New York State Seal
STATE OF NEW YORK
INSURANCE DEPARTMENT
25 BEAVER STREET
NEW YORK, NEW YORK 10004

The Office of General Counsel issued the following informal opinion on October 11, 2002, representing the position of the New York State Insurance Department.

RE: Return of Unearned Premiums Upon Cancellation of Premium-Financed Policy

Questions Presented:

1) Is a premium finance agency authorized by law to request cancellation of an insurance policy that it financed?

2) To whom must an insurer remit unearned premium upon cancellation of a premium-financed insurance policy?

3) May an insurer require the premium finance agency, as a condition of such agency’s request for cancellation, to submit a copy of the finance agreement?

4) Are the procedures proposed by the inquirer, regarding communications with premium finance agencies, permissible under the New York Insurance Law?

Conclusions:

1) N.Y. Banking Law § 576 (McKinney 2001), as referenced in N.Y. Ins. Law § 3428 (McKinney 2000), authorizes a premium finance agency to request cancellation of an insurance policy that it financed.

2) Upon cancellation of a premium-financed insurance policy, the insurer must remit the unearned premium to the premium finance agency that financed such policy, pursuant to N.Y. Ins. Law § 3428(d) (McKinney 2000), and N.Y. Banking Law § 576(1)(f) (McKinney 2001). However, as a practical matter, any factual dispute arising from a situation where an insurer has remitted unearned premium to the insured because the insurer claims to not have had knowledge of the premium finance agency’s interest in the canceled policy would have to be resolved by a court.

3) N.Y. Banking Law § 576(1)(d) (McKinney 2001) appears to prohibit an insurer from requiring the submission of a copy of a premium finance agreement as a condition of cancellation by a premium finance agency that has complied with N.Y. Banking Law § 576.

4) The procedures proposed by the inquirer regarding communications with premium finance agencies are not prohibited under the New York Insurance Law, and do not appear to be prohibited under the New York Banking Law, provided that any request made to a premium finance agency to submit a copy of its premium finance agreement is not made a condition of policy cancellation.

Facts:

The inquirer represents an authorized property/casualty insurer in New York. The inquirer stated that a motor vehicle insurance policy that was newly underwritten was canceled. The inquirer referred to such policy as a "personal auto" policy, and by that it is assumed that the inquirer meant a motor vehicle insurance policy that is subject to N.Y. Ins. Law § 3425 (McKinney 2002 Pocket Part). The inquirer did not state why the policy was canceled, or who ordered cancellation. The inquirer stated that the insurer first became aware that the insurance policy had been financed by a premium finance agency after the unearned premium was returned to the insured. The inquirer stated that the premium finance agency provided a copy of its canceled check to the insurer, and that the check was inscribed on its back with the following notation: "endorsement hereat shall constitute acceptance of financing by . . . Insurance Carrier (Payee Hereon) . . . and agreement to effect cancellation of policy(ies) upon request of Lender. . ." The inquirer did not state to whom the check had been made payable, or who cashed the check. The inquirer stated that the insurer was advised that, pursuant to N.Y. U.C.C. § 3-311(c) (McKinney 2001), the wording inscribed on the back of the premium finance agency’s check was ineffective to bind the insurer.

The inquirer also proposed a procedure whereby the insurer will contact, by mail, each premium finance agency known to the insurer, to advise the premium finance agency as to how to make its interest in a policy known to the insurer. Such notification would also be attached to copies of policies that the insurer ordinarily sends to the premium finance agencies that financed such policies. In addition, the premium finance agencies would be required by the insurer to submit copies of their premium finance agreements as a condition of cancellation.

Analysis:

N.Y. Banking Law § 576 (McKinney 2001) provides the conditions under which a premium finance agency must operate in order to effectuate cancellation of an insurance policy that it financed. The premium finance agency must mail to the insured, at the insured’s last known address as shown on the premium finance agreement, not less than ten day’s written notice of its intent to cancel, pursuant to N.Y. Banking Law § 576(1)(a) (McKinney 2001). N.Y. Banking Law § 576(1)(d) (McKinney 2001) states:

After the notice in paragraph (a) above has expired, the premium finance agency may thereafter, in the name of the insured, cancel such insurance contract by mailing to the insurer a notice of cancellation stating when thereafter the policy shall be cancelled [sic], and the insurance contract shall be cancelled [sic] as if such notice of cancellation had been submitted by the insured himself, but without requiring the return of the insurance contract. A copy of the notice of cancellation shall also be mailed to the insured.

N.Y. Ins. Law § 3428(c) (McKinney 2000) states in relevant part:

No authorized insurer shall honor a power of attorney or other authority to cancel an insurance contract executed by an insured in connection with insurance premium financing, except in accordance with section five hundred seventy-six of the banking law.

With reference to the information the inquirer provided regarding the wording inscribed on the back of the premium finance agency’s check, it is unnecessary to discuss whether such wording binds the insurer to its terms since N.Y. Banking Law § 576 (McKinney 2001), as referenced in N.Y. Ins. Law § 3428 (McKinney 2000), authorizes a premium finance agency to request cancellation of an insurance policy that it financed.

Pursuant to N.Y. Ins. Law § 3428(d) and N.Y. Banking Law § 576(f), the insurer must return any gross unearned premiums due, on a pro-rated basis, to the agency that financed such premium within sixty days after the effective date of cancellation. However, as a practical matter, any factual dispute arising from a situation where an insurer has remitted unearned premium to the insured because the insurer claims to not have had knowledge of the premium finance agency’s interest in the canceled policy would have to be resolved by a court.

With regard to the proposed plans to contact premium finance agencies to make them aware of how they may make their interests in insurance policies known to the insurer, the Insurance Law does not, and the Banking Law does not appear to, prohibit such activity. However, with respect to conditioning cancellation upon receipt of a premium finance agency’s submission of a copy of its premium finance agreement, such proposal appears to be prohibited by N.Y. Banking Law § 576(1)(d), which as above-stated, requires cancellation of the policy upon the properly executed request of the premium finance agency. This section does not appear to allow an insurer to set conditions upon cancellation, regardless of the reasons for such conditions.

This opinion interprets the New York Insurance Law. The New York State Banking Department, 2 Rector Street, New York, NY 10006-1894 may be contacted for their views on the New York Banking Law.

For further information you may contact Senior Attorney Sally Geisel at the New York City Office.