OGC Opinion No. 07-09-09
The Office of General Counsel issued the following opinion on September 12, 2007, representing the position of the New York State Insurance.
Return of Unearned Premium Money Upon Cancellation of Personal or Commercial Fire Insurance Policies
Question Presented:
Is there a statute or regulation in New York that governs the number of days an authorized insurer has to refund unearned premium money to insureds after the cancellation of personal or commercial fire insurance policies?
Conclusion:
With respect to property/casualty insurance generally, including fire insurance policies where the premiums are financed pursuant to a premium finance agreement, N.Y. Ins. Law § 3428(d) (McKinney 2007) requires an insurer to return any gross unearned premium due to the finance company within a reasonable time not to exceed sixty days after the effective date of cancellation. There is no such specified time period concerning the cancellation of non-financed fire insurance policies, but since Insurance Law § 3428(a) permits only earned premium to be retained by an insurer, such insurer would have to refund the unearned premium within a reasonable time.
Facts:
Your inquiry is of a general nature, without reference to particular facts.
Analysis:
N.Y. Banking Law § 554(8) is relevant to your inquiry. It defines a “premium finance agreement” as:
…a promissory note or other written agreement by which an insured promises or agrees to pay to, or to the order of, either a premium finance agency or an insurance agent or broker the amount advanced or to be advanced under the agreement to an authorized insurer or to an insurance agent or broker in payment of premiums on an insurance contract, together with a service charge as authorized and limited by law….
When insurance premiums are advanced under a premium finance agreement and the policy for which the premiums have been financed is cancelled, the amount that an authorized insurer, like your company, would have to return to the premium finance company would be the gross unearned premiums calculated on a pro rata basis less ten percent of the gross premium or $60, whichever is greater. Indeed, N.Y. Ins. Law § 3428(e) (McKinney 2007) provides as follows:
Whenever an insurance contract, issued by or on behalf of an authorized insurer or insurers, the premiums for which are advanced under a premium finance agreement as defined in section five hundred fifty-four of the banking law, is cancelled, upon such cancellation the authorized insurer or insurers shall return the gross unearned premiums due under the insurance contract or contracts, on a pro rata basis to the bank, lending institution, premium finance agency or premium finance company, for the benefit of the insured, provided, however, that such authorized insurer or insurers shall be entitled to retain a minimum earned premium on the policy of ten percent of the gross premium or sixty dollars, whichever is greater.
The statute thus places the responsibility for remitting the gross unearned premium to the premium finance company upon the insurer.
Insurance Law § 3428(d) provides that the payment must be remitted to the premium finance agency within a reasonable time not to exceed 60 days after the effective date of cancellation. Insurance Law § 3428(d) provides:
Whenever an insurance contract the premiums for which are advanced under a premium finance agreement as defined in section five hundred fifty-four of the banking law, is cancelled, the insurer or insurers within a reasonable time not to exceed sixty days after the effective date of the cancellation shall return whatever gross unearned premiums are due under the insurance contract or contracts to the bank, lending institution, premium finance agency or sales finance company, for the benefit of the insured.
However, for non-financed insurance policies, the Insurance Law does not establish any time frame to refund unearned premiums to the insured. Rather, Insurance Law § 3428(a) reads only as follows:
Except as provided in subsection (e) of this section, whenever an insurance contract made or issued in this state is cancelled or otherwise terminated by the insured before the expiration thereof in accordance with the terms of such contract, the earned premium to be retained by the insurer shall be determined by the applicable rate filing, if any, otherwise in accordance with the provisions of such contract.
Since the insurer may only retain the earned premium on non-financed insurance policies, the Department, in Circular Letter No. 16 (1976) (a copy of which is attached hereto), interpreted the statute to require that insurers should return the gross unearned premium to the insured within a “reasonable” time.
For further information you may contact Associate Attorney Jeffrey A. Stonehill at the New York City Office.