Bulletin: NY000113

Dear Associates:

Several weeks ago, the Insurance Department of the State of New York was asked to respond to a number of complaints from members of the title industry as well as to an inquiry from the New York State Land Title Association as to the legality of an attorney compensation program that was being utilized in certain areas of upstate New York. The program in question provided a closing attorney (who in some cases, also represented the lender or some other party in the transaction) with compensation equal to a percentage of the title insurance premium (e.g. 30% of the total premium collected at the closing). Presumably, the attorney performed the functions which a title closer would perform, i.e., a mark-up of the title report, collection of title company charges and a review of the closing instruments for accuracy, notarization and legibility. The compensation paid did not bear any relationship to the value of the actual services rendered by the closing attorney, but was based strictly on a percentage of the premium paid.

On January 31, 1996, the Department of Insurance held a meeting with a number of title agents and underwriters and advised them that a compensation program which pays a closing attorney a percentage of the title premium is a violation of Section 6509(d) of the Insurance Law and the use of any such program in this state is to be discontinued. The Department, in making this determination, applied the same rationale used in a previous letter ruling, dated February 7, 1995, which addressed another type of closing attorney compensation program, one which paid a flat fee to the attorney, but which fee, again, bore no relationship to the value of the actual services rendered by the attorney. This "flat fee" arrangement was found to be unacceptable by the Department and it ordered the discontinuation of that program.

In both "flat fee" and "percentage of premium" programs, the Department determined that payment of compensation to all closing attorneys in the same amount, without regard to the value of the actual services rendered by the closing attorney, is a violation of Section 6409(d) of the Insurance Law, in that it appears to be a form of kickback or rebate to the closing attorney for the referral of business to the title agent or insurer.

According to the Department, attorneys can be compensated only on the basis of the value of services actually rendered on behalf of the title agent or underwriter, and such compensation must bear a reasonable relationship to the services performed. A closing attorney may be required to submit an invoice detailing the services rendered, time spent and fee charged for acting as closing attorney in order to establish the reasonableness of the fee.

Although the Department did not specify what it believed was compensation reasonably related to actual services rendered, it indicated that it would rely upon the value that has been placed on such services in the past in making a determination as to the reasonableness of the fee paid.

Consequently, all agents of Stewart Title Insurance Company are hereby notified that closing attorney programs which compensate individuals with a percentage of the premium or with a flat fee which bear no relationship to the value of the services actually rendered by the closing attorney are prohibited. Any agent that is using or involved in such a program is hereby directed to terminate it immediately. If any agent of this Company is found to have participated in a compensation program which pays fees in excess of the guidelines established by the Department of Insurance and set forth in this bulletin, such conduct could result in a termination of his or her agency relationship with Stewart Title Insurance Company.

The Department chose not to impose any financial or other sanctions on any of the parties at the January 31st meeting. However, it was made clear to all attendees that future violations of Section 6409(d) will not be treated so lightly. While the Department has the authority to punish title insurers for such future violations, it indicated that it would refer any complaints relating to attorneys who accept compensation pursuant to a prohibited "compensation program" or arrangement to the appropriate department of the Appellate Division of the New York State Supreme Court for further investigation.

Should you have any questions regarding this matter, please contact Company Counsel.