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Referrals and Consumer Choice: California’s Cautionary Tale

The California Department of Insurance (“Department”) last week announced a multi-million dollar settlement with a licensed producer that also involved the producer agreeing to cease transacting insurance in California. The accusation filed by the Department and the order approving the settlement agreement (collectively the “Order”) can serve as a reminder of the general regulatory principles surrounding referral programs and consumer choice. We re-examine these principles in the context of the Order.


Despite policies and procedures in place prohibiting such activities, the Order indicates the Department alleged unlicensed persons working for the producer were transacting insurance on a regular basis and thus exceeding permissible referral activities. Namely, the Department alleged that unlicensed persons regularly discussed, solicited and explained insurance products and assisted consumers with completing applications for insurance.

“Selling, soliciting or negotiating” is prohibited.

An unlicensed person cannot explain, recommend or describe the financial benefits of insurance, encourage a consumer to purchase insurance, promote the financial strength of an insurer, or otherwise “sell, solicit or negotiate” insurance. An unlicensed person can, however, refer a consumer to a licensed producer or insurer and be paid for that referral, subject to certain limitations. Each referral should be a merely passive introduction with contact information, such as for a website or a licensed producer/insurer.

Referral compensation.

Compensation for a referral should be aligned with the nature of a passive introduction. The Order alleged the producer offered significant financial incentives to unlicensed representatives based on the ultimate sale of insurance products. In many cases, state insurance regulators will assume referral compensation conditioned on an insurance sale will necessarily involve some degree of activity that can only be conducted by a licensee – an assumption that might be difficult to disprove. Other considerations in establishing a referral compensation structure – i.e., not based on sales – may include the nature and amount of compensation (e.g., cash vs. gift cards), conditions to compensation other than sales, and number of referral payments and overall total compensation that can be earned over a certain time period.

Consumer Choice – Opt-in vs. Opt-out

Another issue highlighted in the Order is a consumer choice with respect to purchasing coverage. The Order indicates that consumers were signed up for insurance without their express consent and without full information regarding pricing. This issue can also arise in the context of certain programs where consumers will be provided and charged for an insurance product unless they affirmatively “opt out” of the offer. The use of an “opt-out” (as opposed to an affirmative “opt-in”) could potentially be challenged in some states. Generally speaking, an insurance product can be “included” in, or “bundled” with, a non-insurance product only if (a) the insurance and price thereof are specifically disclosed, and (b) the consumer has the ability to decline to purchase the insurance and still purchase the non-insurance product (in addition to complying with any applicable rate/form filing requirements or surplus line placement requirements). Although such sales and marketing practices are common in other industries, they can violate state insurance laws such as those requiring prior approval of rates and policy forms and unfair trade/marketing practices. Potential solutions include early and complete disclosure, as well as prior regulatory approvals.


Referral programs and other marketing efforts should be structured carefully with the above regulatory principles in mind. A small dose of preventive medicine can often avoid potential future headaches. 

© 2020 Faegre Drinker Biddle & Reath LLP. All Rights Reserved.


About this Author

Dan Brown, insurance lawyer, Drinker Biddle

Dan Brown represents insurance companies, agents and brokers, and others in all aspects of the admitted, exempt, and surplus lines insurance markets in the United States. This includes advising alien or foreign insurers on how to comply with various state laws in placing business; advising insures on exempt and specialty lines such as marine, aviation, and transportation risks; advising producers on licensing, placement and premium tax issues; and advising insureds on coverage and placement issues. Dan advises participants in the London market on how to...

(415) 591-7585
H. Michael Byrne, Insurance Lawyer, Drinker Biddle, New York

Michael Byrne* has extensive insurance transactional and regulatory experience. He advises U.S. and international re/insurers, investors, start-ups and producers on a broad range of matters including obtaining regulatory approvals for M&A, change of control and affiliate transactions, forming, licensing and structuring compliant business operations, drafting and negotiating agreements, and providing strategic advice on complex and cutting edge issues.

Mike is a leader in the excess and surplus lines and nonadmitted market, and serves on the NAPSLO Legislative Committee and as outside counsel to the New Jersey Surplus Lines Association. He was awarded NAPSLO’s Legislative Advocacy Award in 2013. 

*Michael Byrne's practice is limited to advising clients on U.S. law, and he is not admitted to practice as a solicitor in England and Wales.