Gil's Lapsed License, Tara's 'You're Covered,' and a 20% Bonus
Gil has held a New Mexico life and health producer license for 12 years. His renewal date passed three months ago. He completed 18 of the required continuing-education hours, never finished the rest, and never submitted anything, but he has kept writing applications, and two carriers have kept accepting them and paying commissions. His unlicensed assistant Tara handles walk-ins. Last week she explained the difference between an HMO and a PPO to a small-group owner, quoted a premium, took a check for the first month, and told him 'you're all set, you're covered effective Monday.' Gil now wants to pay Tara 20% of the commission on that case as a bonus and have her 'keep closing small group cases' because she is good at it.
1. Characterize what Tara did. Was it clerical work or transacting insurance, and what are the consequences?
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This was transacting insurance without a license. The line between clerical and licensed activity is drawn by the acts performed:
- Clerical (permitted): scheduling appointments, taking messages, collecting factual data such as names and dates of birth, delivering a policy that has already been sold, and accepting a premium for immediate remittance.
- Transacting (requires a license): soliciting, negotiating, or selling insurance; explaining and comparing coverage; quoting a premium as part of a sales discussion; and executing a contract of insurance.
Tara did at least four licensed acts: she compared an HMO to a PPO (explaining coverage is negotiating), quoted a premium, took a premium payment in connection with a sale, and told the client coverage was effective, which purports to bind coverage she had no authority to bind.
Consequences: the arrangement exposes Tara to unlicensed-activity penalties and Gil to discipline for aiding and abetting unlicensed activity. The client may not actually be covered: an unlicensed person cannot create a binder, and if the application was never submitted or was submitted after the effective date, the group has a gap and a claim denial. The premium she accepted is trust money that must be remitted promptly and accounted for. Gil must stop the practice immediately, confirm the case was actually submitted and bound, and correct the client's understanding in writing.
2. Can Gil pay Tara 20% of the commission? Analyze under producer compensation rules.
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No. A producer may not share commissions with an unlicensed person.
- Commission splitting and referral fees are limited to licensed producers (and, where permitted, to licensed agencies and their licensed producers, with proper disclosure and appointment). Paying an unlicensed employee a percentage of the commission on a specific sale is the classic prohibited arrangement, and calling it a 'bonus' does not change what it is: compensation contingent on the sale of insurance by an unlicensed person.
- What Gil may do: pay Tara a regular salary or hourly wage for clerical work, or a bonus tied to non-sales metrics, and pay a referral fee only if the jurisdiction permits nominal, non-contingent referral fees to unlicensed persons for names only, with no discussion of coverage.
- Path forward: Tara should be encouraged to obtain her own license, be appointed by the carriers, and then be compensated as a licensed producer. Until then, all client conversations about coverage, premiums, and effective dates must be handled by Gil or another licensed producer.
Why the rule exists: commission sharing is the incentive that drives unlicensed selling. The prohibition is designed to remove the motive, not just the title.
3. Gil's license lapsed for failure to complete continuing education. What should he have done, and what must happen now?
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What should have happened: when it became clear he would not complete the required hours before the renewal date, Gil should have stopped transacting, notified the carriers, and completed the hours and any late reinstatement requirements before writing another application. Continuing to solicit and submit business on a lapsed license is transacting insurance without a license, the same violation Tara committed, and 12 years of clean history does not cure it.
What must happen now:
- Stop writing business immediately and notify the carriers in writing; their continued acceptance of applications does not make the license valid, and appointments on a lapsed license should be terminated.
- Complete the outstanding continuing-education hours, including the ethics component, and apply for reinstatement or a new license under the applicable late-filing rules, paying any penalty or late fee.
- Review every application written during the lapse for placement, effective dates, and disclosure. Any client who believed coverage was bound must be told the truth in writing.
- Account for all premiums collected during the lapse and remit them to the correct insurer or refund them.
- Expect examination. Commissions were received on unlicensed business, and the Department can require disgorgement, impose civil penalties, and suspend or refuse reinstatement.
General principle: the license is the authority to act, and it is personal and non-delegable. Neither a carrier's acceptance of an application nor a clean complaint history substitutes for a current license, and an unlicensed assistant cannot be used to keep the pipeline moving.