STATE OF NEW YORK

INSURANCE DEPARTMENT
25 BEAVER STREET
NEW YORK, NEW YORK 10004

George E. Pataki Gregory V. Serio

Governor Superintendent

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 inquirer’s 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.