The Office of General Counsel issued the following opinion on September 19, 2000, representing the position of the New York State Insurance Department.
RE: Premiums Quoted "Net of Commission"
1) Does the New York Insurance Law permit an insurance agent quoting property/casualty insurance to charge an insured a service fee, either flat or hourly, in lieu of commission?
2) Does the New York Insurance Law permit an insurance agent (or insurance broker) to quote property/casualty insurance "net of commission", whereby the quoted premium is reduced by an amount proposed to be the insurance agents (or insurance brokers) commission?
1) The New York Insurance Law prohibits insurance agents, whether quoting property/casualty or some other kind of insurance, from charging insureds service fees for the placement of insurance. See Friedman v. Markman, 11 A.D.2d 57, 201 N.Y.S.2d 743 (1st Dept 1960); Angstreich v. Beck, 165 N.Y.S. 449 (App. Term 1917); Townsend v. Tompkins, 10 N.Y.S. 797 (Sup. Ct. 1890); Monat v. Ettinger, 194 Misc. 692, 87 N.Y.S.2d 488 (City Ct. 1947).
2) N.Y. Ins. Law §§ 2314 and 2324 (a) (McKinney 1985) prohibit an insurance agent (or an insurance broker) from quoting property/casualty insurance on a "net of commission" basis, whereby the quoted premium is reduced by an amount proposed to be the insurance agents (or insurance brokers) commission. Different sections of the Insurance Law prohibit insurance agents (and insurance brokers) from quoting other kinds of insurance on a "net of commission" basis.
XYZ Inc. informed the Department that it had viewed many large risks for property and casualty insurance quotations that were net of all commissions. XYZ Inc. further stated that in lieu of commission, the insurance agent quoted either an annual service fee or an hourly fee. XYZ Inc. inquired whether these practices are prohibited by N.Y. Ins. Law § 2324 (McKinney 1985), commonly referred to as the anti-rebating statute.
N.Y. Ins. Law § 2101 (a) (McKinney Supp. 2000) states in relevant part:
In this article, "insurance agent" means any authorized or acknowledged agent of an insurer, fraternal benefit society or health maintenance organization issued a certificate of authority pursuant to article forty-four of the public health law, and any sub-agent or other representative of such an agent, who acts as such in the solicitation of, negotiation for, or procurement or making of, an insurance, health maintenance organization or annuity contract, other than as a licensed insurance broker (emphasis added)
Hence, by its definition, an insurance agent quoting property/casualty, or any other kind of, insurance, represents and acts on behalf of an insurer. Because an insurance agent represents the insurer, an insurance agent may not charge an insured a service fee for placing insurance and may be compensated for placing such insurance only by the insurer. See Friedman v. Markman, 11 A.D.2d 57, 201 N.Y.S.2d 743 (1st Dept 1960); Angstreich v. Beck, 165 N.Y.S. 449 (App. Term 1917); Townsend v. Tompkins, 10 N.Y.S. 797 (Sup. Ct. 1890); Monat v. Ettinger, 194 Misc. 692, 87 N.Y.S.2d 488 (City Ct. 1947). It is true that an insurance broker, which represents the insured, is also compensated for placing insurance by the insurer. However, unlike an insurance agent, an insurance broker is not prohibited from charging an insured a service fee for placing insurance, provided N.Y. Ins. Law § 2119 (c) and (d) (McKinney 1985) requirements are met, because an insurance broker acts on behalf of the insured. This is the reason that N.Y. Ins. Law § 2119 (c) and (d) (McKinney 1985) address insurance brokers and not insurance agents. Thus, an insurance agent that collects a flat or hourly fee from an insured for placing insurance violates the Insurance Law.
An insurance agent (and insurance broker) violates the Insurance Law by quoting a premium "net of commission", which for purposes of this opinion will mean a premium that is reduced by an amount purported to represent the insurance agents (or insurance brokers) commission. Please bear in mind that because you limited your inquiry to transactions involving property/casualty insurance, the remainder of this opinion will only address property/casualty insurance. However, there are other sections of the Insurance Law that prohibit insurance agents (and insurance brokers) from quoting other kinds of insurance on a "net of commission" basis.
N.Y. Ins. Law § 2304 (a) (McKinney 1985) (emphasis added) states:
In the making of rates, consideration shall be given to past and prospective loss experience, including the conflagration and catastrophe hazards, if any, both within and without this state, to all factors reasonably attributable to the class of risks, to a reasonable profit, to past and prospective expenses both country-wide and those specially applicable to this state, and in the case of participating
insurers to policyholders' dividends, savings or unabsorbed premium deposits allowed or returned to policyholders, members or subscribers.
Thus, property/casualty insurance rates are based, in part, on an insurers expenses. Included in such expenses are the commissions the insurer has contractually agreed to pay its insurance agents (and insurance brokers).
N.Y. Ins. Law § 2314 (McKinney 1985) states:
No authorized insurer shall, and no licensed insurance agent, no employee or other representative of an authorized insurer, and no licensed insurance broker shall knowingly, charge or demand a rate or receive a premium which departs from the rates, rating plans, classifications, schedules, rules and standards in effect on behalf of the insurer, or shall issue or make any policy or contract involving a violation thereof.
Thus, an insurance agent (or insurance broker) quoting a premium for property/casualty insurance may not deviate from the effective rates. Because such rates are based, in part, on commission payments, the insurance agents (or insurance brokers) commission may not be subtracted from either the rate or the premium.
Furthermore, N.Y. Ins. Law § 2324 (a) (McKinney 1985) (emphasis added) states:
No authorized insurer, no licensed insurance agent, no licensed insurance broker, and no employee or other representative of any such insurer, agent or broker shall make, procure or negotiate any contract of insurance other than as plainly expressed in the policy or other written contract issued or to be issued as evidence thereof, or shall directly or indirectly, by giving or sharing a commission or in any manner whatsoever, pay or allow or offer to pay or allow to the insured or to any employee of the insured, either as an inducement to the making of insurance or after insurance has been effected, any rebate from the premium which is specified in the policy, or any special favor or advantage in the dividends or other benefit to accrue thereon, or shall give or offer to give any valuable consideration or inducement of any kind, directly or indirectly, which is not specified in such policy or contract, other than any article of merchandise not exceeding five dollars in value which shall have conspicuously stamped or printed thereon the advertisement of the insurer, agent or broker, or shall give, sell or purchase, or offer to give, sell or purchase, as an inducement to the making of such insurance or in connection therewith, any stock, bond or other securities or any dividends or profits accrued thereon, nor shall the insured, his agent or representative knowingly receive directly or indirectly, any such rebate or special favor or advantage, provided, however, a licensed insurance agent or a licensed insurance broker may retain the usual commission or underwriting fee on insurance placed on his own property or risks, if the aggregate of such commissions or underwriting fees will not exceed five percent of the total net commissions or underwriting fees received by such licensed insurance agent or insurance broker during the calendar year.
Thus, an insurance agent (or insurance broker) quoting property/casualty insurance is also prohibited from quoting a premium "net of commission" because such act constitutes rebating in violation of § 2324.
Therefore, an insurance agent (or insurance broker) quoting property/casualty insurance at a premium less the amount purported to be its commission ("net of commission") violates the Insurance Law.
For further information you may contact Attorney, Sally A. Geisel at the New York City Office.