OGC Op. No. 08-07-21
The Office of General Counsel issued the following opinion on July 28, 2008 representing the position of the New York State Insurance Department.
RE: Section 2119 memorandum by premium finance arranger
1) Must a licensed insurance broker, which also acts as a premium finance arranger for a premium finance agency, obtain from all insureds for whom it arranges premium financing a written compensation agreement pursuant to Insurance Law § 2119(c) (McKinney 2006) (“§ 2119(c) memorandum”)?
2) If the § 2119(c) memorandum is required, may the broker include it with the premium financing documents that the insured must complete?
1) No. A licensed insurance broker need only obtain a § 2119(c) memorandum from an insured when the premium finance agency recoups its payment to the broker by charging the insured. In that instance, the insured would be indirectly paying a service fee to the broker.
2) Yes. The broker may obtain the § 2119(c) memorandum at the same time the insured signs the premium financing documents, provided that the broker has not yet received its compensation.
The inquirer represents a licensed insurance brokerage that seeks to act as a premium finance arranger for a premium finance agency. The brokerage plans to market the premium finance agency’s products and services to other insurance agents and brokers. The inquirer states that the insurance brokerage would neither offer nor negotiate premium finance agreements, but that it would assist other insurance agents and brokers in arranging finance agreements with the premium finance agency. In order to arrange premium financing, the brokerage plans to: (i) meet with other insurance agents and brokers; (ii) provide information to agents and brokers about the premium finance agency; (iii) obtain information from agents and brokers about their premium finance needs; and (iv) assist agents and brokers with drafting their initial premium finance transaction. In turn, the brokerage would receive a commission from the premium finance agency based on the volume of finance agreements it generates.
The inquirer asks whether the insurance brokerage must obtain a § 2119(c) memorandum from all insureds for whom it arranges premium financing. The inquirer also asks whether the brokerage may obtain the § 2119(c) memorandum at the same time that the insured signs the premium financing documents.
As an initial matter, the Banking Department, which regulates premium finance agencies, has opined in a recent letter to the inquirer about whether the premium finance agency may compensate the insurance brokerage. As long as the brokerage provides legitimate services, and the premium finance agency provides reasonable payment for actual services that are not inducements, the payments would not run afoul of Banking Law § 566(2)(a). See NYS Banking Department Opinion Letter dated May 22, 2008.
Insurance Law § 2119(c)(1) governs compensation agreements between insurance brokers and insureds. That provision states:
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 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.
Therefore, no insurance broker may receive from an insured compensation other than commissions from premiums for any services in connection with a contract of insurance without a written memorandum that details the amount or extent of the compensation.
In Aeropulse v. Armstrong & Brokers, 740 F. Supp. 938, 948 (E.D.N.Y. 1990), the court discussed the import of a § 2119(c) memorandum:
While Section 2119 is similar to a statute of frauds, it is “more exacting” and is intended to do more than merely protect an insured from the baseless claim of an insurance broker. If that was its sole purpose, it could have been accomplished by simply allowing the insured to avoid liability by asserting the absence of the requisite writing as a defense to an action by the insurer.
Section 2119 does considerably more than this. It flatly forbids receipt of compensation in the absence of the requisite writing. . . . Obviously, the statutory scheme reflects a desire on the part of the Legislature to defer brokers from receiving payments in the absence of the requisite writing.
The reason for this policy seems equally obvious. By allowing brokers to receive compensation in addition to the commissions they receive from insurers, the Legislature sought to encourage brokers to provide needed services to insureds. On the other hand, by requiring a writing setting forth the precise amount of such compensation, the Legislature sought to ensure that the purchaser of insurance was fully aware that the broker was receiving additional compensation. Otherwise, the insured might be paying such additional compensation without knowing that he was doing so or without knowing the amount of the additional compensation that he was paying.
Thus, a § 2119(c) memorandum protects insureds from brokers that charge unspecified and undisclosed fees without the knowledge of the insured. See Insurance Department’s Office of General Counsel (“OGC”) Opinion dated November 10, 2005; see also Meadowbrook-Richman, Inc. v. Associated Fin. Corp., 253 F. Supp. 2d 666, 675 (S.D.N.Y. 2004).
With respect to premium finance agreements, OGC has previously opined that Insurance Law § 2119(c) applies when a broker procures the agreement on behalf of a premium finance agency, and the premium finance agency recoups its payment to the broker by charging the insured. In that instance, the insured would be indirectly paying a service fee to the broker. See OGC Opinions dated August 16, 2003, January 13, 2003, and February 12, 2003.
Therefore, if the insurance brokerage arranges premium financing for insureds for whom it also acts as the broker, and the premium financing agency recoups from the insured the cost of the brokerage’s service fee, then the brokerage must obtain a § 2119(c) memorandum. Put another way, if the brokerage is not a broker on the insurance transaction, and if the premium finance agency does not recoup the referral or finders fee that it pays to the brokerage from the insured, then the brokerage is not required to obtain a § 2119(c) memorandum.
The inquirer’s second question asks whether the insurance brokerage may include the § 2119(c) memorandum with the loan documents that insureds who finance their premiums are required to complete.
As stated above, Insurance Law § 2119 prohibits an insurance broker from receiving any compensation unless the compensation is based on a written memorandum. It “flatly forbids receipt of compensation in the absence of the requisite writing.” Aeropulse, 740 F. Supp. at 948. Therefore, the broker may obtain the memorandum at the same time the insured signs the premium financing documents, provided that the broker has not yet received any compensation.
Under Insurance Law § 2119(c), the memorandum must “specify or clearly define the amount or extent of [the] compensation.” Therefore, the brokerage must obtain a § 2119(c) memorandum that is separate and apart from the premium financing agreement, see OGC Opinion dated September 18, 2003, and the memorandum must clearly delineate what portion of the compensation is allocated towards the broker’s services fees and expenses.
Please note that this opinion letter is limited to an interpretation of the Insurance Law, and expresses no opinion regarding any other law (such as the Banking Law).
For further information you may contact Senior Attorney Sapna S. Maloor at the New York City Office.