Donating Commissions to Charity

New York State Insurance Laws prohibit rebating and inducements in the sale of insurance. But when, and under what circumstances, can a licensed agent or broker donate a portion of commissions to charity? By way of background, Sections 2324 and 4224 of the Insurance Laws prohibit licensees from directly or indirectly paying, allowing or giving (or offering), any valuable consideration or inducement in connection with the procurement of insurance, when such “rebate” is not specified in the policy.

What if a licensee permits a client to select a charity of its choice as the recipient of the licensee’s commission? The client is not receiving anything of value as the payment is going to charity. Well, in the context of life insurance, the Insurance Department has opined that if a prospective client of a licensee selects the charity that would confer an intangible benefit to the prospective client, and acts as an inducement to place insurance through the agent or broker. Therefore, allowing an insured or prospective insured to select a charity as the recipient of the licensee’s commission would violate Section 4224(c), which applies to life insurance. See OGC Op. Nos. 10-06-04; 06-02-06; and 00-03-12).

Similarly, in the context of property/casualty insurance, the Department has applied Section 2324 and opined that if a property/casualty agent donates commissions to a ministry on policies referred through a Bible study group, and the potential clients know that the agent’s commissions will be given to the ministry, the charitable donations are an incentive for new insurance business, and as such constitute an improper inducement that violates Insurance Law § 2324. Along the same reasoning, the Department has opined that a licensee may not advertise to potential clients that a portion of his commissions will be donated to charity since doing so would be making an unlawful inducement conferring on the insured an “indirect,” “intangible” benefit. See OGC Op. No. 10-06-04.

However, a licensed insurance agent or broker may donate to a charity a portion of his commissions earned from the sale of insurance where three requirements are met: (1) the prospective insured has no influence over the choice of which charity receives donations; (2) no donations are made in the name of or on behalf of an insured or prospective client; and (3) no applicable tax deductions for the charitable contributions, or any other benefits stemming from such donations, inure to an insured or prospective client.

When the above three requirements are met, the possibility of a benefit to the prospective client or insured is eliminated and the donation is permissible.