OGC Opinion No. 06-05-12

The Office of General Counsel issued the following opinion on May 30, 2006, representing the position of the New York State Insurance Department.

Dishonored premium checks and sweep accounts

This is in response to letter dated March 16, 2006, in which the inquirer raised concern about one aspect of an Office of General Counsel opinion dated December 12, 2005 regarding whether an insurance agent or broker may charge a fee for an insufficient check charge.

Question Presented:

May an insurer cancel an insurance policy for non-payment of premium when the insured's check that had been deposited in the insurance producer's sweep account was dishonored and the insurer had already withdrawn funds representing the premium from the producer's account?

Conclusion:

Except with respect to an assigned risk automobile insurance policy, an insurer may not cancel the policy for non-payment of premium when the insured's check that had been deposited in the insurance producer's sweep account was dishonored and the insurer had already withdrawn funds representing the premium from the producer's account.

Facts:

The December 12, 2005 opinion states, "…if the [insurance] producer has paid the premium to the insurer from the producer's premium account, the insurer may not cancel the policy for non-payment of premium nor may the producer request the insurer to cancel the policy because the check was dishonored." The inquirer raises concern about this statement when the producer has a sweep account from which the insurer withdraws premium monies.

As the inquirer describes the circumstances, the producer maintains a sweep premium account into which the producer deposits the premium monies received from insureds. The insurer, pursuant to an agreement with the producer, is periodically credited with the amounts so received and the amounts are "swept" into the insurer's account. If the insured's check is dishonored for insufficient funds, the producer will so advise the insurer, which will then return to the producer an amount equivalent to that of the dishonored check, and a cancellation notice would then be issued by the insurer.

Analysis:

It has been the long-standing position of the Department that, if payment in the form of the producer's check has been remitted by the agent or broker, received by the insurer and honored by the bank, the insurer has received a valid payment of the premium.¹ Except with respect to an assigned risk automobile insurance policy pursuant to § 18(4) of the Rules of the New York Automobile Insurance Plan, an insurance agent or broker may not order cancellation of a policy because of an insured's failure to reimburse the premium voluntarily advanced by the agent or broker. The Insurance Law does not authorize cancellations to be made on such basis. Thus, an insurer that has received such advance by an insurance agent or broker may not cancel the policy for nonpayment of premium because the insurer has in fact been paid.

In effect, there does not appear to be any significant difference between the producer issuing a check to the insurer and the producer authorizing the insurer to withdraw the premium monies directly from the producer's account. In both cases, the producer is effectively advancing the premium monies and the insurer has been paid. The producer can take steps to protect against the result described by requiring a certified check; 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.

The inquirer argues that the insufficient check renders the contract null and void from inception. Without addressing whether or under what circumstances an insurer that deposits an insured's check may void a policy if the check is dishonored,² no such remedy is available once the insurer has actually been paid, as is the case when the producer advances the funds out of the producer's own bank account.

The inquirer also argues that the extension of credit by the producer would constitute an impermissible rebate to the insured, in violation of N.Y. Insurance Law § 2324 or § 4224, since there has been no consideration to the producer. Both sections, in pertinent part, prohibit the insurer, its agent, or a broker from giving or offering to give any valuable consideration or inducement of any kind, directly or indirectly, which is not specified in the policy, or making any rebate of the premium.³ However, under these circumstances, the Department does not consider the producer's actions to constitute a rebate or valuable inducement.

Accordingly, it is our opinion that the insurer, once it is paid out of the producer's account, may not cancel the policy for non-payment. The producer's remedy is to pursue the insured for the monies owed as a result of the dishonored check.

For further information you may contact Principal Attorney Paul A. Zuckerman at the New York City Office.

¹ See, for example a January 24, 2002 opinion by Joan Siegel, located at http://www.ins.state.ny.us/ogco2002/rg201244.htm on the Department's website, in which the Department reaffirmed its earlier position.

² See, for example, a May 5, 2003 opinion by Michael Campanelli, located at http://www.ins.state.ny.us/ogco2003/rg030503.htm on the Department's website.

³ Section 2324, with respect to most kinds of property/casualty insurance, permits an exception for an article of merchandise not exceeding $15 in value, which shall have conspicuously stamped or printed thereon the advertisement of the insurer, agent, or broker.