The Office of General Counsel issued the following opinion on February 3, 2005, representing the position of the New York State Insurance Department.
Re: Commission Added to Ocean Marine Premium
Questions Presented:
1) Under the facts provided, would an increase to the premium by the excess line broker to accommodate the brokers commission violate N.Y. Ins. Law § 2119(c)?
2) Is a broker, when handling ocean marine insurance, exempt from § 2119?
Conclusions:
1) Yes, increasing the premium to accommodate the brokers commission would violate N.Y. Ins. Law § 2119(c) unless the insured has signed a written memorandum specifying the amount or extent of such compensation.
2) No, an insurance broker, with respect to ocean marine insurance, is not exempt from N.Y. Ins. Law § 2119 which is applicable under the facts provided.
Facts:
A licensed insurance broker and excess line broker previously inquired whether it could attach its commission to an ocean marine cargo policys net premium to create the "gross premium": net premium + commission = gross premium. It was explained that the broker had received a cover note for an excess line insurance policy from a London broker stating as follows:
Premium: US$15,000.000 minimum and deposit adjustable @ 0.06% on total annual shipments. Nett [sic] to US broker with permission for US broker to add commission to premium.
In response to the inquiry, the Department opined in a letter dated December 2, 2004 that the addition of the brokers commission to the net premium would violate N.Y. Ins. Law § 2119(c), which provides that a broker may not receive any compensation other than commissions deductible from premiums unless the insured signs a written memorandum specifying the amount or extent of such compensation.
The broker has forwarded another inquiry which states that underwriters have proposed to word the slip as follows: "US Broker is permitted to increase premium and deduct their commission from the premium." The broker now inquires whether a § 2119(c) agreement is required, arguing that ocean marine cargo insurance is exempt from regulation.
Analysis:
N.Y. Ins. Law § 2119(c) (McKinney 2000 & Supp. 2005) provides:
(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. (Emphasis added)
The Department construes this language to mean that the broker may not receive any compensation other than a commission included within the premium established by the insurer without a written memorandum signed by the insured. The "premium" must be the amount reported to the broker by the insurer; not an amount determined by the broker. Otherwise brokers could easily evade the requirements of § 2119(c) by loading all of its fees into the "premium" without the insureds knowledge.
Although there are some sections of the N.Y. Ins. Law from which ocean marine insurance is exempted, there is nothing in the N.Y. Ins. Law exempting the broker, with respect to ocean marine insurance, from the requirements set forth in N.Y. Ins. Law § 2119. Accordingly, the broker is prohibited from increasing the premium amount set by the insurer in order to receive compensation without a written memorandum signed by the insured.
For further information you may contact Principal Attorney Paul A. Zuckerman at the New York City Office.