The Office of General Counsel issued the following opinion on February 14, 2003, representing the position of the New York State Insurance Department.
Re: Limitations on commissions under § 2324 for business placed by a producer in regard to the producers or its affiliates property or risks that are located outside New York
Question Presented:
Are the commissions earned by an agent or broker on its or its affiliates property or risk that is located outside New York subject to the five percent limitation on commissions under N.Y. Ins. Law § 2324 (McKinney 2000)?
Conclusion:
Commissions earned by an agent or broker on its or its affiliates property or risk that is located outside New York (as described herein) are not subject to the five percent limitation on commissions under § 2324.
Facts:
Your client is a New York state chartered savings bank (GB). It owns an insurance agency (GA), a mortgage banker (GM), and a sales finance company and mortgage banker (GC). GA, GM, and GC are subsidiaries of GB and affiliates of each other, and GB is the parent corporation of GA, GM, and GC, within the meaning of the definitions of such terms contained in N.Y. Ins. Law § 107(a)(4), (35) and (40) (McKinney 2000).
GA is licensed in New York as both a property/casualty and life insurance agent. It is also licensed in other states. GM requires mortgagors to maintain property insurance on real property securing GMs mortgages. GC requires debtors to maintain property insurance on the real and personal property securing its extensions of credit. GM or GC is listed as the mortgagee or loss payee, as appropriate, under these policies.
GA sells the property insurance required by GM and GC to customers of GM and GC. GA also sells insurance to GM and GC on behalf of GM and GC debtors who fail to maintain the insurance required by GM and GC. This insurance, which is commonly known as "force-placed" insurance, protects GM or GCs interests in the underlying property. GA receives commissions on all of these policies.
GA sells the insurance in both New York and other states in which GM and GC does business. When GA sells the insurance in regard to non-New York property and risks, it is usually done pursuant to its license in the other jurisdiction.
Although N.Y. Ins. Law § 2103(i)(1) (McKinney 2000), in regard to insurance agents, contains a ten percent limitation on commissions on property or risks of an insurance agent and certain related entities specified therein (and N.Y. Ins. Law § 2104(d)(3) (McKinney 2000 & Supp. 2003) contains identical limitations regarding insurance brokers), your inquiry is limited to the application of the five percent limitation on commissions on property or risks of an insurance agent or broker contained in N.Y. Ins. Law § 2324 (McKinney 2000).
Analysis:
N.Y. Ins. Law § 2324 (McKinney 2000) prohibits certain activities in connection with the sale of property/casualty insurance. It provides in pertinent part:
(a) 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.
(b) Within the meaning of subsection (a) hereof, the sharing of a commission with the insured shall be deemed to include any case in which a licensed insurance agent or a licensed insurance broker which is a subsidiary corporation of, or a corporation affiliated with, any corporation insured, received commissions for the negotiation or procurement of any policy or contract of insurance for the insured. (emphasis added).
In relevant part, § 2324 prohibits an insurer, agent, broker or other representative thereof from giving or sharing a commission with the insured and also prohibits the insured from receiving such a rebate. Payment of commission to an insurance agent or broker in regard to insurance placed on the agent or brokers own property or risks comes within the prohibition. However, an agent or broker may retain commission 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. Commissions earned on the property or risks of the agent or brokers parent or affiliates are included within the calculation of the five percent limitation.
Hence, in the instant situation, commissions earned by GA on insurance covering the property or risks of GM and GC may not exceed five percent of the total commissions received by GA. GM and GC need not be named insureds under their policies for the policy to cover their property or risk. Where GM or GC is a loss payee or mortgagee under a policy, the policy covers GMs or GCs property or risk. In light of the above, and recognizing that much of the insurance issued through GA will provide coverage to GM or GC, you inquired whether GA would violate the five percent limitation if commissions earned by GA on New York property or risks of GA and its affiliates did not exceed five percent of all commissions earned on property insurance policies issued by GA.
In 1946, former § 188, the predecessor to current § 2324, was amended by Chapter 466 of the Laws of 1946 to permit a licensed insurance agent or broker to receive its usual commission on policies of insurance on its own property or risks, subject to the five percent limitation. In its Memorandum to the Governor, dated March 26, 1946, the Department noted that it did not consider "receipt by a licensed insurance agent or broker of commissions not exceeding 5% of his total commission earnings on insurance placed on his own property or risks to be improper or within the contemplation of the statute which prohibits rebating."
The five percent provision, therefore, applies only to commissions on insurance business that would otherwise be subject to the prohibitions of § 2324. Section 2324(e) specifies the policies or contracts to which § 2324 does not apply. Of particular relevance to your inquiry, § 2324(e) states that § 2324 does not apply to "any insurance contract, or rate of insurance in connection with any insurance contract either against loss or damage to, or legal liability in connection with, any property located wholly outside of this state or any activity carried on outside of this state or any motor vehicle or aircraft principally garaged and used outside of this state." Since § 2324 does not apply to insurance placed on such property or risks, there is no limitation imposed by that section on the commissions earned by an insurance agent or broker in regard to such business.
You are further advised that the percentage limitation in § 2324 does not apply to commissions earned by the broker or agent in another state pursuant to the authority of a license issued to the agent or broker by such other state. The limitations of business apply only to the business placed pursuant to the New York license.
Although commissions on property insurance business on such property or risks are not subject to the percentage limitations in § 2324, they are included in determining the total net commissions or underwriting fees received by the licensed insurance agent or insurance broker during the calendar year.
For further information you may contact Principal Attorney Paul A. Zuckerman at the New York City Office.