OGC Opinion No. 06-08-07
The Office of General Counsel issued the following opinion on August 3, 2006 representing the position of the New York State Insurance Department.
Re: Non-Payment of Voluntary Market Commercial Automobile Premium
Questions:
1. May an insurance agent request that an insurance company cancel a voluntary market motor vehicle policy from inception when the agent has advanced the first premium payment but the insured's check was dishonored?
2. When a motor vehicle insurance policy is cancelled for non-payment, does the agent owe the insurance company the earned premium due?
3. Does an agent have recourse against an insured for which the agent advanced a payment but was never reimbursed?
Conclusions:
1. No, an insurance agent may not request that an insurance company cancel a voluntary market motor vehicle policy from inception when the agent has advanced the first premium payment but the insured's check was dishonored.
2. No, the earned premium is not owed by the agent.
3. Yes, the agent has a right to recover the amount of the forwarded premium payment made on behalf of the insured.
Facts:
An insurance agent received a check from an insured and in turn advanced the first installment of the premium to an insurance company for a commercial motor vehicle insurance policy. After the payment was received by the insurer, the insured's check was dishonored by the bank upon which it was withdrawn. The agent accordingly refused to advance the second installment payment for the insured. The insured did not pay the second installment payment to either the agent or the insurer. Having not received the second payment, the insurance company issued to the insured and to the agent a notice of cancellation and the policy was cancelled thereafter. The agent inquired whether an agent is allowed to request that the insurance company will cancel the policy from inception because no payment was received by the agent, and whether the agent can demand payment from the insured. We assume for the purposes of this inquiry that the policy was voluntarily written by the insurer and is not issued pursuant to the New York Automobile Insurance Plan (NYAIP).
Analysis:
New York Ins. Law § 3426 (McKinney's 2006) specifies the grounds for which an insurer may cancel a commercial risk motor vehicle insurance policy (other than a policy written in the NYAIP) and provides in pertinent part:
(a)(3) "Nonpayment of premium" means the failure of the named insured to discharge any obligation in connection with the payment of premiums on a policy of insurance or any installment of such premium, whether the premium is payable directly to the insurer or its agent, or indirectly under any premium finance plan or extension of credit. Payment to the insurer, or to an agent or broker authorized to receive such payment, shall be timely for the purpose of this section if made within fifteen days after the mailing to the insured of a notice of cancellation for nonpayment of premium.
Sections (a)(4) through (a)(11) omitted.
(b) During the first sixty days a covered policy is initially in effect, except for the bases for cancellation set forth in paragraph one, two or three of subsection (c) of this section, no cancellation shall become effective until twenty days after written notice is mailed or delivered to the first-named insured at the mailing address shown in the policy and to such insured's authorized agent or broker.
(c) After a covered policy has been in effect for sixty days unless cancelled pursuant to subsection (b) of this section, or on or after the effective date if such policy is a renewal, no notice of cancellation shall become effective until fifteen days after written notice is mailed or delivered to the first-named insured and to such insured's authorized agent or broker, and such cancellation is based on one or more of the following:
(1) With respect to covered policies:
(A) nonpayment of premium provided, however, that a notice of cancellation on this ground shall inform the insured of the amount due;
New York Veh. & Traf. Law § 313(1) (McKinney's 2006), with respect to motor vehicle insurance, provides in pertinent part:
(a) No contract of insurance for which a certificate of insurance has been filed with the commissioner shall be terminated by cancellation by the insurer until at least twenty days after mailing to the named insured at the address shown on the policy a notice of termination by regular mail, with a certificate of mailing, properly endorsed by the postal service to be obtained, except where the cancellation is for non-payment of premium in which case fifteen days notice of cancellation by the insurer shall be sufficient, provided, however, if another insurance contract has been procured, such other insurance contract shall, as of its effective date and hour, terminate the insurance previously in effect with respect to any motor vehicles designated in both contracts.
Thus, where the insurer has not received the premium for a voluntary market commercial risk motor vehicle insurance policy, the insurer has a right to cancel the policy so long as proper notice is given. In this particular case, even though the insured's check was dishonored by the bank, the insurer nonetheless received the initial premium installment from the agent and may not cancel the policy. A motor vehicle insurance policy may only be cancelled prospectively. It may not be cancelled from inception once it is issued. Since it did not receive the second installment payment, the insurer may promptly cancel the policy after issuing proper notice pursuant to New York Ins. Law § 3426 and New York Veh. & Traf. Law § 313(1).
An agent may forward premium payments from the insured to the insurer. Such payments are transactions between the agent and the insured and should be treated as such. The insurer may not cancel the policy as long as the premium is received, whether from the agent or the insured. Likewise, the agent may not request that the insurer cancel the policy because the agent was not paid by the insured1. Unless there is an agreement between the insurer and the agent that states otherwise, the agent does not owe the insurer any payment if the policy is cancelled due to the non-payment of the insured.
The agent or broker can take steps to protect against the defaulting of an insured by requiring a certified check, declining to advance premium for the insured; 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. See General Counsel Opinion No. 02-01-29 (January 24, 2002).
For further information you may contact Principal Attorney Paul A. Zuckerman at the New York City Office.
1 An exception exists under the New York Automobile Insurance Plan (NYAIP). The Plan, in effect, requires (rather than permits) a producer to advance premium payment when it has received payment in the form of a check that has not yet cleared in the producer's premium account. Consequently, the Plan expressly provides that the producer may request cancellation in the event that the bank upon which the check was drawn subsequently dishonors the insured's check. NYAIP § 18(4), § (14)(E).