New York licensee regulation: controlled business, commissions, fiduciary duty, records, and compensation transparency (Reg 194)

Why this objective matters

New York regulates more than who may hold a license. It also regulates how a licensee gets paid, whose money the licensee is holding, what records must be kept, and what the customer must be told about compensation. The exam groups these together because each one protects the buyer from a producer whose own interests could quietly shape the sale.

Controlled business

Controlled business is insurance a licensee writes on his or her own life, property or interests, or on those of relatives, an employer, or a business the licensee controls. Writing some controlled business is lawful. What New York, like other states, will not allow is a license obtained or used principally to write controlled business. A license exists to serve the insurance-buying public; it is not a device for collecting commissions on your own family's or your own company's coverage. A licensee whose book is mostly controlled business risks having the license refused, not renewed, or revoked.

Commissions and other compensation

• An insurer may pay commissions only to a properly licensed (and, for agents, appointed) producer, and a licensee may not share a commission with an unlicensed person for work that requires a license.
• Rebating, giving the buyer part of the commission or anything else of value not stated in the policy as an inducement to buy, is an unlawful inducement unless the law specifically permits it.
• Fees need a signed writing. A licensed agent, broker or consultant may not take a fee for examining, appraising, reviewing or evaluating a policy, annuity or pension plan, or for advice about one, unless the fee rests on a written memorandum signed by the person charged that states the amount or how it is figured.
• The 12-month rule. If a licensee was paid, or contracted to be paid, a consulting fee by a client in the preceding 12 months, the licensee may not also collect compensation from selling that client related insurance or annuities unless the memorandum provides for it. The memorandum may also provide that the commission offsets the fee.
• Brokers. A broker may not collect anything from an insured beyond commissions deductible from premiums, whether for the sale or for later services such as claim adjustment, unless a signed written memorandum spells out the amount.

Fiduciary duty

A producer who collects premiums or receives return premiums or claim money holds those funds in a fiduciary capacity, as a trustee for the insurer or the insured. The money must be accounted for and remitted promptly and must not be mixed with the producer's personal or operating money. Using premium funds for the agency's own expenses is misappropriation and is grounds for discipline and possible criminal charges.

Records

A licensee must keep a copy of every fee memorandum for at least three years after the services have been fully performed. On the insurer side, Regulation 194 requires the insurer to keep records of the compensation it pays to each individual producer, under its record-retention regulation (Regulation 152). Records must be available when the Department of Financial Services examines the licensee.

Compensation transparency: Regulation 194

Regulation 194 (11 NYCRR Part 30) applies to insurance producers as defined in Insurance Law section 2101(k): agents, brokers, excess line brokers, title agents, limited licensees and anyone else required to be licensed to sell, solicit or negotiate insurance, subject to the exclusions listed below, such as a producer with no direct sales contact with the purchaser. It covers every kind of direct insurance: life, annuities, accident and health, property/casualty and surety, including state-mandated disability coverage.

Step one: the mandatory initial disclosure, in every case. Section 30.3(a) requires the producer to give each purchaser a prominent written disclosure that describes the producer's role in the sale, whether the producer will be paid by the insurer or another third party, that compensation can vary with factors such as the policy chosen, and that the purchaser may ask for more information about compensation. Key points from the Department's FAQ:

• Posting the notice on the office wall is not enough; the purchaser must receive a copy.
• A producer who earns nothing on the sale still gives the disclosure, stating the role and that no compensation will be received.
• The purchaser's signature is not required.
• Mail, internet and phone sales are covered. For a phone application, the producer may disclose orally and then in a prominent writing no later than policy issuance, or include the written disclosure with the application.
• The insurer may deliver the disclosure on the producer's behalf with the application materials, as long as it is prominent.

Step two: the compensation amount, only if asked. Under section 30.3(b), if the purchaser requests it, the producer must disclose the compensation amount at or before issuance, unless time is of the essence (for example, a buyer who needs proof of coverage to drive a new car off the lot).

Exception to remember: a title insurance agent must disclose the amount the title insurer will pay it at the time of application, whether or not the applicant asks (Insurance Law section 2113(b) and section 30.3(g)).

Who and what is outside the rule. Reinsurance (and reinsurance intermediaries); placements with an Article 70 captive insurance company; producers with no direct sales contact with the buyer, such as many wholesalers and managing general agents; sales by persons not required to be licensed for that sale; and renewals. The renewal exception has its own exception: if the purchaser asks about compensation within 30 days before or after a renewal, the producer must provide the section 30.3(b) disclosure in a prominent writing within five business days. A captive agent, one who places business with one insurer group, is not exempt; that exemption is for captive insurance companies.

Whose compensation. When a business entity sells through employees or sublicensees, the entity discloses what the insurer pays the entity; salaries and the internal split need not be disclosed, but any separate extra pay the insurer gives an individual for that sale must be. A referring producer must disclose if paid based on the sale or if it discussed the policy's terms. For group coverage, disclosure always goes to the group policyholder, and also to a certificate holder the producer solicited directly who pays the entire premium.

What counts as compensation. Anything of value received based in whole or in part on sales. An agency appreciation dinner with awards for sales milestones counts. A service-team meeting with dinner, a training lunch, or a customer council meeting does not, as long as nothing is received because of the producer's sales.