New York State Insurance Laws require brokers to obtain signed writings from insureds prior to charging service fees. But what exactly must a service fee agreement or “2119 Agreement” set forth?

The express language of Section 2119(c)(1) prohibits an insurance broker from receiving: “any compensation, other than commissions . . . from any insured or prospective insured for or on account of the sale, solicitation or negotiation of . . . insurance . . . 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.”

That is, if an insurance broker expects compensation from an insured (aside from a commission), there must be a written memorandum between the insured and the broker that specifies the amount of the fees and that document must be signed by the insured. See OGC Op. No. 08-07-06 (July 14, 2008); Circular Letter No. 9 (April 4, 2006). An insurance broker may even charge a service fee that is a percentage of the premium so long as a Section 2119 Agreement sets forth the percentage, the amount of the premium, and explains whether changes in coverage, cancellation of the policy or audits will result in changes in the fee. See O.G. C. Op. No. 03-03-11 (March 17, 2003). A service fee agreement that sets forth only the minimum premium charge, without specifying or clearly defining the amount or extent of the compensation to be received, is invalid and violates Section 2119. See, e.g., Citron v. Curiale, 273 A.D.2d 183 (1st Dep’t 2000).

A Section 2119 Agreement should also set forth the time period which it covers. Although it is not set forth in the statute, the Insurance Department permits service fee agreements that cover renewals, so long as the agreement is properly drafted. To cover renewal fees, the service fee agreement must state that the insured has the right to cancel each year prior to the broker performing the additional services, it must specify the amount of the compensation, and indicate that the agreement continues upon renewals. See O.G. C. Op. No. 03-03- 11 (March 17, 2003).

Of course 2119 Agreements are important to avoid disciplinary actions by the Insurance Department but such writings are also important if a licensee ever seeks to recover fees in court. Typically, where one provides services even without a written and signed agreement, a plaintiff may be able to recover under a theory of breach of contract and/or “quantum meruit.” The highest state court in New York, the Court of Appeals, addressed this very issue and held that an insurance broker’s action to recover fees for services rendered to an insured was barred by Section 2119. See Henry L. Fox Co v. William Kaufman Org., Ltd, 74 N.Y.2d 136 (1989). Because there was no writing signed by the insured “specifying or clearly defining” the amount to be paid, the Court rejected the insurance broker’s claim that he could satisfy the requirements of Section 2119 by piecing together multiple writings.

In addition to satisfying the express requirements of Section 2119, brokers should also be mindful that service fees should be reasonable and different insureds should not be charged different amounts for the same services. Brokers must also retain copies of service fee agreements for atleast three years.