The Office of General Counsel issued the following informal opinion on February 2, 2001, representing the position of the New York State Insurance Department.
RE: Agencys Receipt of Policy Premiums
Questions Presented:
1) When must an insurance agent or broker that collects, on behalf of an insurer, policy premiums remit such premiums to the insurer?
2) May policy premiums that are collected by an insurance agent or broker be used for any purpose other than the payment of the policy premiums?
Conclusions:
1) Neither the N.Y. Insurance Law nor the regulations promulgated thereunder establish a time frame for which insurance agents and brokers must remit policy premiums to the insurers for whom the premiums were collected. Case law obligates insurance agents and brokers to "promptly" remit policy premiums; however, these decisions do not state what constitutes "prompt" payment.
2) Policy premiums that are collected by an insurance agent or broker may be used only as described in N.Y. Comp. Codes R. & Regs., tit. 11A, § 20.3 (1996), which is discussed below.
Facts:
In addition to the questions above-noted, the Department was asked whether an insurance agent or broker may keep premiums, which were received prior to the payment due date imposed by the insurer, until the insurer issued notice of cancellation, and until the day before the effective date of cancellation. The Department was also asked whether the use of policy premiums to pay office expenses and employee salaries, amongst other things, was violative of the N.Y. Insurance Law.
Analysis:
N.Y. Ins. Law § 2120 (McKinney 2000) imposes a fiduciary duty upon insurance agents and brokers with respect to funds received or collected as insurance agents and brokers, which includes but is not limited to policy premiums remitted by insureds. This statute prohibits the commingling of any such funds with the insurance agents or brokers own funds unless its principal(s) expressly consent to commingling. (In the instance where an agent or broker is maintaining premium or other funds to be paid to the insurer, the insurer is the "principal". If the agent or broker is maintaining return premium or other funds that are to be paid to the insured, then the insured is the "principal".) Section 2120 does not require an insurance agent or broker to maintain a separate bank account for each of its principals provided that the funds held for each principal can be reasonably ascertained from the agents or brokers books of accounts and records.
N.Y. Comp. Codes R. & Regs., tit. 11A, § 20.3 (1996) (Regulation 29) was promulgated to facilitate compliance with N.Y. Ins. Law § 2120, and states in pertinent part as follows:
(b) Every insurance agent and every insurance broker is responsible as a fiduciary for funds received by such agent or broker in such capacity; all such funds shall be held in accordance with the following paragraphs:
(1) An agent or broker who does not make immediate remittance to insurers and assureds of such funds shall deposit them in one or more appropriately identified accounts in a bank or banks duly authorized to do business in this State, from which no withdrawals shall be made except as hereinafter specified (any such account is hereinafter referred to as "a premium account").
(2) An agent or broker who makes immediate remittance to insurers and assureds of such funds need not maintain a premium account for such funds.
(3) Deposits in a premium account in excess of aggregate net premiums received but not remitted may be made to maintain a minimum balance, to guarantee the adequacy of the account, or to pay premiums due but uncollected (any such deposit is hereinafter referred to as "a voluntary deposit").
(4) No withdrawals from a premium account shall be made other than for payment of premiums to insurers, payment of return premiums to assureds, transfer to an operating account of (i) interest, if the principals have consented thereto in writing and (ii) commissions, or withdrawal of voluntary deposits, provided, however, that no withdrawal may be made if the balance remaining in the premium account thereafter is less than aggregate net premiums received but not remitted.
(5) Deposit of a premium in a premium account shall not be construed as a commingling of the net premium and of the commission portion of the premium.
(6) In the case of an agent operating under an "account current system", maintenance at all times in one or more premium accounts of at least the net balance of premiums received but not remitted shall be construed as compliance with section 2120(a) and (c) of the Insurance Law, provided that the funds so held for each such principal are reasonably ascertainable from the agent's records.
(c) Except as hereinabove provided, an agent or broker shall not commingle any funds received or collected as agent or broker with his or its own funds or with funds held by him or it in any other capacity without the written consent of the person, firm or corporation for whom they are held in a fiduciary capacity.
(d) If any provision of this section or the application thereof to any person or circumstances is held unauthorized by law, the remainder of the section and the application of such provision to other persons or circumstances shall not be affected thereby.
Thus, pursuant to the above-cited regulation, neither agents nor brokers may use collected premiums to pay for office expenses or employee salaries. This is true even where the agents or brokers principals have expressly authorized the commingling of funds. Where the agent or broker has lawfully engaged in commingling, the only funds that may be used to pay for the agents or brokers own expenses are the agents or brokers own funds that were deposited in the account. Because agents and brokers act as fiduciaries with respect to premiums collected, premiums can never be considered the agents or brokers own funds.
In response to the question regarding the timeliness of payments to an insurance agents or brokers principals of policy premiums collected from insureds, neither the N.Y. Insurance Law nor the regulations promulgated thereunder impose a specific time frame upon which an insurance agent or broker must remit such collected premiums. Case law provides that insurance agents and brokers should remit policy premiums "promptly". See Letterman v. Pink, 249 A.D. 164, 291 N.Y.S. 249 (1st Dept 1936) and K. Bell & Assocs, Inc. v. Lloyds Underwriters, 97 F.3rd 632 (2d Cir. 1996). However, these cases do not state what constitutes "prompt" payment.
Nonetheless, where it is obvious that an insurance agent or broker failed to remit collected premiums within a reasonable period of time (i.e., keeping collected premiums until a notice of cancellation has been sent, and until the day before the policy is set to cancel, when the premiums had been sent by the insured in a timely fashion), such circumstance may be evidence of an agents or brokers untrustworthiness and may form the basis of a Department investigation. The Department has on many occasions penalized a producer for failing to remit premiums in a timely manner. An insurance agent or broker acting in a fiduciary capacity is required to act solely in the interest of its principal. Therefore, absent a specific agreement with the principal, any unnecessary delay in remitting premium funds to the proper party may be evidence of untrustworthiness sufficient to warrant disciplinary action.
For further information you may contact Attorney Sally Geisel at the New York City Office.