The Office of General Counsel issued the following opinion on January 30, 2008, representing the position of the New York State Insurance Department.
RE: Update on broker disclosure of fixed commission and other compensation
Is an insurance broker required to disclose to its clients the fixed commission it earns on the policies it places?
No. At present, and as a general matter, there is no legal requirement that a broker disclose to its clients the fixed commission that it earns on the policies that it places.
The inquirer’s inquiry, which is general in nature and does not set forth particular facts, refers to both OGC Opinion Number 05-08-18 (08/30/2005), and OGC Opinion Number 06-11-19 (11/20/2006). Those opinions concluded that neither the Insurance Law nor regulations promulgated thereunder require that a broker disclose to its clients the fixed commission it earns on the policies it places. The inquirer also cites Circular Letter Number 22 (August 25, 1998), and asks whether that Circular Letter only requires brokers to disclose compensation other than commission.
Fixed commission is the amount payable to a producer for sale of a particular insurance contract or policy, set prior to the sale of the contract or policy. Neither the Insurance Law nor regulations promulgated thereunder require that a broker disclose to its clients the fixed commission that it earns on the policies that it places. See OGC Opinion Number 05-08-18 (08/30/2005), and OGC Opinion Number 06-11-19 (11/20/2006). Thus, at present and as a general matter, there is no legal requirement that an insurance broker disclose to its clients the fixed commission that it earns on the policies it places.
Please be advised, however, that in the Insurance Department's Regulatory Agenda published in the New York State Register on June 27, 2007, the Department expressed its intention to adopt "a new part to 11 NYCRR to establish requirements regarding disclosure of all sources and amounts of compensation received by licensed insurance brokers and certain agents." Although the Department will not adopt this regulation during the remainder of 2007, the Department plans on proposing such a regulation in 2008.
The inquirer also refers to Circular Letter Number 22 (August 25, 1998), and asks whether it only requires that brokers disclose compensation other than commission. The Insurance Department did not intend that the Circular Letter apply to a broker's disclosure of fixed commission. The Circular Letter provides guidance regarding broker disclosure of compensation to producers over and above fixed commission payments. Such compensation would include contingent commissions, which may be based upon business volume, profitability, new business generated, existing business retained, or loss experience of business placed with the insurer by the producer. Contingent commissions are included in the kinds of compensation arrangements that the Circular Letter addresses in advising brokers that they should disclose “...to insureds prior to the purchase so as to enable insureds to understand the costs of the coverage and the motivation of their broker in placing the business.”
This opinion supersedes the opinion on this matter issued by the Department's Office of General Counsel of December 12, 2007.
For further information, you may contact Senior Attorney Robert Freedman, at the New York City office.