New York State Seal
STATE OF NEW YORK
INSURANCE DEPARTMENT
25 BEAVER STREET
NEW YORK, NEW YORK 10004

The Office of General Counsel issued the following opinion on January 4, 2002, representing the position of the New York State Insurance Department.

RE: Notice of Cancellation/Service Fees

Questions Presented:

1) May an insurer charge an insured a fee for services it provided in relation to an insured’s late payment of premium, policy reinstatement, or premium installment plan?

2) Under N.Y. Ins. Law §§ 3425 and 3426 (McKinney 2000),1 may a policy be cancelled for non-payment of a late payment fee, reinstatement fee, or premium installment fee?

3) Under N.Y. Ins. Law §§ 3425 and 3426 (McKinney 2000), may the effective date of cancellation for non-payment be the same as the policy’s inception or renewal date?

4) Under N.Y. Ins. Law §§ 3425 and 3426 (McKinney 2000), must a notice of cancellation for non-payment specify the amount due in order for cancellation to be effected?

5) May an insurance agent or broker that advances premium payment for its insured order the insurer to cancel the policy when the insured fails to reimburse the agent or broker for the premium advanced?

6) May an insurance agent or broker charge an insured a fee for the services it provides in attempting to prevent policy cancellation, or to reinstate an insured’s policy?

Conclusions:

1) Yes; generally speaking, it is permissible for an insurer to charge an insured such service fees.

2) Yes; an insurer may cancel a policy for the non-payment of such insurer service fees under N.Y. Ins. Law §§ 3425 and 3426 (McKinney 2000) provided that the insured was made aware of the fees, and the conditions placed on such fees, before being charged such fees.

3) Yes; under N.Y. Ins. Law §§ 3425 and 3426 (McKinney 2000), the effective date of cancellation for non-payment may be the same as the policy’s inception or renewal date.

4) No; under N.Y. Ins. Law §§ 3425 and 3426 (McKinney 2000), a notice of cancellation for non-payment does not have to specify the amount due in order for cancellation to be effected.

5) Except with respect to an assigned risk automobile insurance policy, an insurance agent or broker that advances premium payment for its insured may not order the insurer to cancel the policy when the insured fails to reimburse the insurance agent or broker for the premium advanced.

6) An insurance broker may charge an insured a fee for the services it provides in attempting to prevent policy cancellation, or to reinstate an insured’s policy where a written memorandum, signed by the insured and specifying the amount and purpose of such compensation, is obtained pursuant to N.Y. Ins. Law § 2119(c) (McKinney 2000). An insurance agent may not charge a fee for such services, except when acting as a producer of (and only with respect to) an assigned risk automobile insurance policy, and in such case must do so in accordance with N.Y. Ins. Law § 2119(c) (McKinney 2000). Service fees relating to an assigned risk automobile insurance policy may be limited by § 21(C) of the Rules of New York Automobile Insurance Plan (2001).

Facts:

No specific facts were presented.

Analysis:

For purposes of this opinion, a fee charged to an insured by an insurer for services provided in relation to an insured’s late payment of premium, policy reinstatement, or premium installment plan shall be denominated a "late payment fee," a "reinstatement fee," and a "premium installment fee," respectively. The Department makes a distinction between the meaning of the terms "late payment fee" and "reinstatement fee." A "late payment fee" refers to a fee associated with premium payment that is made at a time later than the premium due date, but prior to both policy cancellation and the time in which an insurer may reject premium payment.2 A "reinstatement fee" refers to a fee associated with the reinstatement of a policy after the cancellation date, or after the time in which an insurer may reject premium payment.

The Department views late payment fees, reinstatement fees, and premium installment fees to be properly classified as fees that are outside of the rating structure, and which do not have to be filed with the Department or included as part of the manual rates. Such fees may be charged separately and apart from the policy premium because the expenses that such fees are meant to deflect arise independently from the issuance, underwriting, or general maintenance of insurance policies.3 These fees arise in relation to the way an insured opts to pay the premium, or are incurred because of an individual insured’s lateness in paying the premium, and not in relation to the expenses incurred on behalf of insureds generally. However, certain other fees, such as "policy placement fees" and "origination fees," are part of the policy rate because they are part of the insurer’s expenses in issuing the policy. Such fees generally relate to underwriting and arise in relation to every policy issued.

An insurer may charge late payment fees, reinstatement fees, and premium installment fees provided that the insured was made aware of these fees prior to being charged such fees. These service fees, and any consequences an insured would experience for failure to pay such fees, must be clearly stated to the insured (i.e., by including this information in the insurance policy form or in the billing statement). To preclude discrimination, the amounts and conditions of these service fees must be applied equally to all insureds of the same class that are subject to the fees. In addition, the service fee charged must be reasonable.

The failure by an insured to pay these insurer service fees, where the insured was made aware of the amount of, and the conditions placed upon, such fees prior to being charged the fees, may provide the basis for policy cancellation under N.Y. Ins. Law §§ 3425 or 3426 (McKinney 2000). N.Y. Ins. Law §§ 3425(a)(10) and 3426(a)(3) (McKinney 2000), which are written in identical terms, state in relevant part:

"Nonpayment of premium" means the failure of the named insured to discharge any obligation in connection with the payment of premiums on a policy of insurance or any installment of such premium . . . ."

Where an insurer sends notice of cancellation for non-payment of premium and the insured remits premium payment, but not the late payment fee, within the 15-day grace period provided by N.Y. Ins. Law §§ 3425(a)(10) and 3426(a)(3) (McKinney 2000), the insurer may not cancel the policy for non-payment of the late payment fee unless the insurer indicates in the notice of cancellation that the policy is being cancelled due to non-payment of the premium and the late payment fee, in order to cancel the policy on such grounds.

Under N.Y. Ins. Law §§ 3425 and 3426 (McKinney 2000), the cancellation date of a policy may be the same as the policy’s inception or renewal date. Cancellation may not take effect until on or after the policy’s effective date because in order to cancel a policy, one must be in effect. Additionally, an insurer may advance the date that premium is due to a date that is prior to the policy’s effective date. As above noted, the insured is provided a 15-day grace period from the date that notice of cancellation has been sent in order to make timely payment, pursuant to N.Y. Ins. Law §§ 3425(a)(10) and 3426(a)(3). It is possible that an insured may fail to make payment within the 15-day grace period, but offer to submit payment before the cancellation date. The insurer is not required to accept payment in this circumstance. For example, an insurer advances the premium due date to December 1, 2001 for a policy that renews on January 1, 2002. The insured does not pay on December 1st. On December 2nd, the insurer sends notice of cancellation for nonpayment of premium: the cancellation date is January 1. The insured does not pay by December 17th, the last day of the 15-day grace period. The insured proffers payment on December 18th; however, the insurer is not required to accept such payment because it is proffered after the 15-day grace period.

A notice of cancellation for non-payment does not have to specify the amount due in order for cancellation to be effected under N.Y. Ins. Law §§ 3425 and 3426 (McKinney 2000). Gannon v. New York Mutual Underwriters, 78 A.D.2d 399, 435 N.Y.S.2d 163 (3rd Dep’t 1981), aff’d 55 N.Y.2d 641, 446 N.Y.S.2d 265 (1981). With reference to then N.Y. Ins. Law § 167-a, now § 3425, the Gannon court stated: "We find nothing in the language of the statute itself, nor in the prior legislative history of the enactment, which offers any support for the proposition that notices of cancellation must state the amount of the premium due." Although Gannon was directed at a § 3425 policy, the similar wording of §§ 3425 and 3426 logically dictates that the reasoning of the court would apply in the case of a § 3426 policy as well.

Except with respect to an assigned risk automobile insurance policy, discussed infra, an insurance agent or broker may not order cancellation of a policy because of an insured’s failure to reimburse the premium voluntarily advanced by the agent or broker: the Insurance Law does not authorize cancellations to be made on such basis. Thus, an insurer that has received such advance by an insurance agent or broker may not cancel the policy for nonpayment of premium because the premium has been paid to it.

With respect to an assigned risk automobile insurance policy, § 18(4) of the Rules of New York Automobile Insurance Plan (2001) provides that:

An insurer shall, at the request of a producer, cancel the entire policy in conformity with the Vehicle and Traffic Law where a producer submits proof that a check, tendered by the insured to be used for the payment of premium, and which has been deposited in the producer’s premium account, has been refused payment by the bank upon which it has been drawn. Such cancellation shall be on a pro rata basis, subject to the minimum retained premium charge prescribed in the Minimum Premium Rule in the Plan Manual, whichever is greater, and the unearned portion of the paid premium, if any, shall be returned to the producer to the extent of the amount of the dishonored check.

The Plan permits a producer to order cancellation under such circumstances because producers are required under the Plan to make immediate payment to an insurer upon receipt of payment by an insured. The Plan, in effect, requires (rather than permits) a producer to advance premium payment when it has received payment in the form of a check that has not yet cleared in the producer’s premium account.

With respect to fees that may be charged an insured by a licensee other than an insurer, an insurance broker may charge an insured a fee for services it performed, pursuant to N.Y. Ins. Law § 2119 (c) (McKinney 2000), which states in relevant part:

(c)(1) No insurance broker may receive any compensation, other than commissions deductible from premiums on insurance policies or contracts, from any insured or prospective insured for or on account of the negotiation or procurement of, or other services in connection with, any contract of insurance made or negotiated in this state or for any other services on account of such insurance policies or contracts, including adjustment of claims arising therefrom, unless such compensation is based upon a written memorandum, signed by the party to be charged, and specifying or clearly defining the amount or extent of such compensation.

(2) A copy of every such memorandum shall be retained by the broker for not less than three years after such services have been fully performed.

Thus, provided that § 2119(c) requirements have been met, an insurance broker may charge a fee for activities that it undertakes on behalf of its insured, such as fees associated with the broker’s assistance in preventing cancellation of a policy, or in reinstating a policy. Such fees charged by an insurance broker are distinct from an insurer’s fees. Therefore, a broker may charge, for example, a fee for its assistance in having a policy reinstated even where the insurer has charged a reinstatement fee, provided that the broker complies with the § 2119 requirements.

However, there is no statute that allows an insurance agent to charge a fee for its services. The only fee an insurance agent may charge an insured is a consulting fee pursuant to N.Y. Ins. Law § 2119(a) (McKinney 2000) for consulting services, which are not the kind of services that you inquire about.

There is one exception to this general rule, and that is in regard to policies placed with the New York Automobile Insurance Plan. Under the Rules of New York Automobile Insurance Plan (2001), an insurance agent represents the insured and, therefore, acts as an insurance broker. Thus, for this limited purpose only, an insurance agent may charge an insured a service fee as permitted under, and limited by, § 21(C) of the Plan. Since the agent would be acting as a broker in this situation, the agent would also be subject to N.Y. Ins. Law § 2119(c) (McKinney 2000). Under § 21(C) of the Plan, a producer, which may be an insurance agent or broker, may charge a maximum service fee of $40 per year per policy, which is applicable to all risks written under the Plan except commercial automobiles, private passenger fleets, and vehicles listed in § 6(A)(1)(e)(1) of the Plan.

This opinion supersedes any earlier Department opinions that are contrary to, or conflict with, this opinion.

For further information you may contact Senior Attorney Sally Geisel at the New York City Office.


1 N.Y. Ins. Law §§ 3425 and 3426 (McKinney 2000) set out the cancellation provisions, inter alia, for most property/casualty insurance policies.
2 Discussed infra.
3 This opinion does not address whether these fees are part of the premium for tax purposes.