The Office of General Counsel issued the following informal opinion on August 10, 2000, representing the position of the New York State Insurance Department.
RE: Policy cancellation and subsequent partial payment of premium
What is the obligation of a broker, pursuant to N.Y. Ins. Law § 2324 (McKinney 1985), regarding the attempted partial payment of premium by an insured after notice of cancellation for non-payment of premium has been sent?
If such partial payment were made more than fifteen days after the due date, the broker shall either forward the partial payment to the insurer or may deduct earned premium, which must be forwarded to the insurer, and refund the balance to the insured.
A broker, with authority to accept premium payment for renewal of a homeowners and automobile insurance policy, sent a cancellation notice to the insured due to unpaid premium. The broker subsequently receives a partial payment from the insured. The broker does not reinstate the policy because the partial payment is insufficient.
The Insurance Law states that every insurance agent and every insurance broker shall be responsible in a fiduciary capacity for all funds received or collected as insurance agent or insurance broker. N.Y. Ins. Law § 2120 (McKinney 2000). In addition, N.Y. Ins. Law § 3425 (a)(10) (McKinney 2000) provides that: "Payment to the insurer, or to the agent or broker authorized to receive such payment shall be timely, if made within fifteen days after the mailing to the insured of a notice of cancellation for non-payment of premium."
Although partial payment is not payment sufficient to reinstate the policy, there is time to remedy the situation if the payment is made within the 15 day grace period. The broker, although acting on behalf of the insurer for acceptance of the money, nevertheless owes a duty to the insured to warn the insured that insufficient payment is regarded as no payment for renewal purposes. The insured should be so notified by the broker. However, if payment is made after the 15 day grace period has passed, the coverage lapses and the insured is entitled to a refund of the partial payment, minus the earned premium.
If the 15 day grace period has passed and the policy has lapsed, the preferred practice is for the broker to immediately forward the partial payment to the insurer for appropriate processing. But there is no statutory prohibition that prevents the broker from doing what the insurer would have done, i.e., retain the earned premium for forwarding to the insurer and return the balance to the insured. This requires the maintenance of a premium bank account by the broker so that such funds are kept separate from non-fiduciary funds.
For further information, you may contact Associate Attorney Elaine Berger.