Payment of Referral Fees – Is It Legal?

The above question continues to come up every so often in the Free Legal Service program that I run for the members of the Independent Insurance Agents of Georgia. There is no definitive answer to the question in either the Insurance Code of Georgia or the regulations or other pronouncements issued by the Georgia Insurance Commissioner’s Office.  However,  I have advised my clients for a long time that a very strong argument can be made that the payment of referral fees is permissible, as long as their payment is not conditioned on the purchase of an insurance product by the person or business who is the subject of the referral.

The basis for my argument is that the law most often cited in support of the position that the payment of referral fees is illegal is the prohibition on the sharing of commissions by an insurance agent with a person or entity that is not licensed by the Insurance Commissioner’s Office.  I agree that this prohibition would most likely make illegal the payment of a referral fee only for referrals that resulted in the sale of an insurance policy or other product.  In that situation, it is easy to see how the agent or agency could be said to be sharing the commissions earned for such a sale with the referral source.

However, if the referral fee is paid regardless of whether the person or business who is referred buys an insurance policy or other product from the agent or agency, to say that such an arrangement would be the sharing of commissions with an unlicensed person would mean that an agency could not pay its employees who are not licensed by the Insurance Commissioner’s Office for the services rendered to the agency.  This because the source of the compensation paid to those employees was the commissions received by the agency for the insurance policies and other products it sold to its customers.

Obviously, such an interpretation of the law would make it cost prohibitive, if not impossible, for many agencies to conduct their business activities.  The passage of an amendment to the anti-rebate law by this year’s General Assembly lends further support to my argument.  In a change that took effect on July 1, 2016, that law was amended to allow an insurance company or producer to give a customer or potential customer certain kinds of gifts as part of an “advertising” or “promotional” program, as long as the giving of such gifts was not conditioned on the purchase or renewal of an insurance policy by the recipient of the gift. (Click here for more details on this new law).

If an agent and presumably an agency can give a customer or potential customer a gift as long as it is not conditioned on the purchase or renewal of an insurance policy, there is no difference in giving a fee or other gift to a third party for referring a potential customer regardless of whether that potential customer buys an insurance policy.