The Office of General Counsel issued the following opinion on January 6, 2006, representing the position of the New York State Insurance Department.
Re: Use of Sweep Account for Premium Funds.
Would an arrangement where some of the premium funds received by a licensed insurance agent or broker are transferred from a checking account and placed into a "sweep account" violate N.Y. Insurance Law § 2120 or N.Y. Comp. Codes R. & Regs. tit. 11, § 20.3(b) (2005) (Regulation 29)?
No. As long as both accounts are properly identified as premium accounts and kept in banks authorized to do business in this State, the above mentioned arrangement will not violate § 2120 or Regulation 29.
ABC, Inc. is not an agency but an organization of agents and brokers. One of its members is a licensed New York insurance agent. The agent currently deposits premium funds at a New York bank in a non-interest bearing checking account prior to remitting the funds to insurers or refunding them to the insureds. The bank has offered the agent the option of transferring some of the funds into a "sweep account." Under the arrangement, the bank will compare the balance in the checking account at the end of each business day. The bank will then transfer any amount that exceeds the minimum that is required for a checking account into an interest bearing money market account. This account is an FDIC insured account, and not a money market mutual fund. Funds will remain in the money market account until they are needed for remittance to the insurers and insureds, at which time the bank will transfer them back to the checking account. The agent wishes to know whether this arrangement would place him in violation of either N.Y. Insurance Law § 2120 or Regulation 29.
Insurance agents and insurance brokers are responsible in a fiduciary capacity for all funds received or collected as an agent or broker. Premium accounts of insurance agents and insurance brokers are regulated pursuant to N.Y. Ins. Law § 2120 (McKinney 2005) and N.Y. Comp. Codes R. & Regs. tit. 11, § 20.3(b) (2005) (Regulation 29).
N.Y. Ins. Law § 2120(a) in pertinent part, states:
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.
Regulation 29, in pertinent part, provides:
(b) Every insurance agent and 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 . . . .
Transfer of premium funds above the minimum required for a checking account into a money market account does not violate New York Insurance Law § 2120 or Regulation 29 as long as both accounts are properly identified as premium accounts kept in banks authorized to do business in this State. N.Y. Insurance Law § 2120(a) makes insurance agents and brokers responsible in a fiduciary capacity for all funds received or collected as an agent or broker and the agent or broker, without the express consent of his or its principal, cannot mingle funds with his or its own funds or with funds held by him or it in any other capacity.
For further information you may contact Principal Attorney Paul A. Zuckerman at the New York City Office.