The Office of General Counsel issued the following opinion on September 18, 2003, representing the position of the New York State Insurance Department.
Re: Financing of Brokers Fee by Premium Finance Agency and Written Authorization by Insured
1. May a premium finance agency finance an insurance brokers service fee?
2. If the premium finance agency may finance the fee, must such agency obtain written authorization from the insured?
1. Whether or not a premium finance agency may finance an insurance brokers fee is a question to be answered by the New York State Banking Department, which regulates premium finance agencies.
2. Whether a premium finance agency is required to obtain a written agreement from an insured when financing the brokers service fees is also a question for the Banking Department. However, with regard to the collection of a service fee by an insurance broker, N.Y. Ins. Law § 2119(c)(1) (McKinney 2000) requires that such compensation be "based on a written memorandum, signed by the party to be charged, and specifying or clearly defining the amount or extent of such compensation."
The inquiry is general in nature. No specific facts were given.
As a preliminary matter, premium finance agencies are regulated and licensed pursuant to the New York Banking Law. Therefore, whether or not a premium finance agency may finance an insurance brokers service fee and obtain a written authorization from the insured regarding such financing, are matters to be addressed by the New York State Banking Department.
For purposes of the Insurance Law, N.Y. Ins. Law § 2119(c)(1) (McKinney 2000) does not permit an insurance broker to receive compensation (other than commissions deductible from premiums) from an insured or prospective insured for services in connection with an insurance contract unless the "compensation is based on a written memorandum, signed by the party to be charged, and specifying or clearly defining the amount or extent of such compensation." (emphasis added).
Therefore, notwithstanding any separate fee financing agreement between the premium finance agency and the insured, in order to collect a brokers service fee from the insured, a broker must obtain a signed Section 2119(c) memorandum that is separate and apart from the premium finance agreement. Such memorandum must clearly delineate what portion of the compensation goes toward premiums and what portion goes toward the brokers service fees or other expenses. Failure by an insurance broker to obtain a Section 2119(c) memorandum from an insured before collecting its brokers service fees is a violation of such Section and may be deemed by the Department to be untrustworthy conduct by the insurance broker, thus, subjecting the broker to disciplinary action.
Please note that this opinion letter is limited to an interpretation of the Insurance Law and no opinion is expressed regarding any other law. In particular, questions regarding premium finance arrangements and the Banking Law should be addressed to:
Sara Kelsey, Esq.
Deputy Superintendent and Counsel
New York State Banking Department
1 State Street
New York, NY 10004-1417
For further information you may contact Associate Attorney D. Monica Marsh at the New York City Office.