Can Agents Pay for Referrals?

An agent writes, "We have a relationship with a life insurance agent who has access to our clients and our files. He would like to split the commission on the P&C business that he refers to our agency. Can we split commissions with someone who does not have a P&C license? If not, can you call it something different like a 'finders fee'? If not, what alternatives do we have?"

This is a common question, though it arises more often with referrals that originate outside the insurance industry, such as real estate agents, car dealers and so forth. The only absolute answer is to check with your state association or department of insurance. From a general perspective, we ran this by the VU faculty and some of their comments are included below. In addition, a few of our state associations gave us examples of exceptions to the general rule.

It is illegal in most states to split commissions unless the life agent is p-c licensed. You can certainly give him a finders' fee for referrals (not based on sales) or help him with marketing and advertising costs. The amount of compensation between cross-selling agents is all over the field. The key is to make it equitable. He’s going to probably pay you once for life policies (unless you are listed as a sub-agent under his agency—in that case you are the agent of record and get the residuals). If he sends you P&C accounts, identify if the number referred to him equals the number referred to you—then pay him on a per lead basis so that equivalent values are realized by both parties.

In most states, you cannot pay commission to someone who is not properly licensed. You can, however, pay a finder's fee but it cannot resemble a commission split. Many agencies will set up a grid that gives commission ranges and set an appropriate fee. For example, for a commission under $250, pay nothing. For $250 to $500, a one-time fee of $50 is appropriate, and so forth. The key on finder's fees is that you can only pay them one time. Of course, the alternative is for the life producer to get his P&C license.

In New York, you may pay referral fees to an unlicensed person (i.e., a licensed life insurance agent who does not hold a p-c license), provided that the unlicensed person does not discuss policy terms and conditions with the person referred and you pay the fee whether or not you make the sale. See N.Y. Insurance Law Sections 2114, 2115 and 2116. You can find a recent N.Y. Insurance Dept. advisory legal opinion on this subject at http://www.ins.state.ny.us/rg040505.htm.

In Connecticut, you can pay a referral fee to any non-licensed person. The non-licensed person cannot refer herself and cannot act in anyway as a producer. The referral fee can be any amount and can be paid on renewals. Refer to CT DOI Bulletin L-13 (item 12), dated July 24, 2002.

Pennsylvania is another state that has some exceptions. To learn more, go to http://www.iiaba.net/VU/Lib/Bus/AM/Finance/FacultyReferrals.htm.

Bill Wilson (bill.wilson@iiaba.net) is director of the Big “I” Virtual University. If you do not know your Big “I” website user name and password, e-mail logon@iiaba.net to request your login.