NYSBL 554; 555; 566; 568; 576
September 19, 2006
Re: Insurance Premium Finance Agencies
Your letter dated August 7, 2006 to me seeks confirmation from the New York State Banking Department (the "Department") that the premium finance arrangement described in your letter is consistent with Article XII-B of the New York Banking Law. Primarily, you seek confirmation that an insurance agent or broker who originates premium finance agreements and immediately sells those agreements to a licensed premium finance agency does not need to be licensed as a premium finance agency under Article XII-B. Secondarily, you seek confirmation that when a premium finance agency purchases premium finance agreements from an insurance agent or broker, the consideration paid by the premium finance company, regardless of the amount, is not prohibited under Article XII-B.
For the reasons that follow below, the Department concurs that an insurance agent or broker who originates premium finance agreements and immediately sells those agreements to a licensed premium finance agency does not need to be licensed as a premium finance agency under Article XII-B; however, as also discussed below, we disagree with and fail to understand some of the other observations in your letter.
The arrangement you describe in your letter is essentially the following:
- In addition to selling an insurance contract to an insured, an agent or broker, who is not licensed as a premium finance agency under Section 555, may assist an insured in the financing of insurance premiums by entering into a premium finance agreement with the insured.
- The agreement will call for monthly payments (equal to the premium for the insurance contract, less the amount of the down payment, plus a service charge, which may be greater than an interest rate of 16% per annum, but will in all cases comply with the limitations thereon in Section 568) to be payable to the order of the agent or broker at the office of the premium finance agency to which the agreement is to be assigned.
- The agreement will grant a power of attorney directly to the assignee to cancel the underlying policy in the event of nonpayment by the insured in accordance with Section 576, and will otherwise conform to any requirements of law.
- The assignment of the agreement will be without recourse to the agent or broker except in limited circumstances such as fraud or breach by the agent or broker.
- You indicated that the purchase price for each agreement "will, in most or all cases, be greater than the present value of the payments to be made" by the insured. (To us this does not make sense because we fail to understand how the premium finance agency will make any money under the PFA.) The purchase price will be paid first to fund the balance of the policy premium directly to the insurance company and then the balance will be paid to the agent or broker.
For the reasons that follow, we believe that, under the foregoing proposal, the agent or broker does not need to be licensed as a premium finance agency under Article XII-B in order to engage in the contemplated transactions.
We hold this view despite the fact that, we disagree with one of the arguments you make in your letter. To us, the agent or broker appears to meet the definition of a "premium finance agency" in Section 554(7) ("a person engaged, in whole or in part, in the business of entering into premium finance agreements with insureds"). You argued that the agent or broker is not a "premium finance agency" because the agent or broker is not in the business of entering into premium finance agreements. Your rationale is that because the agent or broker is in the business of selling or arranging the sale of insurance, assisting with financing the insurance is not the agent's or broker's core business. We disagree because it is possible for the agent or broker to be in more than one business and the amount of business need not exceed a particular threshold for the conduct to be within the ambit of the statutory definition.
Ordinarily, Section 555(1) might preclude the agent or broker from entering into premium finance agreements. It provides that
However, despite the apparent applicability of this general prohibition, we believe that the more specific language of the Banking Law is controlling. The statute clearly contemplates that an agent or broker that is not licensed as a premium finance agency may originate premium finance agreements.
No person except a bank, state or federally chartered savings bank or savings and loan association, an authorized insurer or a lender licensed pursuant to article nine of this chapter shall engage in the business of a premium finance agency without a license therefor obtained from the superintendent, as provided in this article. (Emphasis added.)
Under Section 554(8), a "premium finance agreement" is defined as a
In addition to the highlighted portion of this definition in Section 554(8), which specifically contemplates that an agent or broker not licensed as a premium finance agency may originate premium finance agreements that are to be subsequently assigned, Section 568(3) of the Banking Law reinforces this view that an agent or broker not licensed as a premium finance agency may originate premium finance agreements.
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 and is subsequently assigned. (Emphasis added.)
Section 568(3) of the Banking Law states:
An insurance agent or broker not licensed as a premium finance agency may, in a premium finance agreement which is payable to the agent or broker or his order at the office of a premium finance agency and which is endorsed or otherwise transferred or assigned to such a premium finance agency, contract for and, if so contracted for, the premium finance agency holding the agreement may charge, receive and collect charges for financing or arranging the financing of premiums under the agreement, computed as provided in subdivision four. (Emphasis added.)
Therefore, the more specific language of the Banking Law, which contemplates allowing unlicensed agents and brokers to enter into premium finance agreements when particular conditions are satisfied, necessarily must control any general definitions or provisions that may appear to more broadly prohibit the practice.
As to your secondary question, Section 566(2)(a) of the Banking law generally prohibits payments of any rebate of the service charge or other inducement valued over one dollar to the agent or broker for the referral of business, but it contains an exception.
Section 566 (2)(a) of the Banking Law reads as follows:
No premium finance agency, and no employee of such an agency shall pay, allow or offer to payor allow in any manner whatsoever to an insurance agent or broker, or any employee of an insurance agent or broker, or to any other person, either as an inducement to the financing of any insurance policy with the premium finance agency or after any such policy has been financed, any rebate whatsoever, either from the service charge for financing specified in the premium finance agreement or otherwise, or shall give or offer to give any valuable consideration or inducement of any kind directly or indirectly, other than an article of merchandise not exceeding one dollar in value which shall have thereon the advertisement of the premium finance agency, but a premium finance agency may purchase or otherwise acquire a premium finance agreement, provided that it conforms to this article in all respects, from an insurance agent or broker or another premium finance agency with recourse against the agent, broker or agency on such terms and conditions as may be mutually agreed upon. (Emphasis added.)
Although premium finance agencies are prohibited from making payments to any other person as an inducement to financing or any rebate whatsoever after an insurance policy has been financed, the arrangement proposed in your letter limits the payment to the price paid to the agent or broker when the premium finance agreement is assigned to the premium finance company. Therefore, the consideration paid by the premium finance company, regardless of the amount, falls within the exception and is not a payment prohibited by Section 566(2)(a).
The opinion rendered herein is based on the facts set forth in your letter and may not be applicable to any other situation. I trust that this reply is responsive to your inquiry.
Very truly yours,