OGC Opinion No. 06-03-07
The Office of General Counsel issued the following opinion on March 13, 2006, representing the position of the New York State Insurance Department.
Refund of a Consulting Fee
May an insurance broker/consultant refund fees to a client based on compensation that the broker/consultant receives from an insurer?
Any refund of the premium paid by the insured would be considered a rebate and thus in violation of N.Y. Ins. Law §§ 2324 or 4224. However, an insurance consultant may offset its consulting fee to the extent that it receives a commission on a policy, so long as the consulting agreement allows it to receive a commission on the policy.
The inquirer presented the Department with two agreements: the first was a proposed consulting agreement between a client, who the Department assumed is a licensed insurance broker, and an insured with respect to accident and health policies; the second was a copy of an agreement between the broker and an insurer. The inquirer wishes to know after a review of these two agreements whether the broker may refund fees to a client if it gets paid a commission by the insurer.
It is not clear to the Department that the consulting agreement that the inquirer provided is limited to consulting. In addition to consulting, the agreement mentions "professional services." It is ambiguous as to whether these services relate to consulting or to other services in connection with the insurance contract including services related to the sale, solicitation or negotiation of the insurance contract or other services provided in connection with the contract of insurance. Additionally, the agreement calls for a payment of a maximum of 3% of the premium a month. It is unclear what type of consulting on an existing policy would require a monthly payment of up to 3% of the premium. Accordingly, the Department assumes that the agreement is not limited to consulting services.
N.Y. Ins. Law § 2119 (McKinney 2000 & 2006 Supp.) provides:
(a)(1) No person licensed as an insurance agent, broker or consultant may receive any fee, commission or thing of value for examining, appraising, reviewing or evaluating any insurance policy, bond, annuity or pension or profit-sharing contract, plan or program or for making recommendations or giving advice with regard to any of the above, 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 or contract shall be retained by the licensee for not less than three years after such services have been fully performed.
(b)(1) No person licensed as an insurance agent, broker or a consultant may receive any compensation, direct or indirect, as a result of the sale of insurance or annuities to, or the use of securities or trusts in connection with pensions for, any person to whom any such licensee has performed any related consulting service for which he has received a fee or contracted to receive a fee within the preceding twelve months unless such compensation is provided for in the memorandum or contract required pursuant to subsection (a) hereof.
(2) This chapter shall not prohibit the offset, in whole or in part, of compensation payable under subsection (a) hereof by compensation otherwise payable to such consultant as agent or broker as a result of such sale of insurance or annuities or the use of securities or trusts in connection with pensions, if any such offset is provided for in the written memorandum or contract required under subsection (a) hereof.
(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.
(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.
In the current proposed consultant agreement the compensation is not clearly or specifically defined, because the agreement calls for a maximum of 3% of the premium. It is not clear when the maximum would apply, and what other amount would be paid if not the maximum.
In addition, N.Y. Ins. Law § 4224(c) (McKinney 2000 & 2006 Supp.) provides:
No such life insurance company and no such savings and insurance bank and no officer, agent, solicitor or representative thereof and no such insurer doing in this state the business of accident and health insurance and no officer, agent, solicitor or representative thereof, and no licensed insurance broker and no employee or other representative of any such insurer, agent or broker, shall pay, allow or give, or offer to pay, allow or give, directly or indirectly, as an inducement to any person to insure, or shall give, sell or purchase, or offer to give, sell or purchase, as such inducement, or interdependent with any policy of life insurance or annuity contract or policy of accident and health insurance, any stocks, bonds, or other securities, or any dividends or profits accruing or to accrue thereon, or any valuable consideration or inducement whatever not specified in such policy or contract; nor shall any person in this state knowingly receive as such inducement, any rebate of premium or policy fee or any special favor or advantage in the dividends or other benefits to accrue on any such policy or contract, or knowingly receive any paid employment or contract for services of any kind, or any valuable consideration or inducement whatever which is not specified in such policy or contract.
Section 2324 contains similar provisions with regards to property and casualty insurance. Any refund of premium paid by the insured would violate § 2324 or 4224.
However, § 2119(b)(2) permits a consultant to offset part or whole of a consulting fee if the consultant receives a commission on the policy. A consultant may not receive a commission on a policy unless it complies with the requirements set forth in § 2119(b)(1). It would appear that in the proposed consulting agreement there is no provision allowing for the consultant to receive commission on the policy, and thus the consultant would be barred from doing so. Please note that there is no similar offset provision in § 2119(c) with respect to a brokers service fee, so any offset would be impermissible.
Finally the consulting agreement may be in violation of the agent/broker agreement with the insurer. In the latter agreement the broker has agreed with the insurer to obtain written consent from the insurer before charging any service fee from the insured. The insurer might consider the consulting agreement as providing for a service fee and thus the broker would need to obtain consent from the insurer.
For further information you may contact Principal Attorney Paul A. Zuckerman at the New York City Office.