The Office of General Counsel issued the following informal opinion on February 5, 2007, representing the position of the New York State Insurance Department.
Re: Public Adjusters and Compensation for Work Referrals
May a public adjuster compensate an insurance broker or insurance agent for referring the insured to the public adjuster?
Pursuant to Section 25.3(b) of N.Y. Comp. Codes R. & Regs. tit. 11, Part 25 (2004) (Regulation 10), a public adjuster may compensate a licensed insurance broker for referring the insured to the public adjuster if the broker was either the broker of record in placing the insurance that was involved in the adjustment of the loss, or was designated to act for the insured in writing before the loss occurred. An insurance broker who receives compensation from a public adjuster for a referral must disclose the receipt of such compensation to the insured pursuant to a written memorandum executed in accordance with the provisions of N.Y. Ins. Law § 2119(c)(1) (McKinney 2006).
A public adjuster may not compensate an insurance agent for a referral.
None were provided.
In making a referral to a public adjuster, an insurance broker would be assisting in procuring an adjustment of the loss. Section 25.3(b) of N.Y. Comp. Codes R. & Regs. tit. 11, Part 25 (Regulation 10), which was originally promulgated in 1953 but replaced earlier versions, applies to public adjusters and states in pertinent part that:
(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 1231 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.
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, so long as the above conditions are met.
We note that in opinions dated May 21, 1968 and April 24, 1970, this office stated that “[m]erely recommending a public adjuster” is “insufficient to warrant” broker compensation. Upon further reflection, we believe that Regulation 10 is intended to allow public adjusters to compensate insurance brokers for referrals under certain circumstances. Therefore, to the extent that the May 21, 1968 opinion and the April 24, 1970 opinion assert otherwise, they no longer should be followed.
Furthermore, N.Y. Ins. Law § 2119(c)(1) states that:
(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 of such compensation.
Because the insured pays the public adjuster’s fee, the insurance broker may receive compensation indirectly from the insured with respect to the adjustment of a claim. Given this circumstance, 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 N.Y. Ins. Law § 2119(c)(1). In fact, the undisclosed receipt of compensation by the broker could create a perception of divided or conflicted loyalties, which itself may be regarded as untrustworthy conduct within the meaning of N.Y. Ins. Law § 2110 (McKinney 2006).
Lastly, a public adjuster may not compensate an insurance agent in exchange for a referral because agents are not specified in § 25.3(b) of Regulation 10 as an exception to the general rule.
For further information you may contact Associate Attorney Pascale Jean-Baptiste at the New York City Office.
1 Section 123 was recodified as § 2108 in 1984.