OGC Op. No. 07-08-06
The Office of General Counsel issued the following opinion on August 28, 2007, representing the position of the New York State Insurance Department.
RE: Reinsurance Intermediaries and Premium Accounts
1) Must a reinsurance intermediary that deals with more than one insurer maintain separate fiduciary accounts for each insurer?
2) May a reinsurance intermediary title a fiduciary account in any name?
3) Must a reinsurance intermediary deposit into a premium account return premiums that the intermediary receives from a reinsurer?
4) If a reinsurance intermediary has earned commissions pursuant to an agreement with an insurer, must the reinsurance intermediary obtain the insurer’s written consent prior to withdrawing the commissions from the funds held for the insurer in the reinsurance intermediary’s fiduciary account?
1) No. A reinsurance intermediary need not maintain separate premium accounts for each insurer, provided that the reinsurance intermediary maintains records and books from which the amount of funds being held for each insurer may be readily determined, and provided that all premium monies are protected under federal insurance limits.
2) No. Although the New York Insurance Law and regulations promulgated thereunder do not require a specific title, the name on the premium account must include the name of the licensee (i.e., the name under which the license has been obtained from the Department), and language that identifies the account as a "premium" account.
3) Yes. The fiduciary obligations of a reinsurance intermediary apply to all funds received by a reinsurance intermediary acting in the capacity of reinsurance intermediary, including return premiums or other monies received or collected from a reinsurer by the reinsurance intermediary.
4) No. If a reinsurance intermediary has earned commissions pursuant to an agreement with an insurer, the reinsurance intermediary may withdraw the commissions from the funds held for the insurer in the reinsurance intermediary’s fiduciary account, provided the withdrawal does not otherwise conflict with the agreement between the insurer and the reinsurance intermediary.
The inquirer reports that he is in the process of obtaining a license in this state to operate as a reinsurance intermediary under the name ABC Reinsurance Intermediaries, LLC (“ABC”). In other states, it is ABC’s practice to submit to both the ceding and assuming insurers an invoice that specifically states the premium due to the assuming insurer, and the commission due to the reinsurance intermediary. The inquirer asks whether this is sufficient to allow ABC to withdraw its commissions from the premium account, or if ABC needs written permission to do so.
A reinsurance intermediary acts as a broker in soliciting, negotiating, or selling any reinsurance contract or binder, or acts as an agent in accepting any reinsurance contract or binder on behalf of the insurer. N.Y. Ins. Law § 2106 (McKinney 2006).
Insurance Law § 2120, which specifies the fiduciary obligations of an insurance agent or broker or reinsurance intermediary with respect to funds received or collected by the licensee while acting in such capacity, is germane to the inquirer’s question. Insurance Law § 2120 reads, in pertinent part, as follows:
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(b) Every reinsurance intermediary acting as such in this state shall be responsible, in a fiduciary capacity for all funds received or collected in such capacity, and shall not, without the express consent of his or its principal or principals, mingle any such funds with his or its own funds or with funds held by him or it in any other capacity.
(c) This section shall not require any such agent, broker or reinsurance intermediary to maintain a separate bank deposit for the funds of each such principal, if and as long as the funds so held for each such principal are reasonably ascertainable from the books of account and records of such agent, broker or reinsurance intermediary, as the case may be.
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Section 32.3 of N.Y. Comp Codes R. & Regs. (“NYCRR”) tit. 11, Pt. 32 (Regulation 98) (2005), which was promulgated pursuant to Insurance Law § 2120, applies to reinsurance intermediaries. Section 32.3 reads as follows:
(a) Every person, firm, association or corporation acting as reinsurance intermediary in this State, is responsible as a fiduciary for funds received by such reinsurance intermediary, in such capacity. All such funds shall be held in accordance with the following rules:
(1) A reinsurance intermediary shall deposit funds received 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 (any such account is hereinafter referred to as "a premium and loss account"). A licensed nonresident reinsurance intermediary may use a bank not authorized to do business in this State, provided such bank is a member of the Federal Reserve System.
(2) Deposits in a premium and loss account in excess of aggregate funds received but not remitted may be made to maintain a minimum balance, to guarantee the adequacy of the account, or to pay funds due but uncollected (any deposit is hereinafter referred to as "a voluntary deposit").
(3) No withdrawals from a premium and loss account shall be permitted except as follows: for payment or return of premiums, commission due others, losses to insurers or other parties entitled thereto, interest, if the principals have consented thereto in writing, the intermediary's commissions, and voluntary deposits, provided that no withdrawal of voluntary deposits may be made if the balance remaining in the premium and loss account thereafter is less than aggregate net premiums, commissions due other and losses received but not remitted. In computing aggregate net premiums, offsets from different principals shall not be permitted.
(4) Deposit of a premium in a premium and loss account shall not be construed as a commingling of the net premium and of the commission portion of the premium.
(5) In the case of a reinsurance intermediary dealing with more than one insurer, maintenance at all times in one or more premium and loss accounts of at least the net balance of funds received but not remitted shall be construed as compliance with this Part, provided that the funds so held for each such principal are reasonably ascertainable from the books of accounts and records of such reinsurance intermediary.
(b) Except as hereinabove provided, a reinsurance intermediary shall not commingle any premium or loss funds received or collected in such capacity with its own funds or with funds held by it as insurance agent, insurance broker or in any other capacity.
The pertinent language in 11 NYCRR § 32.3 to this inquiry is identical to the language set forth in 11 NYCRR § 20.3, which applies to agents and brokers. Consequently, the Department construes these regulatory provisions in pari materia.
Question 1: Premium Account Requirements for Multiple Insurers
By its terms, Insurance Law § 2120 does not require a reinsurance intermediary that deals with more than one insurer to maintain a separate account for each insurer, provided that the reinsurance intermediary maintains sufficient records to allow the funds held for each insurer to be reasonably ascertainable. Similarly, pursuant to 11 NYCRR § 32.3(a)(5), a reinsurance intermediary may maintain one or more premium accounts, provided the reinsurance intermediary keeps books and records from which the amount of each insurer’s funds may be reasonably ascertainable.
However, because a reinsurance intermediary has a fiduciary relationship with its client, the reinsurance intermediary is subject to prudent rules of investing. See Opinion of General Counsel No. 07-04-05 (April 4, 2007). Given this circumstance, a reinsurance intermediary is required to ensure that all funds the reinsurance intermediary holds in a fiduciary capacity (whether received from an assuming or ceding reinsurer) are protected under federal insurance limits. See Office of General Counsel Opinions dated September 28, 1990 and October 23, 2000. In some instances, this may require multiple accounts, irrespective of whether the reinsurance intermediary receives funds from one insurer or multiple insurers.
Question 2: Premium Account Title
In Opinion of General Counsel No. 04-11-17 (November 22, 2004), the Department stated that “[a]n insurance agent’s or broker’s premium account should be appropriately identified by the name under which the broker’s license is obtained, and should specify that it is a ‘premium’ account.” See also Opinion of General Counsel No. 06-08-19 (August 29, 2006). For example, the inquirer may name the premium account ABC Reinsurance Intermediaries, LLC Premium Account. Although prior opinions construed 11 NYCRR Part 20, which applies to agents or brokers, their conclusions are equally applicable to reinsurance intermediaries given that, as noted above, the Department construes Parts 20 and 32 in pari materia.
Question 3: Return Premiums
By its terms, Insurance Law § 2120 imposes a fiduciary duty upon reinsurance intermediaries for all funds received by a reinsurance intermediary acting in such capacity. Accordingly, this includes return premiums, or other monies received from a reinsurer by the reinsurance intermediary. See Opinion of General Counsel No. 04-11-19 (November 24, 2004). Thus, if a reinsurance intermediary receives any such funds and holds them on behalf of the reinsurer, the funds must be deposited in the reinsurance intermediary’s premium account. Note, however, that the reinsurance intermediary may immediately forward a check to the named payee without depositing the check in the premium account.
Question 4: Withdrawal of Commissions
This question appears to concern whether the phrase in 11 NYCRR § 32.3 that states “if the principals have consented thereto in writing” applies to the withdrawal of commissions. It was the Department’s intent, as evidenced by the placing of the phrase immediately after the word “interest,” and by setting it off by commas, for this phrase to apply to the word “interest.” The rationale for requiring written consent for a reinsurance intermediary to withdraw interest on funds in the premium account is that the interest would otherwise be considered the property of the insurer for which the reinsurance intermediary is holding the funds. Note, however, that determining whether the funds are property of the assuming or ceding insurer depends on the particular circumstances. See Opinion of General Counsel No. 04-11-19 (November 24, 2004).
Nevertheless, although 11 NYCRR § 32.3 does not specifically require written consent for a reinsurance intermediary to withdraw funds from the premium account, there must be some agreement in place that establishes the reinsurance intermediary’s right to commissions, and the amount thereof. Thus, in answer to this question, if a reinsurance intermediary has earned commissions pursuant to an agreement with an insurer, the reinsurance intermediary may withdraw the commissions from the funds held for the insurer in the reinsurance intermediary’s fiduciary account, provided that the withdrawal does not otherwise conflict with the agreement between the insurer and the reinsurance intermediary.
The Department is not, however, in a position to offer an opinion regarding the terms of the agreement to which the inquirer referred, since the Department has not received a copy of that agreement. In any event, contract interpretation is a matter best left to the parties to the agreement or the courts.
For further information you may contact Senior Attorney Brenda Gibbs at the Albany Office.