The Office of General Counsel issued the following opinion on September 4, 2007, representing the position of the New York State Insurance Department.
RE: Insurance Law § 2119 Service Fee Agreement
Does the service fee agreement set forth below comply with the requirements of Insurance Law § 2119(c)(1)?
Yes. The service fee agreement below complies with the requirements of Insurance Law § 2119(c)(1).
The inquirer states that his office procured a commercial general liability (“CGL”) insurance policy for his client, a general contractor, through a wholesale insurance brokerage company that is a managing general agent (“MGA”) for the insurer that underwrites the risk. The inquirer states that the policy is sold by the insurer on a net basis. The MGA then adds its fee, which is based upon a percentage of the premium. The inquirer’s fee will also be a percentage of the premium, and is outlined in an Insurance Law § 2119 agreement, which provides in relevant part as follows:
Insurance Service Fee Agreement
Insured: ABC Construction, Ltd.
Insurance Carrier: DEF Insurance Company
Coverage: Commercial General Liability Insurance
Effective Date: June 30th, 2007 thru June 30th, 2008
This agreement is for a service fee that ABC Construction, Ltd. is charged on the above captioned commercial general liability insurance policy by XYZ & Associates. The New York State Department of Insurance requires XYZ & Associates to make certain you are aware that XYZ & Associates is not being paid a commissions by the Insurance carrier indicated above, and the fee is not part of the premium charged by the insurance company and is our only compensation for the procurement of the general liability insurance policy.
The initial Service Fee Amount is based on a Rate of one dollar and forty cents ($1.40) per thousand dollars ($1,000.00) of annual sales bases [sic] upon the fifteen million dollars ($15,000,000.00) in annual sales exposure used to calculate the premium at inception. This initial fee is full [sic] earned by XYZ & Associates at the inception of the policy period. Cancellation of the policy will not reduce the amount of fee, and this fee will not be refunded if coverage is cancelled. Secondly, an additional fee will be charged at time of end of policy year audit, if the audited sales exposure calculated is greater than the initial sales figure of fifteen million dollars ($15,000,000.00) for the policy period covering June 30th, 2007 thru June 30th, 2008. This additional service fee will be calculated at the same aforementioned rate of one dollar and forty cents ($1.40) per thousand dollars ($1,000) of annual sales.
Your signature represents your acknowledgement and agreement to this service fee. Our invoice will show the service fee as a separate item.
This agreement is made between XYZ & Associates and ABC Construction, Ltd.
_________________________on this ______________ day _____________, 2007.
ABC Construction, Ltd. ( President)_____________________
Insured Signature Producer Signature
Insurance Law § 2119(c)(1), which is relevant to this inquiry, provides that a broker may not receive compensation, other than commissions deductible from premiums on insurance contracts, unless it the based on a written memorandum that specifies or clearly defines the amount or extent of such compensation. Insurance Law § 2119(c)(1) provides as follows:
(c)(1) …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 sale, solicitation or negotiation 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.
The inquirer has asked that the Department review the service fee agreement above and advise whether it complies with Insurance Law § 2119(c)(1). In reviewing the agreement above, this opinion assumes that the inquirer is a licensed broker. In this instance, the inquirer has drafted a written memorandum that is to be signed by the party to be charged, ABC Construction. In addition, the amount and extent of the compensation is specified and clearly defined in the agreement, in proper compliance with Insurance Law § 2119.
However, the Department has insufficient information to determine whether the amount or extent of the compensation that is outlined in the agreement is commensurate with services performed. The Department’s position is that “service fees should be reasonable and different insureds should not be charged different amounts for the same services.” See Circular Letter No. 9 (2006). In addition, licensees must retain Insurance Law § 2119 agreements for not less than three years after fully performing the services.
Moreover, the statement in the agreement above that “[t]he New York State Department of Insurance requires XYZ & Associates to make certain you are aware that XYZ & Associates is not being paid a commission by the Insurance carrier indicated above, and the fee is not part of the premium charged by the insurance company and is our only compensation for the procurement of the general liability insurance policy” is not accurate. Please correct that statement in the agreement to reflect the Department’s position as set forth in the preceding paragraphs.
Further, the inquirer mentioned in his cover letter to the Department that the “insurance carrier sells its CGL policies on a net basis, and the MGA then adds on their fee, based on a percentage of the premium.” N.Y. Comp. Codes R. & Regs. tit. 11, § 33.2 (2003) (Regulation 120) sets forth the definition and requirements of MGAs. Specifically, 11 NYCRR § 33.2(c) defines an MGA to mean any person, firm, association or corporation that:
(1) manages all or part of the insurance business of an insurer (including the management of a separate division, department or underwriting office);
(2) acts as an insurance agent as defined in section 2101(a) of the Insurance Law for such insurer, whether known as a managing general agent, manager, or other similar term, or acts as an insurance broker as defined in section 2101(c) of the Insurance Law; and
(3) with or without the authority, either separately or together with affiliates, produces, directly or indirectly, and accept or reject risks on behalf of the insurer (underwriter) an amount of gross direct written premium equal to or more than five percent of the policyholder surplus as reported in the last annual statement of the insurer in any one quarter or year together with one or more of the following activities related to the business produced:
(i) adjusts or pays claims in excess of $25,000; or
(ii) negotiates reinsurance on behalf of the insurer.
Please note that if the MGA is acting as such, it must obtain an insurance agent license and it may not charge an additional fee in addition to its commissions for selling the policy. If, however, the MGA is not acting as an MGA, but as a wholesale broker, then it may do so only if it has also obtained an Insurance Law § 2119 agreement. Since the inquirer has not provided the Department with sufficient details to ascertain the role that the MGA in his inquiry serves, please provide us with the name of the MGA in question so that the Department can investigate this matter further.
For further information you may contact Associate Attorney D. Monica Marsh at the New York City Office.