The Office of General Counsel issued the following informal opinion on December 5, 2002, representing the position of the New York Insurance Department.
Re: Recoupment of Unearned Commissions.
May a licensed insurance agent recoup from insurance brokers submitting insurance business through it that portion of the commissions paid to the broker that the agent is obligated to refund to its principal, the insurance company?
Since the contract between the insurance agent and each insurance broker does not require the insurance brokers to refund unearned commissions, the insurance agent may not recoup such amounts.
Mr. A is an insurance agent licensed pursuant to New York Insurance Law § 2103(b) (McKinney 2000) and which has contracted with a licensed property/casualty insurer to submit business to the insurer. The contract between Mr. A and the insurer specifically contemplates that applications from prospective insureds will be submitted by insurance brokers who are licensed pursuant to New York Insurance Law § 2104 (McKinney 2000 and 2002 Supplement) under circumstances where the insurer has indicated that such brokers may submit applications to insurer through Mr. A. The insurer has no independent contractual relationship with the insurance brokers.
The contract between Mr. A and the insurer provides that the insurer will pay it, as insurance agent, a specified percentage of the premium as a commission and that the agent may deduct such commission prior to transmittal of the premium to the insurer. The contract further provides:
The Agent shall refund ratably to the company on business heretofore or hereinafter written, commissions on cancelled policies and on reductions in premiums at the same rate at which such commissions were originally returned, whether before or after termination of this agreement.
Mr. A has contracted with certain insurance brokers that they will be entitled to a specified percentage of the premium as a commission and may deduct that portion of the premium prior to transmittal of the premium to Mr. A. The contract between Mr. A and the insurance brokers is silent as to any obligation of the insurance brokers to refund unearned commissions.
The insurer has terminated some policies and insists that Mr. A refund the full amount of the commission deducted by it, which refund includes amounts that were credited by the insurance brokers as their commissions prior to transmittal to Mr. A. The insurance brokers have refused to refund any portion of the commissions withheld by them. Mr. A believes that it is inequitable to require it to refund commissions it never received without also requiring contribution by the insurance brokers.
It is presumed that the terminations by the insurer were in compliance with New York Insurance Law §§ 3425 (McKinney 2000 and 2002 Supplement), dealing with termination of personal lines insurance policies, or 3426 (McKinney 2000), dealing with termination of commercial lines insurance policies, where applicable.
Neither New York Insurance Law § 2115 (McKinney 2000 and 2002 Supplement), which prohibits insurers from paying commissions to unlicensed insurance agents, or New York Insurance Law § 2116 (McKinney 2000 and 2002 Supplement), which prohibits insurers or insurance agents from paying commissions to unlicensed insurance brokers, regulates the contractual relationship between an insurer and its producers with respect to unearned commissions. It has long been the rule that commissions on property/casualty policies are fully earned once the policy is placed. Scottish Union & National Insurance Company v. Geery, Guthrie & Company, 242 App. Div. 812, 275 N.Y.S. 476 (1st Dept 1934). However, the parties may contract that the insurance agent or insurance broker is obligated to refund unearned commissions. Western National Insurance Company v. Haph Insurance Brokerage, Inc., 277 App. Div. 6, 97 N.Y.S. 2d 447 (1st Dept. 1951) affd. Western National Insurance Company v. Haph Brokerage Inc., 302 N.Y. 678 (1951).
Since the insurance brokers have not contracted with Mr. A to return unearned commissions, either to it or to the insurer, Mr. A may not insist on any contribution by them regarding its obligation to make refunds to the insurer. If Mr. A had desired to have the insurance brokers contribute to any refund to the insurer, it should have included such an obligation in the contract with the insurance brokers.
In addition, when calculating the return premium to the insureds, New York Insurance Law § 3428(a) (McKinney 2000) provides:
Except as provided in subsection (d) of this section [dealing with financed policies], whenever an insurance contract made or issued in this state is cancelled or otherwise terminated by the insured before the expiration thereof in accordance with the terms of such contract, the earned premium to be retained by the insurer shall be determined by the applicable rate filing, if any, otherwise in accordance with the provisions of such contract.
It has been the consistent position of this Department that any refunds made by the insurer through an insurance agent or insurance broker must be gross and the insurance producer may not deduct any commissions it is required to return to the insurer.
For further information you may contact Principal Attorney Alan Rachlin at the New York City Office.