The Office of General Counsel issued the following opinion on September 22, 2003 representing the position of the New York State Insurance Department.
Re: Excess Lines Placements
In a circumstance where property/casualty insurance has been placed with an unauthorized insurer by a licensed insurance broker without the use of a licensed excess line broker, may any commission that would otherwise be payable on placement of the coverage be paid instead to the insured party?
There is nothing in the New York Insurance Law or regulations which governs the situation. Rather, it would be for a court of competent jurisdiction to make such a determination.
The common denominator in the two hypothetical situations posited in the inquirers letter is that coverage is placed with an unauthorized insurer by a licensed insurance broker without using a licensed excess lines broker. The proposed distinctions between the two situations are irrelevant for purposes of this inquiry.
Insurance Department Regulation No. 41 (11 NYCRR 27), which sets forth Excess Line Placement Standards, states as follows:
"(a) The Insurance Law prohibits the sale in New York of insurance (other than ocean marine insurance and such other insurance specified in section 2117(b) and (c) of the Insurance Law) when written by insurers not authorized in New York,....", N.Y. Comp. Codes R. & Reg. tit. 11, Part 27.0(a) (2001) (Regulation 41).
For purposes of the inquirers inquiry we will assume that the coverage being placed does not fall into one of the exceptions to the general rule cited above. The regulation further provides that certain types of coverage may nonetheless be placed, in accordance with N. Y. Ins. Law §§ 2105 and 2117 (McKinney 2000 and Supp. 2003), with an unauthorized insurer if the coverage is unobtainable in whole or in part from authorized insurers, including, where appropriate, residual market facilities authorized to write and writing the kinds of insurance provided; and the coverage is procured from one or more unauthorized insurers by a licensed excess line broker, provided that the broker exercises due care and makes a diligent effort as required by section 2118 of the Insurance Law.
The regulation further declares that "No excess line broker shall place coverage with any unauthorized insurer except in conformity with this Part or as otherwise permitted by the Insurance Law" N.Y. Comp. Codes R. & Reg. tit. 11, Part 27.0(d) (2001).
The payment of commissions on the sale of insurance policies is a matter of agreement between the producer and the insurer. The insured is not a party to the agreement. As between the producer and the insurer, the question of the producer's right to retain the commission must be determined by the terms of the agreement between those parties. If the producer is acting in violation of N. Y. Ins. Law § 2117 (McKinney 2000 and Supp. 2003), by placing a policy with an unauthorized insurer (without utilizing a licensed excess line broker) it would be subject to disciplinary action by the Department. However, it would not be within the auspices of this Department to interpret the commission agreement and determine the disposition of the paid commissions. Rather, it would be for a court of competent jurisdiction to make such a determination under applicable law.
For further information one may contact Associate Attorney Sam Wachtel at the New York City Office.