OGC Opinion No. 07-03-06

The Office of General Counsel issued the following opinion on March 9, 2007, representing the position of the New York State Insurance Department.

RE: Use of Checking and Sweep Accounts for the Premium Account of a Licensed Insurance Agent or Broker

Question Presented

Must the premium account of a licensed New York State insurance agent or broker be deposited in a bank located in New York State, with all premium funds insured under FDIC federal insurance limits?

Conclusion

Yes. The premium account of a licensed insurance agent or broker must be deposited in a bank located in New York State, with all premium funds insured under FDIC federal insurance limits.

Facts

The inquirer works as a credit analyst at an Illinois-chartered savings bank located in Illinois that does not have a New York State branch. A nationwide insurance agency employs licensed insurance agents and brokers in New York State. This agency has requested that the inquirer ask whether its New York State licensed agents and brokers may use his savings bank's non-interest bearing checking accounts and interest-bearing accounts that are sweep accounts for their premium accounts.

The bank's checking and interest-bearing accounts would be properly identified as premium accounts. The checking account would be insured under FDIC federal insurance limits. The interest-bearing account would not be insured under FDIC federal insurance limits. Instead, each business day, the bank would buy and sell 91-day maturity U.S. Treasury Bonds to secure its interest-bearing accounts. At the end of each business day, the bank would mail each New York State licensed agent and broker premium account holder the certificate number of the applicable 91-day maturity U.S. Treasury Bond(s) noting the amount of funds in the checking and interest-bearing accounts. In addition, this information would be posted on the bank's internet website. Each agent and broker would not maintain separate checking and interest-bearing accounts for each principal; however, it is assumed that the funds held for each such principal would be readily ascertainable from the records of such agent and broker.

Under this arrangement, the bank will compare the balance in the checking account at the end of each business day to any amount of funds that exceeds the minimum required for remittance to the insurers and insureds, at which time such funds will be deposited in the interest-bearing account. Funds will remain in the interest-bearing account until they are needed for remittance to the insurers and insureds, at which time the bank will transfer such funds back to the checking account.

The insurance policies referenced by the inquirer’s inquiry and placed by the agents and brokers would be issued or delivered in New York State; the insureds would be residents of New York State; and the property or risks would be located or resident in New York State.

Analysis

N.Y. Ins. Law § 2120(a) and (c) (McKinney 2006) is relevant to the inquirer’s inquiry. That provision states:

(a) Every insurance agent and every insurance broker acting as such in this state shall be responsible in a fiduciary capacity for all funds received or collected as insurance agent or insurance broker, and shall not, without the express consent of his or its principal, mingle any such funds with his or its own funds or with funds held by him or it in any other capacity . . .

(c) This section shall not require any such agent, broker or reinsurance intermediary to maintain a separate bank deposit for the funds of each such principal, if and as long as the funds so held for each such principal are reasonably ascertainable from the books of account and records of such agent, broker or reinsurance intermediary, as the case may be.

N.Y. Comp. Codes R. & Regs. tit. 11, § 20.3(b)(1) (1991) (Regulation 29) also pertains to the inquirer’s question. That provision states:

(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"). (Emphasis added).

In Office of General Counsel (hereinafter, "OGC") Opinion Number 00-10-06 (10/23/2000), this office explained how it construes 11 NYCRR § 20.3(b)(1) (Regulation 29):

[T]he reference to "identified accounts in a bank or banks duly authorized to do business in this State" should be construed to include any financial institution that functions under the jurisdiction of governmental departments and agencies and is authorized to do business in this State. These institutions include state and national banks, savings banks and state and federal savings and loan associations. It was noted [in earlier OGC Opinions] that it would be incumbent upon the licensee to ascertain from the selected depository or other appropriate source whether or not it would accept and maintain the type of account in question. The Department also opined that the financial institution must be located in this State and that all premium monies must be protected under federal insurance limits. (Emphasis added).

This construction of "identified accounts in a bank or banks duly authorized to do business in this State" was reaffirmed by OGC Opinion Number 04-12-16 (12/14/2004); see also New York State Insurance Department's November 1970 Monthly Bulletin ("Out-of-state financial institutions are not acceptable"). Moreover, OGC Opinion Number 02-10-06 (10/04/2002) likewise concluded that it was not permissible for a broker to have a premium account in a federal chartered bank that has its principal office in Chicago because that bank did not maintain a branch in New York State.

Thus, as construed by the Department's Office of General Counsel, 11 NYCRR § 20.3(b)(1) (Regulation 29) requires that the premium account of an agent or broker be deposited in a bank located in New York State. Because the financial institution for which the inquirer works is not located in New York State, agents or brokers licensed in New York State may not deposit their premium accounts with the inquirer’s bank.

As to whether the premium account of an agent or broker must be insured under FDIC federal insurance limits, an OGC Opinion from September 28, 1990 stated:

Since [the broker] is a fiduciary subject to prudent rules of investing, all premium moneys must be protected under federal insurance limits. This responsibility may require multiple fiduciary accounts or that such accounts be opened in more than one appropriate bank in order to receive full federal insurance protection.¹

Indeed, as recently as February 13, 2007, OGC opined that all premium accounts held by agents and brokers must be FDIC insured.² Thus, the premium account of a New York State licensed agent or broker must be FDIC insured.

For further information you may contact Senior Attorney Robert Freedman, at the New York City Office.

¹  But see OGC's March 12, 2001 Opinion, which opined that under New York State law, a premium "sweep" account opened by an insurance agent or broker need not be FDIC insured. To the extent that the March 12, 2001 Opinion is inconsistent with subsequent Opinions issued by OGC, it should not be followed.

² OGC recognizes that for large agents and brokers, the current FDIC insurance limit of $100,000 may create considerable administrative burdens. Given this circumstance, the Insurance Department is actively considering proposing a regulation that crafts a less cumbersome option for agents and brokers who routinely collect from single parties premiums that exceed $100,000, and yet keeps intact the fiduciary duty that such agents or brokers owe to the person or entity for whose benefit the premium account is maintained.