New York State Seal
STATE OF NEW YORK
INSURANCE DEPARTMENT
25 BEAVER STREET
NEW YORK, NEW YORK 10004

George E. Pataki
Governor

Gregory V. Serio
Superintendent

The Office of General Counsel issued the following opinion on November 30, 2004, representing the position of the New York State Insurance Department.

RE: Wholesale Insurance Broker Fees

Question Presented:

May a wholesale insurance broker charge an insurance broker a fee of $225, which is passed on to the insured, as a service fee for the placement of insurance?

Conclusion:

A wholesale insurance broker may charge an insurance broker a service fee of $225, which is passed on to the insured, for the placement of insurance, provided that the wholesale broker obtains a written memorandum signed by the insured, specifying the amount and purpose of such fee, pursuant to N.Y. Ins. Law § 2119(c) & (d) (McKinney 2000).

Facts:

ABC Brokerage is a wholesale insurance broker located in New Jersey and licensed to do business in New York that places insurance for insurance brokers and does not deal directly with insureds. The wholesale broker charges the insurance broker a fee for its services in placing the insurance. The insurance broker passes this fee on to the insured in the form of a service fee.

Analysis:

N.Y. Ins. Law § 2101(c) (McKinney 2000) states, in relevant part:

In this article, "insurance broker" means any person, firm, association or corporation who or which for any compensation, commission or other thing of value acts or aids in any manner in soliciting, negotiating or procuring the making of any insurance or annuity contract or in placing risks or taking out insurance, on behalf of an insured, other than himself or itself or on behalf of any licensed insurance broker[.] (emphasis added.)

Thus, the Insurance Law includes in its definition of an insurance broker a wholesale broker.

N.Y. Ins. Law § 2119(c) and (d) (McKinney 2000) states, in relevant part:

(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.

(2) A copy of every such memorandum shall be retained by the broker for not less than three years after such services have been fully performed.

* * * *

(d) No insurance broker shall, in connection with the negotiation, procurement, issuance, delivery or transfer in this state of any contract of insurance made or negotiated in this state, directly or indirectly charge, or receive from, the insured or prospective insured therein any greater sum than the rate of premium fixed therefor by the insurer obligated as such therein, unless such broker has a right to compensation for services created in the manner specified in subsection (c) hereof. (emphasis added.)

In Citron v. Curiale, 273 A.D.2d 183, 710 N.Y.S.2d 67 (1st Dep’t 2000), appeal denied 95 N.Y.2d 766, 716 N.Y.S.2d 640 (2000), the Appellate Division stated, with reference to the petitioner, a wholesale broker that the Department determined had violated N.Y. Ins. Law § 2119: "Petitioner’s argument that he was not acting as an insurance broker in these transactions because he purportedly did not deal directly with insureds is without merit because direct dealing with insureds is not an element of the applicable definition of ‘insurance broker’ (Insurance Law § 2101[c])."

Therefore, in order for the insured to be charged a wholesale broker’s fee in the amount of $225, the wholesale broker must obtain a written memorandum, signed by the insured, specifying the amount and purpose of such fee, pursuant to N.Y. Ins. Law § 2119(c) and (d) (McKinney 2000). For practical purposes, the insurance broker may present the insured with the wholesale broker’s written memorandum for signing, and, after the memorandum has been signed by the insured, forward the memorandum to the wholesale broker, who must retain the signed memorandum for no less than three years pursuant to § 2119(c)(2).

For further information you may contact Special Counsel Athan Shinas at the Albany Office.