The Office of General Counsel issued the following opinion on August 30, 2005, representing the position of the New York State Insurance Department.
RE: Disclosure of Broker Commission
Question Presented:
Is an insurance broker required to disclose to its clients the commission it earns on the policies it places?
Conclusion:
No; neither the Insurance Law nor the regulations promulgated thereunder require an insurance broker to disclose to its clients the commission it earns on the policies it places.
Facts:
No specific facts were provided.
Analysis:
N.Y. Ins. Law § 2101(c) (McKinney Supp. 2005) states in relevant part:
(c) In this article, "insurance broker" means any person, firm, association or corporation who or which for any compensation, commission or other thing of value acts or aids in any manner in soliciting, negotiating or selling, any insurance or annuity contract or in placing risks or taking out insurance, on behalf of an insured other than himself, herself or itself or on behalf of any licensed insurance broker[.]
Thus, in providing insurance services, a broker represents its clients (the insureds) and not the insurers with whom it has placed business. However, neither the Insurance Law nor the regulations promulgated thereunder require an insurance broker to disclose to its client the commission it earns from placing a policy.
However, it is the Department's position that the undisclosed receipt of additional compensation is sufficient to create a perception that a broker is conflicted in its loyalties and may be engaging in a dishonest practice or demonstrating untrustworthiness, which may subject the broker to disciplinary action under N.Y. Ins. Law § 2110 (McKinney Supp. 2005).
The Department's Circular Letter No. 22 (1998) provides the following guidance with respect to undisclosed broker compensation:
· All compensation arrangements between an insurer and a broker should be reduced to writing and agreed to by both parties;
· All such compensation arrangements should be disclosed to insureds prior to the purchase so as to enable insureds to understand the costs of the coverage and the motivation of their broker in placing the business;
· All fees paid to brokers should be included as factors in the establishment of an insurer's premium rates;
· All fees paid to brokers (and reasons for such fee payments) should be included in a broker file maintained by the insurer; and
· The insurer's internal auditing procedures should include verification that all fees paid to brokers are proper and within the parameters of the New York Insurance Law and Department regulations.
The full text of the Circular Letter is available on the Departments web site at www.ins.state.ny.us. Be advised that the Department is considering promulgating a regulation requiring additional disclosure by brokers of compensation.
For further information you may contact Associate Attorney Sally Geisel at the New York City Office.