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

Eliot Spitzer
Governor

Eric Dinallo
Superintendent

The Office of General Counsel issued the following opinion on June 26, 2007, representing the position of the New York State Insurance Department.

Re: Public Adjusters Accepting Compensation from Restoration Contractors for Referrals

Question Presented:

May a public adjuster accept compensation from a restoration contractor for referring an insured to the contractor without disclosing such compensation to the insured?

Conclusion:

No.  A public adjuster may accept compensation from a restoration contractor for referring an insured to the contractor, but the compensation must be disclosed in a compensation agreement between the public adjuster and the insured pursuant to § 25.6 of N.Y. Comp. Codes R. & Regs. 11, Part 25 (1986) (Regulation 10), and may not exceed the maximum compensation stated in that agreement.

Facts:

The inquiry is of a general nature, without reference to particular facts.

Analysis:

Pursuant to 11 NYCRR § 25.6 of Regulation 10, any compensation paid by an insured to a public adjuster for services rendered to the insured by the public adjuster must be stated in a written compensation agreement.  In addition, 11 NYCRR § 25.7 states that:

No public adjuster shall charge any insured a fee in excess of 12.5 percent of the recovery for services rendered by the adjuster.

Therefore, if an insured receives $100,000.00, for example, from his or her insurance company to pay for a loss, a public adjuster may not receive a fee in excess of $12,500.00 from the insured for adjusting the loss.

In the Department’s view, compensation from a restoration contractor to a public adjuster for a referral is a fee for services rendered by the public adjuster pursuant to 11 NYCRR § 25.7, with the referral itself constituting a service rendered by the public adjuster.  Although the insured pays the referral fee indirectly, the compensation for the referral must be included as part of the maximum 12.5% fee that the public adjuster is entitled to collect under Regulation 10, and must be disclosed in the compensation agreement between the public adjuster and the insured pursuant to 11 NYCRR § 25.6.

This conclusion is bolstered by the fact that under the common law, an “agent” has a duty of undivided loyalty to his or her “principal.”  See OGC Opinion No. 97-9 (NILS) (Jan. 28, 1997);  See also Sokoloff v. Harriman Estates Dev. Corp., 96 N.Y.2d 409, 416 (2001) (noting that “the proposition that an [agent] is to be loyal to his [principal] and is ‘prohibited from acting in any manner inconsistent with his agency or trust and is at all times bound to exercise the utmost good faith and loyalty in the performance of his duties’” is fundamental to the principal-agent relationship).  In a relationship between a public adjuster and an insured, the public adjuster is the agent, and the insured is the public adjuster’s principal.  See OGC Opinion No. 97-9 (NILS) (Jan. 28, 1997).  As a result, a public adjuster owes a duty of undivided loyalty to the insured that hired her to adjust the loss.  See id.

With that said, N.Y. Penal Law §§ 180.05 and 180.08 (McKinney 1998) are commercial bribe-receiving statutes that prohibit an agent from soliciting, accepting, or agreeing to accept, without the consent of his or her principal, any benefit from another person with the understanding that such benefit will influence the agent’s conduct in relation to the principal’s affairs.  Specifically, Penal Law §180.05, which defines commercial bribe receiving in the second degree, states:

An employee, agent or fiduciary is guilty of commercial bribe receiving in the second degree when, without the consent of his employer or principal, he solicits, accepts or agrees to accept any benefit from another person upon an agreement or understanding that such benefit will influence his conduct in relation to his employer's or principal's affairs.

Commercial bribe receiving in the second degree is a class A misdemeanor.

Penal Law § 180.08, which defines commercial bribe receiving in the first degree, states:

An employee, agent or fiduciary is guilty of commercial bribe receiving in the first degree when, without the consent of his employer or principal, he solicits, accepts or agrees to accept any benefit from another person upon an agreement or understanding that such benefit will influence his conduct in relation to his employer's or principal's affairs, and when the value of the benefit solicited, accepted or agreed to be accepted exceeds one thousand dollars and causes economic harm to the employer or principal in an amount exceeding two hundred fifty dollars.

Commercial bribe receiving in the first degree is a class E felony.

Given the plain text of these statutes, please be advised that a court of competent jurisdiction could determine that by accepting a referral fee from a restoration contractor without receiving the insured’s consent, a public adjuster violates the Penal Law.  See OGC Opinion 97-9 (NILS) (Jan. 28, 1997).

Moreover, while the activities of restoration contractors are not regulated by the Insurance Department, a court of competent jurisdiction could also determine that by paying, or agreeing to pay, a referral fee to a public adjuster without the consent of the insured, a restoration contractor violates N.Y. Penal Law § 180.00 (McKinney 1998).  That statute provides that a person is guilty of commercial bribing when “he confers, or offers or agrees to confer, any benefit upon any employee, agent or fiduciary without the consent of the latter’s employer or principal, with intent to influence his conduct in relation to his employer’s or principal’s affairs.”1

For further information you may contact Assistant Attorney Joana Lucashuk at the New York City Office.

___________________________________________________________________________________________

1 A court of competent jurisdiction also could determine that by paying, or agreeing to pay, a referral fee to a public adjuster without the consent of the insured, a restoration contractor violated N.Y. Penal Law §180.03 (McKinney 1998) which contains language similar to Penal Law § 180.00, except Penal Law § 180.03 sets forth an extra requirement that the “value of the benefit conferred or offered or agreed to be conferred exceeds one thousand dollars and causes economic harm to the employer or principal in an amount exceeding two hundred fifty dollars.”