The Office of General Counsel issued the following informal opinion on April 5, 2001, representing the position of the New York State Insurance Department.
RE: Charging of Fees by Insurance Agents and Brokers
May an insurance agent or broker charge a fee for its involvement in reinstating an insurance policy if the insured agrees to such fee in writing?
An insurance agent may not charge a fee for its involvement in reinstating an insurance policy irrespective of whether or not the insured agrees to such fee in writing. However, an insurance broker may do so provided that N.Y. Ins. Law 2119 (c) and (d) (McKinney 2000) requirements have been met.
An inquirer stated that many insurance policies are billed on a "direct bill" basis. By this the inquirer meant the payment of premiums made by an insured directly to the insurer rather than to the insurance agent or broker that placed the policy. The inquirer further stated that insurance agents and brokers spend "considerable time and effort" in reinstating policies that were subject to cancellation due to non-payment of premium, such as sending letters to insureds regarding cancellation, and ensuring that reinstatement notices are sent. The Department was asked whether an insurance agent or broker may charge a fee for this activity if the insured agrees to such fee in writing.
N.Y. Ins. Law 2101(a) (McKinney Supp. 2000) states in relevant part:
In this article, "insurance agent" means any authorized or acknowledged agent of an insurer, fraternal benefit society or health maintenance organization issued a certificate of authority pursuant to article forty-four of the public health law, and any sub-agent or other representative of such an agent, who acts as such in the solicitation of, negotiation for, or procurement or making of, an insurance, health maintenance organization or annuity contract, other than as a licensed insurance broker
By its definition, an insurance agent acts on behalf of the insurer it represents, and does not act on behalf of the insured. Because of this, an insurance agent is prohibited from engaging in conduct that would constitute a violation of the Insurance Law if committed by the insurer.
Insurance rates (and, therefore, premiums) are based in part on an insurers expenses. For example, N.Y. Ins. Law 2304(a) (McKinney 2000), relating to property and casualty insurance (there are other sections of the Insurance Law that apply in like manner to the other authorized classifications of insurance, i.e., life, and accident and health insurance), states:
In the making of rates, consideration shall be given to past and prospective loss experience, including the conflagration and catastrophe hazards, if any, both within and without this state, to all factors reasonably attributable to the class of risks, to a reasonable profit, to past and prospective expenses both country-wide and those specially applicable to this state, and in the case of participating insurers to policyholders dividends, savings or unabsorbed premium deposits allowed or returned to policyholders, members or subscribers. (emphasis added)
The Department considers the amount expended by an insurer to cancel and reinstate a policy to be a kind of prospective expense that should be contained in the policy premium. An insurer that charges a fee for such activity in addition to the policy premium would be in violation of the rate filing and approval provisions contained in the Insurance Law. For example, N.Y. Ins. Law 2314 (McKinney 2000), which also refers to property and casualty insurance (other sections of the Insurance Law also apply in like manner to this section with respect to the other authorized classifications of insurance, i.e., life, and accident and health insurance), states:
No authorized insurer shall, and no licensed agent, no employee or other representative of an authorized insurer, and no licensed insurance broker shall knowingly, charge or demand a rate or receive a premium which departs from the rates, rating plans, classifications, schedules, rules and standards in effect on behalf of the insurer, or shall issue or make any policy or contract involving a violation thereof.
For the same reasons an insurer may not do so, an insurance agent may not charge an insured a fee for the agents involvement in policy reinstatement because, as earlier stated, the agent acts as the insurers representative.
An insurance broker, however, with respect to the reinstatement service fee, is excepted from the Section 2314 provisions pursuant to N.Y. Ins. Law 2119 (c) and (d) (McKinney 2000), which states:
(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.
The Insurance Law provides this exception for insurance brokers because they act on behalf of their insureds, and not as insurer representatives. Based on this exception, an insurance broker is not prohibited from charging an insured a service fee for the brokers involvement in reinstating a policy provided that the Section 2119 requirements have been met.
For further information you may contact Attorney Sally Geisel at the New York City Office.