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

David A. Paterson
Governor

Eric R. Dinallo
Superintendent

The Office of General Counsel issued the following opinion on April 1, 2008, representing the position of the New York State Insurance Department.

Re: Consulting Fee Agreement

Question Presented:

Does the fee agreement set forth below comply with N.Y. Ins. Law § 2119 (McKinney 2006)?

Conclusion:

No. While the fee agreement is a written memorandum that allows for the party to be charged’s signature, it does not specify or clearly define the amount or extent of the compensation. Furthermore, it does not appear that ABC Insurance Agency (“ABC”) is merely providing consulting services, but rather is charging for acting as an insurance agent or broker. As a result, ABC may not charge an insured a consulting fee, but may charge an insured a service fee pursuant to Insurance Law § 2119(c) when acting as an insurance broker.

Facts:

The inquirer reports that she is an employee of an insurance agency licensed in New York as a property/casualty insurance broker and agent, an excess line broker, a life insurance broker and agent, and a reinsurance intermediary. The inquirer submitted the following fee agreement for the Insurance Department’s review:

Draft Consulting Services
Engagement Memorandum

The ABC Insurance Agency, LLC (TABCIA) and __________________ enter into this agreement on    /    /    . __________________authorizes TABCIA to submit applications to insurance companies to obtain premium quotations for the following lines of coverage renewing on     /     /    . These insurance coverages are currently underwritten by __________________.

__________________ agrees to pay TABCIA an insurance consulting fee for this service. The fee will equal 25% of the difference __________________ realizes between their expiring premium and renewal premium as a result of TABCIA’s obtaining alternative premium quotations[.] As an example: If __________________’s expiring premium were [sic] $100,000 and __________________’s renewal premiumis [sic] $75,000, __________________ will pay TCIA $6,250[,] i.e.[,] 25% times the $25,000 premium savings.

Please note that if TABCIA receives [a] commission or other compensation should __________________ authorize TABCIA to serve as their agent of record for the renewal term, then such consulting fee will be waived by TABCIA.

Definitions:
Expiring Premium: The mutually agreed upon premium charged for the insurance coverages for the policy period of    /    /    to     /    /     .
Renewal Premium: The mutually agreed upon premium amount proposed to _________________ for the insurance coverages for the policy period of     /     /     to     /     /    i.e.renewal [sic] term.

I agree to pay the consulting fee as set forth above.

Signed:_______________________________ Date:_________________
Name and Title:______________________________________________

Analysis:

Insurance Law § 2119(a) and (b) permit a licensed insurance agent, broker, or consultant to receive a fee for consulting services if the compensation is based upon a written memorandum signed by the party to be charged, and if the memorandum specifically or clearly defines the amount or extent of the compensation. Insurance Law § 2119(a) and (b) state that:

(a)(1) No person licensed as an insurance agent, broker or consultant may receive any fee, commission or thing of value for examining, appraising, reviewing or evaluating any insurance policy, bond, annuity or pension or profit-sharing contract, plan or program or for making recommendations or giving advice with regard to any of the above, 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 or contract shall be retained by the licensee for not less than three years after such services have been fully performed.

(b)(1) No person licensed as an insurance agent, broker or a consultant may receive any compensation, direct or indirect, as a result of the sale of insurance or annuities to, or the use of securities or trusts in connection with pensions for, any person to whom any such licensee has performed any related consulting service for which he has received a fee or contracted to receive a fee within the preceding twelve months unless such compensation is provided for in the memorandum or contract required pursuant to subsection (a) hereof.

(2) This chapter shall not prohibit the offset, in whole or in part, of compensation payable under subsection (a) hereof by compensation otherwise payable to such consultant as agent or broker as a result of such sale of insurance or annuities or the use of securities or trusts in connection with pensions, if any such offset is provided for in the written memorandum or contract required under subsection (a) hereof.

***

The fee agreement here does not comply with Insurance Law § 2119(a)(1), because ABC does not appear to be merely providing consulting services. Rather, ABC appears to be charging a fee for acting as an insurance agent or broker.

The first paragraph of the fee agreement, as well as the first sentence of the second paragraph, indicate that ABC will receive a consulting fee solely for submitting applications for premium quotations to insurers. Insurance Law § 2119(a)(1) permits a licensed insurance agent, broker, or consultant to receive a consulting fee for “examining, appraising, reviewing or evaluating any insurance policy, bond, annuity or pension or profit-sharing contract, plan or program or for making recommendations or giving advice with regard to any of the above.” But, on the face of the fee agreement, an insured is not compensating ABC for providing consulting services. Rather, an insured is compensating ABC for submitting applications for premium quotations to insurers, which constitutes acting as either an insurance broker or an insurance agent.

An insurance agent represents an insurer in the “solicitation of, negotiation for, or sale of, an insurance, health maintenance organization or annuity contract,” see Ins. Law §§ 2101(a) and (b), while an insurance broker represents an insured “in soliciting, negotiating, or selling, any insurance or annuity contract or in placing risks or taking out insurance,” see Ins. Law § 2101(c). ABC is licensed by the Department as a property/casualty insurance broker and agent, an excess line broker, a life insurance broker and agent, and a reinsurance intermediary. Thus, whether ABC is serving as an insurance agent or an insurance broker depends upon whom ABC is representing in the transaction, and whether a particular insurer has appointed ABC as an agent. Since ABC here is merely soliciting insurance premium quotations, ABC appears to be acting as an insurance broker or agent, instead of a consultant. Therefore, ABC may not receive a consulting fee for these services.

However, ABC may charge an insured a service fee pursuant to Insurance Law § 2119(c), but only when acting as an insurance broker and rendering services in connection with “any contract of insurance made or negotiated in this state,” and so long as the service fee agreement is a written memorandum signed by the party to be charged that specifies or clearly defines the amount or extent of the compensation.1 See OGC Opinion 03-05-21 (May 22, 2003). ABC may not charge an insured a service fee when submitting applications for insurance premium quotations to an insurer for which ABC is an agent, and would only be entitled to a commission from the insurer if the insured chooses to purchase the insurance. In that situation, ABC could not also act on behalf of the insured as an insurance broker. See OGC Opinion 06-04-14 (Apr. 18, 2006).

Moreover, the fee agreement includes an offset clause, which states “that if TABCIA receives commission or other compensation should __________________ authorize TABCIA to serve as their agent of record for the renewal term, then such consulting fee will be waived by TABCIA.” While Insurance Law § 2119(b)(2) permits the inclusion of an offset clause in a consulting fee agreement, Insurance Law § 2119(c) does not permit the inclusion of an offset clause in a service fee agreement.

In addition, regardless of whether ABC receives a consulting fee pursuant to Insurance Law § 2119(a) and (b) or a service fee pursuant to Insurance Law § 2119(c), the formula for calculating ABC’s fee set forth in the fee agreement is problematic. According to the formula, ABC will receive a fee equaling 25% of the difference between the insured’s expiring premium and the renewal premium that ABC obtains for the insured. The fee agreement defines “renewal premium” as “the mutually agreed upon premium amount proposed to __________________ for the policy period of / / to / / i.e.renewal [sic] term.” (Emphasis added.) The phrase “mutually agreed upon” implies that the insurer and the insured must agree on the premium. While the first paragraph of the fee agreement, as well as the first sentence of the second paragraph, imply that ABC will receive a fee for submitting applications for premium quotations to insurers on behalf of the insured, the formula for calculating ABC’s fee appears to suggest that the insurer and insured must agree on the premium for ABC to receive its fee. Therefore, the fee agreement does not specify or clearly define the amount or extent of the compensation in violation of Insurance Law § 2119(a) and (c), because it is unclear when and for what services the insured must pay ABC.2

Further, the phrase “mutually agreed upon” implies that ABC is negotiating the insurance premium with the insured in possible violation of Insurance Law § 2324 or 4224. Insurance Law § 2324 applies to rebating and discrimination with regard to property/casualty insurance, while Insurance Law § 4224 applies to rebating and discrimination with regard to life insurance, accident and health insurance, and annuities. According to the express language of Insurance Law §§ 2324(a) and 4224(c), insurers, insurance agents, insurance brokers, and their representatives are prohibited from directly or indirectly offering rebates or inducements in connection with the sale of insurance, when the rebates or inducements are not specified in the insurance policy or contract. By negotiating the insurance premium with the insured, ABC or the insurer may be providing the insured with a rebate and thereby inducing the insured to purchase the insurance. See OGC Opinion 03-05-21 (May 22, 2003). Therefore, if ABC negotiates the insurance premium with the insured, then ABC could stand in violation of Insurance Law § 2324(a) or 4224(c).

In light of the foregoing discussion, the Department directed ABC to revise the fee agreement to comply with Insurance Law § 2119 and other provisions of the Insurance Law as discussed herein.

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

___________________________________________________________________________________________________

1  The service fee should be reasonable, and the insurance broker should not charge different amounts for the same services. See Circular Letter No. 9 (2006).

2  That is not to say that ABC cannot specify the fee as a percentage in the fee agreement. See OGC Opinion 96-32 (NILS) (Apr. 29, 1996). But even so, when ABC bills the insured, ABC should clearly state the fee in dollar terms, and explain how ABC arrived at that figure. See id.