OGC Op. No. 08-07-11
The Office of General Counsel issued the following opinion on July 16, 2008, representing the position of the New York State Insurance Department.
RE: Insurance Law § 2119 fee agreement for consulting services
1. Does the proposed fee agreement for consulting services set forth below comply with N.Y. Ins. Law § 2119 (McKinney 2006) or other relevant statutes?
2. If consulting services are provided to individuals in other states, is the agreement nonetheless subject to New York law?
1. No. The proposed agreement improperly characterizes the fee as a consulting fee permissible under Insurance Law § 2119(a). It does not appear that ABC Financial, Inc. (“ABC”) is merely providing consulting services; rather, ABC is charging a fee for acting as an insurance broker. Under these circumstances, 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.
2. Yes. Insurance Law § 2119 applies to all insurance business conducted within New York State, even if the insurance business is conducted on behalf of an insured residing outside the State.
The inquirer is a licensed broker1 and life agent who provides life, disability, medical, supplemental and property/casualty insurance. The inquirer also provides consulting services to individuals regarding the conversion from COBRA to individual medical health plans provided by commercial carriers and “state risk pools.”
The inquirer has provided a draft fee agreement to the Insurance Department and asks whether that fee agreement is permissible under Insurance Law § 2119(c)(1) or any other statutes governing fees charged to insureds for obtaining insurance or rendering advice regarding insurance programs. The inquirer also asks whether the Insurance Department has jurisdiction over any insurance-related service that the inquirer may render to residents of other states or fees charged for these services.
The inquirer submitted the following fee agreement with attachments for the Department’s review:
Thank you for contacting ABC Financial, Inc. in relation to your insurance coverage needs. We look forward to providing you with the information, products and services to solve your coverage requirements.
[You can always visit our web pages for more information]
As discussed, our organization provides consulting services on a fee based arrangement. The fee is prepaid and non refundable. Listed below, you will find the fee for the services that you have requested. The fee is to cover our costs which can include but are not limited to, State license fee’s [sic], regulatory fee’s [sic] mailing costs and research time billed at the firms [sic] standard rate of $250 an hour.
Please take notice: No fee’s [sic] billed by the firm will exceed the stated amount below, regardless of the actual costs incurred by the Firm to provide your requested service.
1. Health Insurance search and placement/Commercial $350
Premiums for your coverage are estimated at $ (amount of Premium) per month and are subject to final underwriting and approval from the selected carrier. Rates are subject to change without notice.
Additional charges to your credit card may include initial premium deposits equal to the billing mode chosen for your coverage type plus a discount offset service fee of 4% per transaction.
Please sign the acknowledgement below and fax this letter to 999-999-9999. Than [sic] call our office to confirm receipt of your fax at 999-888-8888. We will bill your fee to a credit card when you call. You may also return this disclosure to our office with a check in the stated amount. We appreciate you [sic] confidence in our firm and look forward to speaking with you in the days to come.
Please read the following and sign the acknowledgement. Then return to the address listed above.
I/WE, request ABC Financial, Inc. endeavor to bind coverage with the quoted carriers. I/WE understand that the coverage is not bound [sic] or effective until confirmed by the carrier. I/WE further understand and agree to be responsible for all earned Premiums, Taxes and or Other Charges that may occur due to changes required by the carrier upon issuance of the coverage. No flat cancellation are [sic] allowed. There are certain exclusion [sic] that will be outline [sic] in the coverage that you should consider. The can include: Lead, Asbestos, Maternity, Preexisting Conditions, employment, nuclear, war & terrorism. There is no contents or flood coverage with this policy. All fee’s [sic] are paid in advance and non refundable except under the terms stated above.
Credit Card Billing Information (circle) Type: Visa / MC / Amex
Card Holder ___________________________________________
Date of Expiration __________________/________/____________
CVC Number (back of card) _______________________________
Billing address: (circle) Same / PO Box / Different from Insured – List below
RE: Information on Accounts and Contracts, Limited Power of Attorney
I, _________________, residing at ______________________________ hereby appoint ABC Financial, Inc., and It’s [sic] officers as my limited attorney in fact. While under contract, my limited attorney in fact will have access to all information required concerning the listed items. If the limited attorney in fact is no longer designated as my financial planner/Insurance consultant, pursuant to this certain agreement dated __________ by ABC Financial, Inc. and its officers, this limited power of attorney shall be automatically terminated.
This limited Power of Attorney is for release of information and settlement of claims.
The limited power of attorney shall be immediately revoked upon my subsequent disability, incapacity, adjudged incompetence or death. However, any act by the attorney in fact in good faith reliance upon this power without actual knowledge of such events shall nonetheless bind my estate, heirs, legal representatives and assigns.
I and my attorney in fact, agree for ourselves, our heirs, the legal representative or our estates, their successors and assigns, that this Limited Power is not available for use by any person or organization other than named as ABC Financial, Inc. or its officers.
Signed and sealed this_____ day of ______, 2007
Signature of client:X________________________
Name of Attorney in Fact: ABC Financial, Inc. and/or its officers
|John Doe, CFP||Jane Doe, LUTCF|
Plan description is subject to final approval of underwriting:
Accident Coverage for $5000
Dental Coverage ________
Vision Coverage ________
Drug Coverage _________
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In response to the Department’s request for clarification regarding certain statements in the fee agreement, the inquirer reports that ABC is hired to provide consulting services for a fee, and the inquirer states that the fee has no relation to insurance contracts. The inquirer asserts that based upon an opinion issued June 26, 2001 by the Department’s Office of General Counsel (“OGC”), insureds are allowed to pay premiums with credit cards, and that brokers may charge to the insured the discount fee levied by the credit card, as long as the insured is advised of the fee and agrees to it in writing. The inquirer also states that the 4% credit card “discount fee” is applied to “avoid rebating as an issue.” The inquirer contends that if a broker did not “pass along” this discount fee to the client, then the broker would be engaging in rebating by having to “make up” the 4% shortfall in commissions. The inquirer also notes that the “research” for which a fee would be charged includes bookkeeping, and tax preparation fees, and that “regulatory fees” include “NASD” fees that the inquirer would be required to pay when dealing with securities.
With respect to the “no flat cancellation” clause set forth in Attachment 1, the inquirer reports that such a clause is a “widely used term” in the property/casualty industry, and that it is common practice to disallow cancellation during the policy period. The inquirer also states that the “limited power of attorney” gives the inquirer permission to contact the client’s insurance carriers to obtain claims and other related information. However, the inquirer believes that the execution of the limited power of attorney is not “germane” to the Insurance Department.
Insurance Law § 2119 is relevant to this inquiry. That provision, which governs written contracts for compensation, reads in relevant part as follows:
(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 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.
(c)(1) No insurance broker may receive 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.
(2) A copy of every such memorandum shall be retained by the broker for not less than three years after such services have been fully performed.
* * *
Insurance Law § 2119 governs the compensation requirements for all agents, brokers, consultants who are licensed in New York. Further, there is no limitation in the statute as to the location of the insured for whom the service is being provided. As such, any agreement for consulting services and other services that are conducted in connection with the procurement of insurance by an agent or broker licensed in New York State are subject to the Insurance Law.
General Business Law § 518 also is relevant to this inquiry. That provision, which governs credit card surcharges, reads as follows:
No seller in any sales transaction may impose a surcharge on a holder who elects to use a credit card in lieu of payment by cash, check, or similar means.
Any seller who violates the provisions of this section shall be guilty of a misdemeanor punishable by a fine not to exceed five hundred dollars or a term of imprisonment up to one year, or both.
As used in General Business Law § 518, “seller” is defined as “any person who honors the credit cards or debit cards which may be used to purchase or lease property or services[.]” See Gen. Bus. Law § 511(6).
The Fee Agreement
As a preliminary matter, the fee agreement and attachments appear to be independent documents rather than a complete agreement. For example, there is no reference to the fee agreement on the acknowledgement form, which would indicate that the insured is signing the acknowledgement as part of the agreement. Thus, at the very least the agreement must be reformatted to reflect the fact that it is one continuous document.
The fee agreement, as proposed, is improper for several reasons. First, although the fee agreement is characterized as solely for consulting services, ABC is not in fact providing strictly consulting services. Instead, ABC appears to be charging a fee for acting as an insurance broker. For instance, although the agreement states that ABC provides consulting services on a fee based arrangement, the agreement shows that a $350 fee would be charged for “Health Insurance search and placement/Commercial.” (Emphasis added). Also, the agreement discusses premium estimates and notes that the actual premium amount would be subject to “final underwriting and approval from the select carrier,” and the third attachment lists a description of an insurance plan, including a specific amount for accident coverage. Clearly, these examples reflect the placement of insurance, rather than merely providing consulting services. Insurance Law § 2119(a)(1) permits a licensed insurance broker, agent or licensed consultant to charge 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 the placement of any contract is specifically excluded from Insurance Law § 2119(a)(1).
However, ABC may charge an insured a service fee pursuant to Insurance Law § 2119(c), but only when acting as an insurance broker rendering services in connection with “any contract of insurance made or negotiated in this state,” provided that the service fee is memorialized in a memorandum signed by the party to be charged and clearly specifying the amount or extent of the compensation.2 See, e.g., OGC Opinion No. 08-04-03 (Apr. 1, 2008); OGC Opinion No. 05-11-24 (Nov. 21, 2005). Further, the inquirer’s reference to license fees, regulatory fees, and research time, which the inquirer asserts would include tax preparation and bookkeeping fees, is confusing, because it is not clear whether these are additional services provided to the insured (and if that is the case, then the agreement needs to specify that these fees are not tied into the sale of insurance).
Moreover, charging an insured a 4% “discount offset fee” for paying premiums via credit card is impermissible under General Business Law § 518. An insurance broker may not charge an insured who pays premiums by credit card a service fee as a means of offsetting the transaction fees that the credit card company imposes on the insurance broker. See OGC Opinion No. 03-01-10 (Jan. 6, 2003). Although General Business Law § 518 refers only to “sales transactions” involving the use of a credit card, the Attorney General, in Formal Opinion No. 2006-F2 (Jan. 25, 2006) (attached hereto), concluded that the statute’s use of the term “sales transactions” also applies to the use of credit cards to pay insurance premiums. Thus, since the purchase of insurance may be considered to be purchase of “property” or a “service,” see Gen. Bus. Law § 511(6), General Business Law § 518 applies to the application of a credit card surcharge in connection with the payment of premiums.
The provisions set forth in the attachments to the fee agreement also are problematic. For example, a broker may not unilaterally prohibit the “flat cancellation” of a policy; an insured and insurer may agree to the “flat cancellation” (that is, cancellation of a policy as of its effective date) of an insurance binder before a matured risk, as long as the rights of a third party are not affected. See Cosmopolitan Mut. Ins. Co., v. Lumbermens Mut. Cas. Co., 20 N.Y.2d 145 (1967). Additionally, the provision may violate a statutory right to cancel flat a policy. For example, Insurance Law § 3216(c)(10) states that no accident and health insurance policy may be delivered to a person unless, printed prominently on the first page, or attached, there is a notice that during a specified period of time, not less than 10 days nor more than 20 days from the date the policy is delivered to the policyholder, “it may be surrendered to the insurer together with a written request for cancellation of the policy and in such event the insurer will refund any premium paid therefore including any policy fees or other charges, provided, however, that this paragraph shall not apply to single premium nonrenewable policies insuring against accidents only or accidental bodily injuries only. . . .”
Further, contrary to ABC’s assertion that a policy may exclude maternity coverage, the Insurance Law unequivocally requires that every policy providing hospital, surgical or medical coverage provide coverage for maternity care to the same extent that coverage is provided for an illness or disease under the policy. See Ins. Law § 3216(h)(10)(A)(i) (governing individual accident and health policies); Ins. Law § 3221(k)(5)(A)(i) (governing group accident and health policies); Ins. Law § 4303(c)(1)(A) (governing non-profit medical and dental health service corporations and health maintenance organizations (“HMOs”)). See also OGC Opinion No. 07-06-18 (June 19, 2007).
In addition, the attachments’ reference to various exclusions is confusing because such exclusions do not apply to all types of insurance. Therefore, the type of insurance to which the various exclusions may apply should be clarified.
Finally, the limited power of attorney as presented is invalid because it fails to meet the legal requirements for a “statutory short form power of attorney” pursuant to General Obligations Law § 5-1501. That provision states that for every durable or non-durable statutory form power of attorney to be valid, the power of attorney must contain the same or “reasonable equivalent” to the “CAUTION” and “DIRECTIONS” provisions set forth in the statute, and must be acknowledged by the principal in the same manner prescribed for the conveyance of real property.3 See Gen. Oblig. Law § 5-1501(1) and (1-a).
In sum, although nothing in the Insurance Law prohibits a broker from creating an agreement to address both fees for consulting services, as well as service fees in connection with the placement of insurance, the agreement must clearly distinguish between the fees and services being offered for consulting from those for acting as an insurance broker. ABC’s purported fee agreement set forth above fails to do so, and thus fails to conform with Insurance Law § 2119. Thus, in light of the foregoing discussion, ABC may not use its fee agreement to comply with Insurance Law § 2119, as well as the other laws discussed herein. Further, any insurance business, including consulting services in connection with the procurement of insurance, conducted by a licensed insurance agent or broker is subject to the Insurance Law, regardless of whether these services are conducted on behalf of an insured residing outside New York State.
For further information you may contact Senior Attorney Camielle A. Campbell at the New York City office.
1 The Licensing Bureau reports that the inquirer’s personal broker’s license expired in or about October 2006, but that the broker’s company, ABC, holds a current broker’s license and that the inquirer is the sub-licensee.
2 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).
3 Real Property Law § 298 states in part that “acknowledgment or proof, within the state, of a conveyance of real property situate in this state may be made: (1) at any place within the state, before (a) a justice of the supreme court; (b) an official examiner of title; (c) an official referee; or (d) a notary public.”