OGC Opinion No. 07-07-08
The Office of General Counsel issued the following opinion on July 18, 2007, representing the position of the New York State Insurance Department.
RE: Disclosure of fee sharing between a public adjuster and an insurance broker
Question Presented:
Does the New York Insurance Law require a public adjuster to disclose the sharing of compensation with an insurance broker, based on a referral, to the insured?
Conclusion:
No. There is nothing set forth in the Insurance Law or the regulations promulgated thereunder that requires a public adjuster who shares compensation with an insurance broker on a referral to disclose to the insured the sharing of such compensation. However, the insurance broker is required under law to disclose such an arrangement, and in the interest of full disclosure, it would be prudent for an adjuster to do so as well.
Facts:
The question is of a general nature, without reference to particular facts.
Analysis:
An insurance broker assists in procuring an adjustment of a loss when the broker makes a referral to a public adjuster. Section 25.3 of New York Code, Rules & Regulations (“N.Y.C.R.R.”) tit. 11, Part 25 (Regulation 10) applies to public adjusters. That provision states in relevant part as follows:
(b) No such licensee or sublicensee shall divide any fee or give any fee, commission or other compensation to any person, firm or corporation for procuring, or assisting in procuring, the adjustment of any such loss for any such licensee or sublicensee, unless the person, firm or corporation to whom such fee, commission or other compensation is given or paid had at the time when the loss occurred:
(1) a public adjuster’s license issued and in force pursuant to section 123 of the Insurance Law;1 or
(2) an insurance broker’s license issued and in force and such licensee either was the broker of record in placing the insurance which was involved in the adjustment of the loss, whether or not designated in writing to act for the insured, or was designated to act for the insured in writing before a loss occurred.
Thus, by the plain terms of § 25.3(b), a public adjuster may compensate an insurance broker for a referral as an exception to the general rule against such fee splitting, provided the conditions in paragraphs (1) or (2) are satisfied.2
The Insurance Law and regulations promulgated thereunder require compensation agreements to be in writing between a broker and an insured. New York Insurance Law § 2119(c)(1) (McKinney 2006) 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 or such compensation.
Similarly, Insurance Law § 2108 requires compensation agreements to be in writing between a public adjuster and an insured. The statute states:
(p) No adjuster shall have any right to compensation from any insured for or on account of services rendered to such insured as public adjuster unless such right to compensation is based upon a written memorandum, signed by the party to be charged, and specifying or completely defining the amount or extent of such compensation…
11 N.Y.C.R.R. § 25.6 likewise states that:
(a) a public adjuster may be compensated by an insured for or on account of services rendered to such insured by the public adjuster solely as provided for by a written compensation agreement obtained by the public adjuster which shall consist of substantively the same information and statement contained in Form 1 of section 25.13(a) of this Part.
Thus, compensation agreements between either a broker or adjuster and an insured must be in writing.
Nothing in the Insurance Law or regulations promulgated thereunder require a written agreement between a public adjuster and broker in order for them to share compensation. Nonetheless, it is the Insurance Department’s view that because the insured pays the public adjuster’s fee, the insurance broker receives compensation indirectly from the insured with respect to the adjustment of a claim. Therefore, the insurance broker must disclose the receipt of the compensation to the insured pursuant to a written memorandum executed in accordance with the provisions of Insurance Law § 2119(c)(1). See Office of General Counsel (“O.G.C.”) Opinion 07-02-06 (February 5, 2007); O.G.C. Opinion 99-18 (February 8, 1999). In addition, the undisclosed receipt of compensation by the broker could create the perception of divided or conflicted loyalties, which itself may be regarded as “untrustworthy conduct” within the meaning of Insurance Law § 2110 that could result in disciplinary action.
There is, however, no requirement in the Insurance Law or regulations that the sharing of compensation between a public adjuster and a broker be disclosed by the adjuster. Nevertheless, in the interest of full disclosure, the Department believes that it would be prudent for the adjuster to inform the insured of the agreement.
For further information you may contact Associate Counsel Alexander Tisch at the New York City Office.
1 Section 123 was recodified as Insurance Law § 2108 in 1984.
2 The exceptions reflect that, under those circumstances, insurance brokers are excepted from having to be licensed as public adjusters. See Insurance Law § 2102(g)(2)(c) and (d).