The Office of General Counsel issued the following opinion on October 27, 2005, representing the position of the New York State Insurance Department.
Re: Reinsurance Intermediary Clause
Question Presented:
A ceding insurer and several reinsurers plan to enter into a reinsurance contract. The contract contains a clause providing that where the ceding insurer inadvertently remits payment to the reinsurance intermediary, which fails to forward such payment to the intended reinsurer(s), the ceding insurer is obliged to remit payment to the reinsurer(s) in the amount remitted to the intermediary. Is this contract clause contrary to the New York Insurance Law or the regulations promulgated thereunder?
Conclusion:
Yes. As written, this contract clause is contrary to N.Y. Ins. Law §§ 2120 and 2121 (McKinney 2000) and N.Y. Comp. Codes R. & Regs. tit. 11, § 32.3 (Regulation 98). Additionally, under certain circumstances it would violate N.Y. Comp. Codes R. & Regs. tit. 11, § 125.6 (Regulation 20).
Facts:
The following wording is from a clause in a reinsurance contract:
Intermediary
ABC Inc. is hereby recognized as the Intermediary negotiating this Agreement for all business hereunder. Premium and loss payments made to ABC, Inc., if any, shall be deposited in a Premium and Loss Account in accordance with Section 32.3(a)(1) of Regulation 98 of the New York Insurance Department. The parties hereto consent to withdrawals from said account in accordance with Section 32.3(a)(3) of the Regulation, including interest and Federal Excise Tax. (It is intended that there shall be direct settlement between the Reinsured and the Reinsurer.) Inadvertent payments by the Reinsured to the Intermediary shall be deemed to constitute payment to the Reinsurer, except should the Intermediary fail to remit such payments to the Reinsurer and the Reinsurer suffers a loss as a result, the liquidated damages for the breach by the Reinsured would be the amount so misdirected. Inadvertent payments by the Reinsurer to the Intermediary shall be deemed to constitute payment to the Reinsured only to the extent that such payments are actually received by the Reinsured.
It is contended that "[t]his provision shifts the credit risk to the ceding company in the event any payment is made to the Intermediary and the Intermediary fails for any reason to pass on the payment to the reinsurer. Since the purpose of the clause prescribed in the Regulation is to place the credit risk of the Intermediary on the reinsurer, this provision appears to undermine the intent of Regulation 98."
Analysis:
N.Y. Ins. Law § 2101 (McKinney Supp. 2005) states in relevant part:
(f) In the article, "reinsurance intermediary" means any person, firm, association or corporation who acts as broker in soliciting, negotiating or selling any reinsurance contract or binder, or acts as an agent in accepting any reinsurance contract or binder on behalf of an insurer[.]
Thus, a reinsurance intermediary may act in the capacity of either an insurance broker or agent, depending upon the circumstances of a particular transaction. It is not clear whether the intermediary in the situation presented to us represents the ceding insurer or the reinsurers.
N.Y. Ins. Law § 2121 (McKinney 2000) states:
Any insurer which delivers in this state to any insurance broker or any insured represented by such broker a contract of insurance pursuant to the application or request of such broker, acting for an insured other than himself, shall be deemed to have authorized such broker to receive on its behalf payment of any premium which is due on such contract at the time of its issuance or delivery or payment of any installment of such premium or any additional premium which becomes due or payable thereafter on such contract, provided such payment is received by such broker within ninety days after the due date of such premium or installment thereof or after the date of delivery of a statement by the insurer of such additional premium.
N.Y. Ins. Law § 2120(b) (McKinney 2000) states:
Every reinsurance intermediary acting as such in this state shall be responsible, in a fiduciary capacity for all funds received or collected in such capacity, and shall not, without the express consent of his or its principal or principals, mingle any such funds with his or its own funds or with funds held by him or it in any other capacity.
N.Y. Comp. Codes R. & Regs. tit. 11, § 32.3(a) (Regulation 98) states in pertinent part:
(a) Every person, firm, association or corporation acting as reinsurance intermediary in this State, is responsible as a fiduciary for funds received by such reinsurance intermediary, in such capacity.
N.Y. Comp. Codes R. & Regs. tit. 11, § 32.3(b) (Regulation 98) states:
(b) Except as hereinabove provided, a reinsurance intermediary shall not commingle any premium or loss funds received or collected in such capacity with its own funds or with funds held by it as insurance agent, insurance broker or in any other capacity.
Pursuant to N.Y. Ins. Law § 2121, payment made by an insured to its broker constitutes payment to the insurer. See Bohlinger v. Zanger, 306 N.Y. 228; 117 N.E.2d 338 (1953); Central Surety & Ins. Corp. v. Marro, 189 Misc. 823, 71 N.Y.S.2d 815 (Rensselaer Co. 1947).
Although N.Y. Ins. Law § 2121 does not explicitly refer to reinsurance intermediaries, this sections predecessor predates the reinsurance intermediary licensing requirement. Were it an insurance broker that was placing the reinsurance, § 2121 would apply.1 It is therefore logical that an intermediary acting on behalf of a ceding insurer be treated as an insurance broker and be held equally subject to § 2121.
Thus, in the transaction described, if the reinsurance intermediary represents the ceding insurer, it is acting as a broker and the contract clause provided violates N.Y. Ins. Law § 2121 in its attempt to remove the intermediarys obligation to accept payment on behalf of the reinsurers.
If the reinsurance intermediary represents the reinsurer, it is acting as an agent. Absent a clear disclaimer from the reinsurer, the intermediary is vested with apparent authority to collect premium payment from the ceding insurer, based on the general law of agency.
The contract clause provided states in part: "Inadvertent payments by the Reinsured to the Intermediary shall be deemed to constitute payment to the Reinsurer[.]" The clause then continues: "except should the Intermediary fail to remit such payments to the Reinsurer and the Reinsurer suffers a loss as a result, the liquidated damages for the breach by the Reinsured would be the amount so misdirected." First, it is unclear what "inadvertent" means and, thus, the contractual language is vague. Secondly, § 2120(b) and Regulation 98 make the intermediary responsible for the funds it receives and to faithfully discharge to the intended parties the funds owed to them. The reinsurance contract clause provided appears to shift this obligation away from the intermediary in making the ceding insurer responsible for re-paying amounts it has already paid to the intermediary.
Additionally, N.Y. Comp. Codes R. & Regs. tit. 11, § 125.6 (Regulation 20) states in relevant part:
In addition to the conditions specified in sections 125.4 and 125.5 of this Part:
(a) Where a ceding insurer obtains reinsurance through a "reinsurance intermediary," as defined in section 2101(f) of the Insurance Law, from an assuming insurer which is neither licensed in this State nor has placed funds with the ceding insurer pursuant to section 1301(a)(14) of the Insurance Law, the ceding insurer shall not be allowed credit unless:
(1) the reinsurance agreement includes a provision whereby the reinsurer assumes all credit risks of the intermediary related to payments to the intermediary; and
(2) in the case of a reinsurance intermediary acting outside this State, the ceding insurer obtains a written agreement from the reinsurance intermediary that he will comply with all of the provisions of Regulation 98 (11 NYCRR Part 32) and the intermediary agrees to be subject to examination by the superintendent as often as he may deem it expedient; except such intermediary may deposit funds received in a bank or banks not authorized to do business in this State, if:
(i) such bank is chartered within the United States; or
(ii) such bank, as designated by a non-United States reinsurance intermediary, is located outside of the United States; provided written consent is obtained from the ceding insurer.
We were advised that certain of the reinsurers involved in the transaction are unauthorized insurers. If any of these unauthorized reinsurers has not placed funds with the ceding insurer pursuant to N.Y. Ins. Law § 1301(a)(14) (McKinney 2000), the reinsurance contract clause provided also violates N.Y. Comp. Codes R. & Regs. tit. 11, § 125.6 (Regulation 20).
For further information you may contact Associate Attorney Sally Geisel at the New York City Office.
1 N.Y. Ins. Law § 2101(f) exempts from the definition of reinsurance intermediary licensed insurance brokers, in the placement of reinsurance on risks produced by such brokers. Thus, under § 2101(f) circumstances, an insurance broker may place reinsurance risks although unlicensed as a reinsurance intermediary.