I like rules. When I open a board game, I immediately read the instructions. I’m sure my affinity for the rules lead to my decision to become an attorney. In a conversation with a guidance counselor, I may have said: “You mean my job would be to argue about what the rules are?! That sounds fantastic!” Now, in my current role, not only do I get to argue about what the rules are, but I also have a hand in making the rules too.
It’s important to know what you can and can’t do before you start playing. That applies to the insurance industry as well—particularly when it comes to the branding and marketing of your agency. Marketing is essential for any successful agency. However, it’s important to know the special rules that apply to agencies when they are marketing to ensure you don’t go directly to jail (when you land on the space, draw the “Go to Jail” card, or role doubles three times in a row).
Rebating, raffles, referrals … oh my
Marketing is about inducing an individual to buy the product you are selling whether it’s a new smartwatch or an insurance policy. Judging by the number of insurance agency branded sunglasses I have, agents are not afraid to market themselves through the use of swag—to use a legal term. It is all about leaving an impression on consumers so that they either buy your product immediately, or so that you work your agency’s name into your customers’ brains Inception style—so the next time they think of insurance they think of you.
When looking to incept a client, the natural inclination often is to go big or go home. But insurance agents need to be careful how big they go because they will be going home when the state insurance department shuts down the agency for not following the rules.
Most states prohibit insurance agencies from providing “anything of value” to clients or potential clients to induce them to purchase a policy. Often, these are referred to as rebating laws. Of course, there is no uniform definition of value from state to state, because what fun would that be? The variation in state law may keep attorneys like me employed, but it can create a lot of headaches for agents who market their agencies in multiple states.
Most rebating laws, which are written to be super easy to understand and certainly not just one run-on sentence (add sarcasm here), contain the same essential foundation: Insurance producers, as well as other licensed insurance entities, are prohibited from offering valuable consideration or inducement of any kind in the selling and servicing of an insurance policy. Almost all states have some sort of rebating threshold. If a particular benefit or inducement does not exceed a certain dollar figure it is not considered to be something of value or an inducement.
This leaves some ground in which agents can offer nominal inducements to potential clients. However, the question is: What is the rebating threshold? There is no one definition of valuable consideration or inducement, instead each state has its own.
In the PIA Northeast footprint, New Hampshire and New Jersey maintain a rebating threshold of $100. As long as an inducement is $100 or less, it would not violate state law. However, that figure is $25 for New York state. Connecticutand Vermont do not have a statutory rebating threshold, meaning any gift would be considered an inducement.
When discussing the rebating threshold, it is important to know that the threshold number is based on the fair market value of the benefit being given. In practice, that means that an agency in New York state could give out $25 worth of scratch-off lottery tickets to anyone who gets a quote, and the agency would not violate the rebating statute even if a person ended up winning $1 million off one of the tickets. However, that same agency could not give out $30 gift cards, which the agency purchased for $25. As the fair market value ($30), exceeds the statutory rebating threshold.
Now there are exceptions to the rebating rule, which have exceptions. There is the raffle corollary.Generally, rebating laws do not apply to contests or raffles—if the contest or raffle is open to the public at-large and there is no cost for participants to enter the contest or raffle. If these conditions are met, an agency could give away a Caribbean vacation and not run afoul of the law.
Another area in which rebating laws may not apply is referral fees. I say may because there is some nuance here. Generally, most states do not limit the amount any agency can give in referral fees. An agency could decide to give an individual $10 or $1 million for a referral. Both would be legally acceptable, if maybe not a sound business practice.
However, there are two important exceptions. First, when a referral fee is paid to a client, state rebating laws still apply. So, agents should be careful not to give referral fees to current clients that exceed their state’s rebating threshold. Second, is how referral fees are paid. Generally, state law prohibits the paying of commissions to an unlicensed individual or entity. So, agents who might want to partner with another local business—such as a law firm or real estate agency—for referrals would be prohibited from paying referrals fees as a portion of the commission received.
Agents should be aware that the unlicensed rule also applies to other insurance agents. If a property/casualty agent has a referral fee agreement with a life and health agent, they could not split commissions. While both agents are licensed to sell insurance, they are not licensed to sell the particular line of insurance for which they are being paid a referral fee. They are considered unlicensed in the eyes of the law.
Another area agents need to be careful of is self-promotion. For those unfamiliar with the term, puffery is a fun term used to describe when a good or service is marketed using inflated language.
Puffery is distinct from fraud in that puffing statements tend to be matters of opinion, as opposed to statements of fact. Puffery allows the breakfast diner on the corner to advertise its coffee as “the best coffee in the world!” but it would not allow that same diner to claim that its coffee was voted “the best coffee in world” by the citizens of the world. The first is a statement of opinion; the second is a purported statement of fact. Opinions vary. Facts need substance behind them.
Applying this to insurance: Agents need to be careful of the line between puffery and fraud. While it’s unlikely that an agency would be sued for false advertising, agencies do need to be concerned about errors-and-emissions claims. The things said in advertising can be used later when there is a claim to demonstrate that the insurance agency had an increased responsibility to their client. (For more on duty of care, watch for the December 2023 issue of PIA Magazine). The classic example—and still the easiest one to fall into—is calling yourself an expert in anything. If an agency advertises itself as an expert, then it reasonable to expect its clients to assume the agency is full of experts. Often, this means that agents will be responsible for more than they normally would be in the event of a lawsuit. So, it’s important to watch what you say in advertising.
As with all my articles, I am not trying to scare you—at least not too much. I’m just trying to educate you because the more you know, the better prepared you can be. After all, knowledge is power.
Knowing the rules of branding and marketing before you start branding and marketing your agency is critical, so you don’t unintentionally fall victim to one of the issues mentioned in this article. This is especially true if you’re working with outside parties who might not be familiar with insurance and its crystal-clear regulatory structure (again, add sarcasm here). It is plausible to imagine a scenario in which an uneducated marketing agency might use certain terminology that could lead to E&O issues, or perhaps make a promise of some guarantee that can’t be backed up. It’s important that you have the knowledge, but also that you share that knowledge with those you are working with on your branding and marketing campaigns.
Now, I leave you—because I just got a new board game, and I need to read the instructions.
This article originally appeared in the October 2023 issue of PIA Magazine.
 While there is no statutory or regulatory rebating threshold, the Connecticut Insurance Department generally does not consider gifts for considerations of $15 or less to be rebating.
 A term I made up because I like the word corollary.
Bradford J. Lachut, Esq.
Bradford J. Lachut, Esq., joined PIA as government affairs counsel for the Government & Industry Affairs Department in 2012 and then, after a four-month leave, he returned to the association in 2018 as director of government & industry affairs responsible for all legal, government relations and insurance industry liaison programs for the five state associations. Prior to PIA, Brad worked as an attorney for Steven J. Baum PC, in Amherst, and as an associate attorney for the law office of James Morris in Buffalo. He also spent time serving as senior manager of government affairs as the Buffalo Niagara Partnership, a chamber of commerce serving the Buffalo, N.Y., region, his hometown. He received his juris doctorate from Buffalo Law School and his Bachelor of Science degree in Government and Politics from Utica College, Utica, N.Y. Brad is an active Mason and Shriner.