The Office of General Counsel issued the following informal opinion on April 29, 2002, representing the position of the New York State Insurance Department.
RE: Brokers' Commissions/Rebating and Discrimination
(1) When a potential insured employs an insurance broker to secure insurance coverage and the broker acts to secure such coverage, at what point does the broker have a vested right to the commission payable on the insurance coverage?
(2) If the potential insured terminates the broker prior to placement of the coverage, may the insurer charge the insured a premium that does not include the amount that would have been payable to the broker as commission?
(1) As a general rule, a broker earns a commission when the policy has been issued and the premium is paid. However, there are exceptions to the general rule stated above.
(2) By reducing the premium charged to an insured, the insurer may be offering an inducement to purchase the insurance in the nature of a rebate from the premium in violation of the New York Insurance Law. In addition the insurer by charging a non-approved rate and the insured, by knowingly receiving such a rebate or inducement, would be violating the Insurance Law.
The inquirers client has been the insurance broker of record on a policy of group health insurance for several years. The insurer is an HMO subject to the provisions of N.Y. Health Law Art. 44 (McKinney 2002). At the close of the most recent annual policy period the insurer proposed a substantial increase in the premium payable for the policy. The inquirer stated that the broker was successful in negotiating a decrease in the proposed premium and communicated this fact to the insured group.
The insured group approached the insurer directly. It presented a letter terminating the authority of the broker. It requested that the insurer issue the policy directly to the group and reduce the premium by an amount equal to the commission that would have been paid to the broker.
New York courts have generally held that absent an agreement to the contrary, a broker earns a commission when it brings about the relationship of insurer and insured. See Hamond v. Risk Specialists, 210 A.D.2d 202, 619 N.Y.S.2d 744 (1994); Western Nat. Ins. Co. v. Haph Brokerage, 277 A.D. 6, 97 N.Y.S.2d 447 (1st Dept. 1950) affd 302 N.Y. 678 (1951). However, there are exceptions to the rule. The issue of the entitlement to payment of commissions involves an aspect of the relationship between a broker and the insured and/or the insurer that is contractual in nature, and does not involve the administration of the Insurance Law. The following cases may be instructive: Clinchy v. Grandview Dairy, 262 A.D. 51, 27 N.Y.S.2d 793 (1st Dept. 1941) affd 288 N.Y. 502 (1942) (Insurance broker successfully sued insured for recovery of commissions based on breach of contract); National Brokerage Corporation v. Travelers Insurance Company, 295 N.Y. 97 (1945) (Court ruled that insurance broker could sue insurer for commissions on theory of breach of contract where the insurer had initiated the change in designation of broker by the insured).
The second aspect of this inquiry concerns the question of rebating, unlawful inducements to the making of insurance and the requirement that premium rates be approved by this Department. The inquirer states that after the premium due for the ensuing policy period had been determined, the insured informed the insurer that it had terminated the authority of the broker of record. The insured further informed the insurer that it would be representing itself in the placement of the policy, and directed the insurer to reduce the premium due on the policy by an amount equal to the amount that the insurer would have paid the broker as commission for placement of the policy.
HMO's in New York must have their forms and premium rate filings submitted to and approved by the Insurance Department. The forms and rates must be in compliance with Article 43 of the Insurance Law and any other applicable provision of law. N.Y. Ins. Law § 4308 (McKinney 2000). N.Y. Comp. Codes R. & Regs. Tit. XI, § 52.42(e) (2001) (Regulation No. 62) requires that HMO's rate filings must incorporate the anticipated expenses for payment of commissions to brokers for the placement of business.
N.Y. Ins. Law § 4224 (McKinney 2000), among other things, prohibits any insurer doing the business of accident and health insurance in this state from utilizing discriminatory rates. Section 4224 provides as follows:
(c) No such life insurance company and no such savings and insurance bank and no officer, agent, solicitor or representative thereof and no such insurer doing in this state the business of accident and health insurance and no officer, agent, solicitor or representative thereof, and no licensed insurance broker and no employee or other representative of any such insurer, agent or broker, shall pay, allow or give, or offer to pay, allow or give, directly or indirectly, as an inducement to any person to insure, or shall give, sell or purchase, or offer to give, sell or purchase, as such inducement, or interdependent with any policy of life insurance or annuity contract or policy of accident and health insurance, any stocks, bonds, or other securities, or any dividends or profits accruing or to accrue thereon, or any valuable consideration or inducement whatever not specified in such policy or contract; nor shall any person in this state knowingly receive as such inducement, any rebate of premium or policy fee or any special favor or advantage in the dividends or other benefits to accrue on any such policy or contract, or knowingly receive any paid employment or contract for services of any kind, or any valuable consideration or inducement whatever which is not specified in such policy or contract.
N.Y. Ins. Law § 4224(c) (McKinney 2000).
While § 4224 only applies to accident and health insurers, it is the position of the Department that the principles of § 4224 also apply to HMO's. Accordingly, when the insurer submits to the Department a uniform rate that integrates its projected expenses for payment of commissions in the placement of business that uniform rate must be charged to all insureds whether business is placed through a broker or not. The "negotiation" of the commission resulting in a deviation from the filed premium rate would clearly result in either a rebate or an unlawful inducement to the making of insurance, in violation of the Insurance Law.
Thus, the HMO is prohibited from offering an illegal inducement or premium rebate to the insured and the insured is similarly prohibited from receiving any inducement or premium rebate. The HMO would also be charging a premium rate not approved by this Department in violation of N.Y. Ins. Law § 4308(b)(McKinney 2000).
For further information you may contact Associate Attorney Sam Wachtel at the New York City Office.