|Eric R. Dinallo
The Office of General Counsel issued the following opinion on February 8, 2007 representing the position of the New York State Insurance Department.
Re: Policy Fees and Surcharges
1) Under New York law, must an insurance policy, or a premium notice, separately state a fire insurance fee, a New York State assessment fee, or a Workers Compensation Security Fund surcharge?
2) May these fees and surcharges be considered in calculating an agents commission, or must they be excluded from such a determination?
3) If these fees and surcharges are not paid by the policyholder, may the policy by cancelled by the insurer for non-payment of premium?
4) If the policyholder cancels the policy, must the fees and surcharges be refunded on a pro-rata, or other, basis, or are they fully earned as paid?
5) Are these fees and surcharges considered premium for purposes of calculating premium tax?
1) Yes. Under the New York State Insurance Law and the New York State Workers Compensation Law, the fire insurance fee, the New York State assessment fee, and the Workers Compensation Security Fund surcharge each must be separately stated on the declarations page of the policy. There is no requirement that they be separately stated on a premium notice.
2) The fire insurance fee may not be used as a basis for the agents commission, and the New York State assessment fee and the Workers Compensation Security Fund surcharge do not count toward that of the part of the premium intended to fund commissions.
3) Yes. An insurance policy may be cancelled for non-payment of the fire insurance fee if the insurer complies with New York Insurance Law §§ 3425 (McKinney Supp. 2007) or 3426 (McKinney Supp. 2007), which set forth cancellation and renewal provisions for most non-commercial property/casualty insurance policies and commercial lines property/casualty insurance policies, respectively. Likewise, a workers compensation policy may be cancelled for non-payment of the New York assessment fee and the Workers Compensation Security Fund surcharge if the insurer complies with New York Workers Compensation Law § 54(5) (McKinney 2006), which governs cancellation and termination of workers compensation insurance contracts.
4) Upon cancellation of a policy by the insured, the fire insurance fee and the New York State assessment fee must be refunded by the insurer on the same basis as any other return of premium. Since the Workers Compensation Security Fund surcharge is a recoupment of funds previously paid by the insurer, the insured would not be entitled to any return of premium.
5) The fire insurance fee and the Workers Compensation Security Fund surcharge are not subject to premium tax, but the New York State assessment fee is subject to premium tax.
Your inquiry is of a general nature, without reference to any facts.
Fire Insurance Fee
New York Insurance Law § 9108(a) (McKinney Supp. 2007) is relevant to your inquiry. It provides:
(a) Every insurance company authorized to do business in this state shall collect, in addition to the applicable premium charge, a fire insurance fee, separately identified and charged to each policyholder, from each such holder of a policy issued in the state or for delivery in the state for coverage of peril of fire, excluding a policy for protection of household furnishings and/or policies issued to protect one or two-family residential structures, schools, churches and hospitals.
Circular Letter No. 19, dated July 9, 1982, which interpreted § 557-a (now § 9108) of the Insurance Law, addresses the fire insurance fee. That reads in relevant part as follows:
The fee shall not be absorbed by the insurance company, but must be charged to the policyholder, and may not be calculated in rate filings. However, where an insurer has issued or renewed a policy prior to July 1, 1982, without charging the required fee, the Insurance Department will permit the insurer to absorb such fee provided the fee does not exceed $5.00.
The insurers right of cancellation for non-payment of the premium shall also extend to non-payment of the fee.
The refund of a fee should be calculated on the same basis as any return of premium.
There shall be no commission earned on the fee.
The fee is not subject to premium tax.
The fee should be shown on the declarations page of the policy.
Thus, as stated in Circular Letter 19 (1982), the fire insurance fee must be shown in the declarations page of the policy, and an agent or broker may not earn a commission on the fee. Furthermore, if the policy is cancelled by the insurer, refund of the fee must be calculated on the same basis as any return of premium, pursuant to Insurance Law §§ 3425 or 3426. If the policy is cancelled by the insured before the expiration of the insurance contract, Insurance Law § 3428 (McKinney Supp. 2007), which governs cancellations of insurance contracts by the insured, applies. Pursuant to Insurance Law § 3428, the refund of the fire insurance fee is calculated according to the insurers applicable rate filing, if any; otherwise, such refund is calculated in accordance with the provisions of the insurance contract. However, if the premiums are financed under a premium finance agreement, an authorized insurer must return the premiums on a pro-rata basis. Finally, as provided in Circular Letter 19, the fire insurance fee is not subject to premium tax.
New York State Assessment Fee
New York State Workers Compensation Law § 151(2)(c) (McKinney 2006) provides:
Assessments for the special disability fund, the fund for reopened cases and for the operations of the board shall not constitute elements of loss but shall for collection purposes be treated as separate costs by carriers. All insurance carriers, including the state insurance fund, shall collect such assessments from their policyholders through a surcharge based on premium in accordance with rules set forth by the New York compensation insurance rating board, as approved by the superintendent of insurance. Such surcharge shall be considered as part of premium for purposes prescribed by law including, but not limited to, computing premium tax, reporting to the superintendent of insurance pursuant to section ninety-nine of this chapter and section three hundred seven of the insurance law, determining the limitation of expenditures for the administration of the state insurance fund pursuant to section eighty-eight of this chapter and the cancellation by an insurance carrier, including the state insurance fund, of a policy for non-payment of premium.
The New York Compensation Insurance Rating Board (NYCIRB) is a non-profit, unincorporated association of workers compensation insurers, including the State Insurance Fund. In conjunction with the Workers' Compensation Law, the Insurance Law provides for the Superintendent of Insurance to designate a statistical organization to collect the loss, premium, and payroll data from each insurer, summarize this information, and develop an adequate rate structure. The Superintendent of Insurance has designated NYCIRB as the organization to provide this service. The New York Workers Compensation and Employers Liability Manual (Manual) contains rules and procedures, classifications and rates to govern the underwriting of Workers Compensation and Employers Liability Insurance in the State of New York. The Manual is available for downloading at www.nycirb.com.
The New York State assessment fee (assessment fee) is a separate, identifiable charge to policyholders for the funding of several funds, including the Special Disability Fund, Reopened Case Fund, and Workers Compensation Board Expenses (Manual Rule IX, R-58(L)(1) (2007)). According to the Manual, the assessment fee amount must be displayed as a separate, identifiable charge on the policy information page (Manual Rule IX, R-58(L)(2)). Further, the Manual contains the premium base for calculating the assessment fee. The assessment fee is not included in the calculation of the part of the premium that is intended to fund commissions.
Since the Workers Compensation Law considers the assessment fee as premium for purposes of an insurers annual statement that is filed with the Superintendent (Work. Comp. § 151(2)(c)), an insurer may cancel the policy for non-payment of the assessment fee. Similarly, because the assessment fee is considered premium, an insurer should return the fee if a workers compensation policy is cancelled prior to expiration. Insurance Law §§ 3425 and 3426 do not apply to cancellation and non-renewal of workers compensation policies. Rather, Workers Compensation Law § 54(5) governs cancellations, and Manual Rule X provides the basis for returning premiums. According to the Manual, premiums are not returned on a pro-rata basis in all instances. For example, when an insured who is not retiring from business cancels a policy, the premium may be returned on short-rate basis.
Finally, Manual Rule IX, R-58(L)(4) and Workers Compensation Law § 151(2)(c) provide that assessment fee amounts collected from policyholders shall be considered as premium for tax purposes, including the computation of premium tax.
Workers Compensation Security Fund Surcharge
The Workers Compensation Security Fund surcharge (surcharge) is a separate, identifiable charge to policyholders for the funding of the Workers Compensation Security Fund (security fund), which serves as the guaranty fund for fulfilling the obligations of insolvent insurers writing workers compensation in New York (Manual Rule IX, R-59(M)(1)). Pursuant to the Workers Compensation Law, a workers compensation insurer must pay, on a quarterly basis, a percentage of its net written premiums, minus the amount of dividends paid to policyholders, into the security fund (Work. Comp. § 108(2) (McKinney 2006)). However, each carrier may recoup these payments from its insureds by way of a surcharge on premiums (Work. Comp. § 108(4))
According to the Manual, this surcharge amount must be displayed as a separate, identifiable charge on the policy information page (Manual Rule IX, R-59(M)(2)). Further, Manual Rule IX, R-58(M)(3) and the Miscellaneous Values page in the rates section of the Manual state the premium base to which the surcharge percentage is to be applied. The surcharge is not included in the calculation of the part of the premium that is intended to fund commissions.
Although cancellation of workers compensation policies is governed by the Workers Compensation Law, there is nothing in the Workers Compensation Law, Insurance Law, or the Manual that precludes an insurer from cancelling a policy for non-payment of the surcharge. Since the surcharge is a recoupment of fees previously paid by the insurer, an insurer may cancel the policy for non-payment of the surcharge pursuant to Workers Compensation Law § 54(5), as provided in its insurance contract. However, upon cancellation by either the insurer or the insured, an insurer does not generally refund the surcharge, since it has already paid into the Workers Compensation Security Fund, and the surcharge is a recoupment of those payments.
Workers Compensation § 108(4) governs payments into the security fund:
The superintendent shall adopt a recoupment rate which shall enable each carrier to recoup over a reasonable length of time a sum reasonably calculated to recover the payments by the carrier under this section by way of a surcharge on premiums charged for insurance policies to which this section applies. Amounts recouped shall not be considered taxable for the purposes of article thirty-three of the tax law.
Article 33 of the New York Tax Law (Tax Law) governs franchise taxes on insurance corporations. Under the Tax Law, non-life insurance companies are subject to a franchise tax based on premiums (N.Y. Tax Law § 1502-a (McKinney 2004)). The franchise tax based on premiums also is referred to as premium tax. However, Workers Compensation § 108(4) exempts the surcharge that insurers charge their insureds, as recoupment for amounts paid into the fund, from such taxation. Thus, the Workers Compensation Security Fund surcharge is not subject to premium tax.
For further information, you may
contact Assistant Attorney Sapna Maloor at the New York City Office.