The Office of General Counsel issued the following informal opinion on October 9, 2002, representing the position of the New York State Insurance Department.
Re: Assignment of Financed Insurance Premiums to Bank
Must an insurer honor an assignment request made by a premium finance agency, wherein the return of premium due to a cancellation of the insurance policy would be paid directly to a bank, as assignee, which extends revolving lines of credit to the premium finance agency?
No. Neither the New York Insurance Law, nor the regulations promulgated thereunder, requires an insurer to honor such an assignment request, but the insurer may choose to do so.
Your client is a Maryland-chartered commercial bank (the "Bank"). You state that: "[The Bank] extends revolving lines of credit to premium finance agencies licensed in accordance with Article XII-B of the New York Banking Law. As security for the lines of credit, each premium finance agency grants to [the Bank] a security interest in its accounts receivable, specifically, but without limitation, unearned premiums due from insurers upon cancellation of insurance contracts."
The Bank would like to change the current procedure in that it would "require each of its premium finance agency borrowers to include in premium finance agreements an assignment pursuant to which [the Bank] would become the assignee of the premium finance agencys right to receive unearned premiums due from insurers upon cancellation of insurance contracts. Each insurer would be instructed, both in notices of financing and notices of cancellation, to remit payment of unearned premium, upon cancellation of an insurance contract, to the premium finance agency in the form of a check payable to [the Bank]."
You further state that when the premium finance agency receives the payment, it would credit the account of the insured and deposit the payment into an account titled "The Bank, for the account of [XYZ Premium Finance Agency, Inc.]" You state that the Bank would have exclusive access to the account pursuant to a Control Agreement among the Bank, the premium finance agency borrower, and the depository institution where the account is kept.
We assume that your inquiry relates to situations where the premium finance agency is cancelling the policy in accordance with N.Y. Banking Law § 576 (McKinney 2001), entitled "Cancellation of insurance contract upon default." Section 576 of the Banking Law sets forth a detailed procedure of cancelling an insurance policy when a premium finance agency has the authority to cancel such insurance contract listed in the premium finance agreement.
N.Y. Ins. Law § 3428(d) (McKinney 2000) states:
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 on a pro rata basis to the bank, lending institution, premium finance agency or sales finance company, for the benefit of the insured. Upon such cancellation the 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.
Neither the New York Insurance Law, nor the regulations promulgated thereunder, requires an insurer to honor an assignment request made by a premium finance agency. The above section requires that the insurer must return the unearned premiums to the bank, lending institution, premium finance agency or sales finance company, for the benefit of the insured. The statute does not require the insurer to honor an assignment request made by the premium finance agency, wherein the return of premium due to a cancellation of the insurance policy would be paid directly to a bank, as assignee, which extends revolving lines of credit to the premium finance agency. All the statute requires is for the insured to enter into a premium finance agreement as defined in Section 554 of the New York Banking Law. However, the insurer may accept the assignment but is not required to accept it.
The foregoing discussion is limited to the application of the New York Insurance Law only. We do not offer an opinion regarding the New York Banking Law or any other state and federal laws.
For further information, you may contact Senior Attorney Meredith S. Kaufer at the New York City Office.
1 N.Y. Banking Law § 554(8) (McKinney 2001) states:
Premium finance agreement" means 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. If the premium finance agreement is payable to, or to the order of, an insurance agent or broker not licensed as a premium finance agency, payments under the agreement must be payable at the office of a premium finance agency named in the agreement, to whom the agreement is by its terms to be and is subsequently assigned. The term "premium finance agreement" does not include a retail instalment credit agreement which complies with the provisions of paragraph (b) of subdivision eleven of section four hundred thirteen of the personal property law.