Pennsylvania is similar to that of New York in that thereferring party cannot discuss specific terms and conditions of theinsurance contract with the potential customer:

An insurance entity or licensee maypay a fee to a person that is not a licensee for referring to alicensee persons that are interested in purchasing insurance if thereferring person does not discuss specific terms and conditions ofa contract of insurance. 40 P.S. § 310.72(a)

Additionally, unlike New York andIllinois, Pennsylvania provides a further limitation in thatreferral fees for personal lines insurance are restricted to aone-time nominal fee for each referral:

…in the case of referrals forinsurance that is primarily for personal, family or household use,the referring person receives no more than a one-time nominal feefor a fixed dollar amount for each referral that does not depend onwhether the referral results in a sale. 40 P.S. § 310.72(b)(2).

• Illinois:Insurance agents and brokers in Illinois can turn to a recentinsurance department bulletin for guidance on referral fees tonon-licensees. Andrew Boron, Illinois Director of Insurance, issueda bulletin dated Dec. 19, 2012 discussing referral fees in relevantpart: 

…a producer may pay a referral fee to anon-licensed person as long as that person does not sell, solicit,or negotiate insurance as defined by 215 ILCS 5/500-10, or performany other duty that would require a license as defined by 215 ILCS5/500-30. If a producer chooses to pay a referral fee to anon-licensed person, the payment may not be conditioned on thepurchase of insurance nor may the purchase of insurance be a factorin determining the amount of the referral fee.

3. Regulatory loss controltips

These referral fee regulations in these three states provide aclear example of some of the reasons insurance agents and brokersneed 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 bemindful of these distinctions.

Related: Read “'Little'FTC Acts“

Fortunately, insurance agents and brokers have a number ofresources to turn to for help in this area:

• Consult insurancedepartments, including any insurance department-issued bulletinsfor referral fee ­information
• Consult with insurance agents and brokers associations at thestate level for guidance
• Speak with your E&O attorney or your E&O insurer forhelp with understanding and implementing any referral feeregulations.