OGC Opinion No. 07-02-12

The Office of General Counsel issued the following opinion on February 13, 2007 representing the position of the New York State Insurance Department.

Re: Premium Accounts and FDIC

Question Presented:

Must all premium accounts used by insurance agents be insured by the Federal Deposit Insurance Corporation ("FDIC")?

Conclusion:

Yes. Funds held by an insurance agent or broker on behalf of another party must be maintained in a federally (FDIC) insured bank account.

Facts:

An associate of a bank which deals with fiduciary accounts maintained by insurance agents inquired whether insurance agents who use the bank's services must deposit funds in federally (FDIC) insured accounts.

Analysis:

N.Y. Ins. Law § 2120(a) (McKinney's 2007) is relevant to the inquiry. It states in pertinent part:

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.

Further, 11 NYCRR § 20.3(b)(4) (Regulation 29) (2007) provides, in pertinent part, as follows:

(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:

* * * *

(4) No withdrawals from a premium account shall be made other than for payment of premiums to insurers, payment of return premiums to assureds, transfer to an operating account of (i) interest, if the principals have consented thereto in writing...

Insurance agents and brokers are responsible in a fiduciary capacity for all funds received or collected. Under N.Y. law, insurance agents and brokers must hold premium funds in "premium accounts" that are designated as such, and maintained separately from other funds. The primary purpose of the premium account is to maintain value until payment is due, rather than attempt to increase value. The agent or broker acting in a fiduciary capacity is subject to prudent rules of investing consistent with securing the value of the funds. Accordingly, in order to ensure that the principal's funds are protected in the utmost fashion, all fiduciary funds must be federally (FDIC) insured.

For further information you may contact Principal Attorney Paul A. Zuckerman at the New York City Office.