The Office of General Counsel issued the following opinion on May 22, 2003, representing the position of the New York State Insurance Department.
Re: Service Fees and Reductions in Commissions
This is in response to your e-mail inquiry dated April 30, 2003 and our telephone conversation on May 15, 2003.
1. Is an insurance agent selling property/casualty insurance permitted to obtain a fee from an insured that is in addition to, or in lieu of, a commission?
2. Is the law on the foregoing question the same for "retail" agents, managing general agents, and excess line brokers?
1. N.Y. Ins. Law § 2119(a) (McKinney 2000) prohibits an insurance agent from charging insureds service fees for the placement of insurance. Unlike a broker who represents the insured, the agent represents the insurer and, consequently, may receive compensation only from such insurer in selling insurance.
N.Y. Ins. Law §§ 2314 and 2324(a) (McKinney 2000 and Supp. 2003) would 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, or from substituting service fees in place of the earned commission.
2. The law concerning fees is the same for "retail agents" and "managing general agents" because both are licensed as insurance agents as defined in N.Y. Ins. Law § 2101(a) (McKinney 2000). A "Surplus lines" broker is known in New York as an excess line broker, and is licensed pursuant to N.Y. Ins. Law § 2105 (McKinney Supp. 2003), which requires that such brokers also be licensed as insurance brokers pursuant to N.Y. Ins. Law § 2104 (McKinney Supp. 2003). As brokers, they are subject, as are agents, to the same prohibitions on rebating and making unlawful inducements to insureds to purchase insurance. However, brokers, unlike agents, may also charge the insured a service fee, in addition to, not in lieu of, any commission, provided there is a written memorandum signed by the insured, specifying the amount of the fee, pursuant to N.Y. Ins. Law § 2119(c) (McKinney 2000).
None are presented.
An insurance agent may not receive compensation directly from an insured for selling insurance, regardless of whether the insured agrees to pay a fee for such sale. There is no separately designated license for "retail agent" or "managing general agent." Under the law, both would need to be licensed as insurance agents as defined in N.Y. Ins. Law § 2101(a) (McKinney 2000).
N.Y. Ins. Law § 2314 (McKinney 2000) provides:
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.
As a general rule, agents act on behalf of and represent insurers, and consequently, may receive their compensation only from such insurers. See Wolcott B. Dunham, Jr., New York Insurance Law § 19.01-02 (1990). The insurance company and the insurance agent determine between themselves the amount of commission that the insurance company will pay the agent. This expense to the insurance company is part of its projected expenses that in regards to property/casualty insurance, are generally filed with the Superintendent as part of the rate filings made in accordance with Article 23 of the New York Insurance Law. See N.Y. Ins. Law § 2304(a) (McKinney 2000). Producer commission, as a past and prospective expense, is a factor upon which the rate is based, even if the rates and rating plan for the policy are not required to be filed with the Superintendent. Commissions are included in the premium charged the insured. Since such premium rates are based, in part, on commission payments, the insurance agents (or insurance brokers) earned commission may not be subtracted from the premium, which would therefore be an unlawful deviation from the rates in effect. N.Y. Ins. Law § 2314 (McKinney 2000).
Commission sharing with the insured or otherwise reducing the premium is known as rebating, a violation of N.Y. Ins. Law § 2324(a) (McKinney Supp. 2003), which 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 or merchandise not exceeding fifteen 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.
The New York State Insurance Law distinguishes between the ability of an insurance broker, including an excess line broker, and an insurance agent in the matter of charging insureds service fees for placing insurance. N.Y. Ins. Law § 2119(c) (McKinney 2000), which permits licensed brokers to charge insureds additional fees, provides:
(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.
Licensed brokers, including excess line brokers, have explicit statutory authorization to receive additional compensation from insureds whereas licensed agents do not.
Accordingly, any additional compensation (e.g., fees, service fees, origination fees) paid by insureds directly to agents, which is beyond the incorporated commissions of an insurers filed or manual rates, violates the rate filing and rate approval provisions of the Insurance Law.
However, an agent who acts as a producer for an automobile insurance policy placed through the New York Automobile Insurance Plan ("NYAIP") represents the insured, and acting as an insurance broker, may collect such additional compensation. N.Y. Ins. Law § 2119(c) (McKinney 2000) and § 21(c) of the NYAIP Rules.
The Office of General Counsel Opinion Letters dealing with this topic are available on the Insurance Departments web site at www.ins.state.ny.us.
For further information you may contact Associate Attorney Jeffrey A. Stonehill at the New York City Office.