The Office of General Counsel issued the following opinion on March 17, 2003, representing the position of the New York State Insurance Department.
Re: INSURANCE LAW SECTION 2119 BROKER COMPENSATION AGREEMENTS
Question Presented:
What information must be included in a written memorandum under N.Y. Ins. Law § 2119 (McKinney 2000)?
Conclusion:
N.Y. Ins. Law § 2119(c)(1) (McKinney 2000) requires that the written memorandum must be signed by the party to be charged, and must specify or clearly define the amount or extent of such compensation.
Facts:
An insurance broker and insured signed a document titled "Service Fee Agreement" (hereinafter "the Agreement") relating to a workers compensation policy. The Agreement is dated November 30, 1995. No fee amount is stated; only a percentage amount is indicated. Neither is there any stated term or duration to the Agreement, nor any specification of the services to be provided or when they would be provided. In addition, there is no provision stating how or when the Agreement is cancelable.
The document titled "service fee agreement" reads as follows:
We (I) hereby agree to pay the [insurance broker] a service fee of 10% of the annual State Insurance Fund earned premium, after application of the appropriate advance discount and/or experience modification that would apply to our (my) company, including audits. In the event of a refund of premium or credit received by you from the State Insurance Fund [you] shall pay a proportionate refund or apply a proportionate credit against future fees.
Accepted by:
Name of Firm:
Address:
Signature of Insured:
Title:
Telephone:
Date: November 30, 1995
ANALYSIS:
In accordance with N.Y. Ins. Law § 2119(c)(1) (McKinney 2000), an insurance broker may, in addition to the commission it collects from the insurer, receive compensation directly from an insured. There must be a written memorandum signed by the party to be charged, which specifies or clearly defines the amount or extent of such compensation. The parameters for receiving such compensation are provided by N.Y. Ins. Law § 2119(c) and (d) (McKinney 2000), which state:
(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 negotiation or procurement 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.
(3) This subsection shall not affect the right of any such broker to recover from the insured the amount of any premium or premiums for insurance effectuated by or through such broker.
(4) This subsection shall not affect the requirements of subsection (a) or (b) hereof, subsection (g) of section two thousand one hundred one or section two thousand one hundred eight of this article.
(d) No insurance broker shall, in connection with the negotiation, procurement, issuance, delivery or transfer in this state of any contract of insurance made or negotiated in this state, directly or indirectly charge, or receive from, the insured or prospective insured therein any greater sum than the rate of premium fixed therefor by the insurer obligated as such therein, unless such broker has a right to compensation for services created in the manner specified in subsection (c) hereof.
In the present matter, the Agreement does not specify the amount of the service fee. A service fee agreement that sets forth merely a percentage (without specifying the premium amount) rather than a specific amount is invalid and therefore, unenforceable under New York law. A service fee agreement must specify the fee amount in order to be enforceable under N.Y. Ins. Law § 2119(c)(1) (McKinney 2000). Attached is an April 7, 1994 opinion of the Department's Office of General Counsel that reached this conclusion.
In addition, the Agreement does not specify what period of time it covers. While a properly drafted multi-year service fee memorandum is permissible under Section 2119, the memorandum must relate to on-going services of the broker and specify or clearly define the amount or extent of the compensation, and indicate that the agreement continues upon renewals. Nor should the agreement bind the insured in perpetuity without allowing the insured to cancel each year prior to the services. (OGC Op. 2/12/91 copy enclosed).
Aside from failing to clearly state the amount or extent of compensation, the Agreement also fails to specifically state that it continues upon renewals or to give the insured the right to cancel the Agreement each year.
The final issue raised by the inquirers letter is whether, assuming the Agreement does not satisfy the requirements of N.Y. Ins. Law § 2119(c) (McKinney 2000), the broker may bring an action for recovery of fees on any basis whether in reliance on the agreement or on any theory of quantum meruit. N.Y. Ins. Law § 2119(d) (McKinney 2000), by its plain language, prohibits a broker from charging an insured any amount in excess of "the rate of premium fixed therefor" unless "such broker has a right to compensation for services created in the manner specified in subsection (c) hereof." Whether an action based upon the theory of quantum meruit would be sustained is a question for determination by a court of competent jurisdiction.
Please note that a broker seeking compensation pursuant to an invalid compensation agreement could be found to be untrustworthy and suffer revocation of its license or other disciplinary action by the Insurance Department, and the Department could order restitution as well. N.Y. Ins. Law § 2110(a) (McKinney 2000).
For further information you may contact Associate Attorney Sam Wachtel at the New York City Office.