OGC Op. No. 04-09-08
The Office of General Counsel issued the following opinion on September 15, 2004, representing the position of the New York State Insurance Department.
Re: Producer Billed Policies Cancellation for Non-Payment
Question Presented
1. Does an agent or broker have to be licensed as a premium finance agency in order to advance premium payments for an insured?
2. If the insured defaults in making payments to an agent or broker, not licensed as a premium finance agency, may the agent or broker cancel or request the insurer to cancel the policy?
Conclusions
1. An agent or broker may advance premium payments for an insured without being licensed as a premium finance agency. Subject to certain limitations, such agent or broker may charge interest for doing so.
2. An agent or broker, not licensed as a premium finance agency, who has advanced premium payments for an insured may neither cancel nor request the insurer to cancel the policy because the insured defaults in making the payments to the agent or broker. A different rule, discussed below, applies with respect to assigned risk automobile insurance policies.
Facts
No facts were presented. The inquiry is general in nature.
Analysis
Agent or Broker Not Licensed as a Premium Finance Agency
An insurance agent or broker may advance premium payments for an insured without being licensed as a premium finance agency. However, such an insurance agent or broker may only charge interest for advancing premium in accordance with N.Y. Banking Law § 577 (McKinney 2001).
If the agent or broker advances the premium, remits its own check to the insurer and the bank honors the check, the insurer has received valid payment of the premium. N.Y. Ins. Law § 3425(c)(1) (McKinney 2000) contains the permissible grounds for canceling certain automobile insurance policies, after such a policy has been in effect for sixty days. N.Y. Ins. Law § 3425(c)(2) (McKinney 2000) contains the permissible grounds for canceling certain personal lines insurance policies, after such a policy has been in effect for sixty days. N.Y. Ins. Law § 3426 (McKinney 2000) contains the permissible grounds for canceling a policy of commercial risk insurance, professional liability insurance or public entity insurance that has been in effect for sixty days. With respect to each of these sections, one of the permissible grounds is nonpayment of premium. However, in the scenario described above, the insurer has received payment of the premium and consequently, this ground is not a valid reason for canceling the policy. Accordingly, the agent or broker may neither cancel nor request the insurer to cancel the policy because the insured defaults in making the payments to the agent or broker or because the insureds check is subsequently dishonored.
The agent or broker can take steps to protect against the result described above by requiring a certified check, declining to advance premium for the insured; by having the insured make the check payable to the insurer and then transmitting that check to the insurer; or by endorsing a check that has been made payable to the agent or broker and then transmitting it to the insurer.
Assigned Risk Automobile Insurance Policies
A different rule applies with respect to an assigned risk automobile insurance policy.1 Section 18(4) of the Rules of New York Automobile Insurance Plan (2001) permits a producer to order cancellation if the insureds check is dishonored because producers are required under the Plan to make immediate payment to an insurer upon receipt of payment by an insured. The Plan, in effect, requires (rather than permits) a producer to advance premium payment when it has received payment in the form of a check that has not yet cleared in the producer's premium account. Consequently, it expressly provides for cancellation in the event that the bank upon which it was drawn subsequently dishonors the insured's check.
Agent or Broker Licensed as a Premium Finance Agency
An insurance agent or broker can become licensed as a premium finance agency in accordance with N.Y. Banking Law § 555 (McKinney 2001). Once licensed as a premium finance agency, the agent or broker, in its role as a premium finance agency, may request cancellation of a financed policy in accordance with N.Y. Banking Law § 576 (McKinney 2001). An insurer is prohibited from honoring a power of attorney or other authority to cancel an insurance contract executed by an insured in connection with insurance premium financing except in accordance with that section. See N.Y. Ins. Law § 3428 (McKinney 2000).
The attached Office of General Counsel Opinions dated October 11, 2002, January 24, 2002, January 12, 2001, July 29, 1998, December 17, 1996, June 14, 1995, October 26, 1984, February 2, 1984, and June 29, 1970 have each addressed the various issues raised in this opinion. Please be advised that many of the Departments opinions are available on its web site at www.ins.state.ny.us.
For further information one may contact Supervising Attorney Joan Siegel at the New York City Office.
1 Such policies are not subject to N.Y. Ins. Law §3425 or N.Y. Ins. Law §3426.