Question from an IIABNY member: I have a few questions relating to disclosure of compensation.
1. Does Regulation 194 relate to insurance broker (or insurance agent) compensation only from insurance companies, or does it also apply to compensation from outside vendors such as public adjuster fees?
2. Is it still legal for the broker of record to receive compensation from a public adjuster?
3. Is there a requirement for the broker to disclose the compensation received from the public adjuster to their insured?
I just heard of a broker that received a letter from the New York Department of Financial Services asking for proof of the compensation disclosure they provided to their insured relating to the public adjuster fee.
Answer: In order --
1. It applies to compensation from any party. Section 30.2(a) of Regulation 194 defines producer compensation as:
(A)nything of value, including money, credits, loans, interest on premium, forgiveness of principal or interest, trips, prizes, or gifts, whether paid as commission or otherwise.
Note that the definition makes no reference to the source of the compensation. Also, Section 30.3(a) states:
(A)n insurance producer selling an insurance contract shall disclose the following information to the purchaser orally or in a prominent writing at or prior to the time of application for the insurance contract:…
(2) whether the insurance producer will receive compensation from the selling insurer or other third party based in whole or in part on the insurance contract the producer sells…” [EMPHASIS ADDED]
2. Yes, assuming the producer is acting as a broker and not an agent. New York Insurance Regulation 10, Public Adjusters, states in Section 25.3(b):
(b) No (licensed public adjuster) 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, 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.
The Insurance Department issued an advisory legal opinion in 2007 stating that a public adjuster may not compensate an insurance agent for a referral.
3. Yes. The department said in another 2007 opinion,
(T)he insurance broker must disclose the receipt of the compensation (from the public adjuster) to the insured pursuant to a written memorandum executed in accordance with the provisions of Insurance Law § 2119(c)(1).
This is the same provision in the law that requires a written memorandum to document brokers’ service fees.
Follow-up question: Just so I am clear…
1. Is a broker required to disclose a PA fee at time of loss?
2. Is a producer NOT permitted to receive a PA fee if they are acting as an agent or does this section only pertain to the license held rather than the contract with the insurance company?
3. If a producer has policies renewing and has not sent a Reg194 letter, are they in violation of the law? (understanding is a producer only needs to provide a Reg 194 letter as new policies are written)
1. Section 2119(c)(1) does not specify a timeframe for providing the written memorandum, but the department has said over the years that the amount of a service fee should be reasonable in relation to the service provided. Thus, they are drawing a direct connection between the fee and the service. I think it’s logical to provide the disclosure at the time of the service, which in this case would be the time you arrange the marriage between the claimant and the PA.
2. As I interpret this, the prohibition applies to those policies for which you have acted as an agent. To illustrate, assume you’re a Company X agent. Your client owns a frame two-story office building 400 feet from Long Island Sound. Company X is willing to write the General Liability and Umbrella policies, but they don’t want any part of the property. You submit the property to a wholesaler who obtains a policy that provides better coverage than the New York Property Insurance Underwriting Association would, and the insured agrees to buy it.
The insured has two claims. A hailstorm damages one side of the building; the insured and the carrier get into a dispute about whether the settlement should include an amount to make the undamaged sides match the color and shade of the newly repaired side. You refer the insured to a PA. It would be legal for the PA to pay you a fee in this situation because you are acting as a broker with regard to the property coverage – you’re not an appointed agent of the carrier that wrote the insurance.
The second claim is a disputed liability claim. Again, you refer the insured to a PA. It would be illegal for the PA to pay you a fee because you are an appointed agent of the carrier that wrote the relevant policy (the GL.)
3. No. Section 30.5 of Regulation 194 states,
This (regulation) shall not apply…to renewals, except that if the purchaser requests more information about the producer's compensation less than 30 days prior to a renewal or less than 30 days after a renewal, the insurance producer shall disclose to the purchaser in a prominent writing the information required by subsection 30.3(b) of this Part within five business days.
Therefore, you have no legal obligation to provide a compensation disclosure with regard to a renewal policy unless the insured requests the information.