The Referral Partner Who Wants a Cut

Not as proposed. The proposal fails on two independent grounds.

First, licensing law. The state prohibits compensation to unlicensed persons for soliciting or negotiating insurance, with a narrow carve-out for referral fees where the referrer does not discuss policy terms. Carla has discussed coverage limits and recommended umbrella policies - that is precisely the conduct the exception excludes. Paying her 20% of first-year commission would be compensation for solicitation by an unlicensed person, which exposes both Carla and the agency to regulatory action, including fines and potential license discipline for the agency. A written agreement does not cure an unlawful arrangement; it creates evidence of it.

Second, E&O and carrier relations. Tom's E&O renewal questionnaire asks directly whether the agency compensates unlicensed referral sources. Answering 'no' while paying Carla is a material misrepresentation that could void coverage for a related claim. Answering 'yes' invites underwriting scrutiny and possibly a coverage restriction. Either way, the agency is worse off than if it had never entered the arrangement.

There is also a practical exposure: Carla's coverage recommendations to her clients create an E&O gap. If a client later claims they were told an umbrella was unnecessary, the agency may be drawn in even though Carla is not its agent. The agency's file should document that Carla does not speak for the agency on coverage.

The compliant path: pay Carla a flat, per-referral fee that is not tied to commission and is paid only for names and contact information, with no discussion of coverage. Some states permit this; Tom must confirm the specific rule and any disclosure or recordkeeping requirement with counsel. Alternatively, Carla could become licensed and appointed, which would allow commission sharing subject to the carrier's rules. Either way, the arrangement must be in writing, disclosed on the E&O questionnaire accurately, and paired with a script and training so Carla stops discussing coverage.

Answer the questionnaire truthfully and completely. If the agency has paid Carla anything tied to commission, disclose it and describe the arrangement. If it has paid only flat referral fees, disclose that and attach the agreement. The temptation is to answer 'no' because the arrangement felt informal, but an inaccurate answer is worse than an unfavorable one: it gives the carrier a rescission argument on any future claim. Tom should also disclose the past coverage discussions if the questionnaire asks about referral-source conduct, and should document the corrective steps taken.

Restructuring the relationship:

1. Convert to a compliant model. Either a flat referral fee for contact information only (confirm state rules with counsel) or Carla becomes licensed and appointed so commission sharing is permissible under carrier agreements. Do not blend the two.

2. Rewrite the agreement. Define what Carla may and may not say. She may introduce the agency and share contact details; she may not quote limits, recommend coverage, or characterize policy terms. Include an indemnity and a termination right if she exceeds the scope.

3. Train and document. Give Carla a one-page script and a short training session. Keep a record of the training. This is the agency's best defense if a client later claims Carla gave coverage advice.

4. Protect the file. Every Carla referral should have a documented agency contact and a coverage review conducted by a licensed agency employee, so the agency's own advice is on record.

5. Review the concentration. 38% of new business from one referral source is a business risk independent of the legal issue. Tom should diversify referral sources and set a target that no single source exceeds 20% of new business.

6. Tell the E&O carrier what changed. A brief note describing the restructured arrangement and the training is good underwriting hygiene and reduces the chance of a coverage dispute later.