There are various types of fees that excess line brokers or insurers may charge insureds. These fees are sometimes limited by New York law, regulation or regulatory interpretation. Below are some of the most common.
Broker Service Fees
Neither the New York Insurance Law nor regulations address limitations on the amount of service fees that can be charged to insureds by insurance brokers. Under Insurance Law §2119(c) and (d), an insurance broker may charge an insured a fee for services, provided there is a written memorandum, often referred to as a Total Cost Form, signed by the insured and specifying or clearly defining the amount or extent of the fee. The memorandum must be retained by the broker for at least three years after the performance of the services.
It is the position of the Department of Financial Services (DFS), as stated in the OGC Opinion of August 3, 2004, Circular Letter No. 9 (2006) and Circular Letter No. 9 (2009), that any broker service fees charged to the insured should be reasonable in relation to the services rendered, and different insureds should not be charged different amounts for the same services. An insurance broker may charge a service fee that is a percentage of the premium, provided the written memorandum clearly explains whether changes in coverage, cancellation of the policy, audits, or other factors will result in changes in the fee. An insurance broker that charges an unreasonable fee in relation to the services the broker provides may be considered to have acted in an untrustworthy manner and their license may be revoked by the DFS. An excess line broker, while legally responsible for paying excess line taxes and stamping fees, may charge them back to the insured, provided the insured consents in writing under a memorandum as described above [See 11 CRR-NY 27.12].
Broker service fees are not subject to either the excess line premium tax or the ELANY stamping fee since they are not included in the definition of “premium” under §9109(b) of the Insurance Law and are not received as consideration or compensation for an insurance contract by the insurer.
Inspection Fees
Inspection fees are subject to premium tax and stamping fees but only in very limited circumstances. The DFS OGC Opinion of March 12, 2007, states that it depends on who performs the inspection and to whom the insured pays the inspection fee. If the inspection is conducted by the excess line insurer itself or on behalf of the insurer by an inspector designated by the insurer, and the insured pays a fee directly to the insurer or the insurer’s designated inspector for that inspection, then that fee is considered part of the premium under Insurance Law §9101(b) even if such fee is a separate charge from the premium (See OGC Opinion of September 25, 2006). As such, the fee is subject to the excess line premium tax and the ELANY stamping fee.
If an inspection fee is imposed in any manner other than as described above, it is not taxable nor subject to stamping fees.
Inspection fees, whether insurer- or broker-imposed, must be reflected in a §2119 memorandum (Total Cost Form) signed by the insured.
This is how a taxable fee should be reported.
Policy Fees, Installment Fees and Reinstatement Fees
A policy fee is a flat amount added to the basic premium charged by the insurer to reflect the cost of underwriting and other related expenses. The DFS stated in its OGC Opinion of September 25, 2006, that policy fees charged by an excess line insurer are to be considered excess line premium subject to the excess line premium tax and the ELANY stamping fee. The rationale for this opinion is based on Insurance Law §9101(b), which states in pertinent part that, “[P]remium includes all amounts received as consideration for insurance contracts … and includes premium deposits, assessments, policy fees, membership fees and every other compensation for such contracts.”
Additionally, the OGC Opinion of March 12, 2007, noted that both installment payment fees and reinstatement fees are considered part of the premium and are subject to the excess line premium tax and the ELANY stamping fee. Under the broad definition of premium set forth in Insurance Law §9101(b), these fees constitute “consideration” and “compensation” to the insurer for the insurance contract.
This is how a taxable policy fee should be reported.
If the fee is payable to one or more producers making the placement or binding the account, it should be characterized as a “broker service fee” and not be set forth on the declarations page or binder. As previously discussed, “broker service fees” are not subject to the excess line premium tax or ELANY stamping fee.
For additional information, please see the ELANY educational video, “Fees Which Can Be Charged on NY Excess Line Transactions.”
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ELANY DISCLAIMER:
This is not intended to be nor should it be construed as legal advice. Consult with your own legal counsel.
Last Reviewed/Revised: March 2, 2022