The Office of General Counsel issued the following informal opinion on December 5, 2002, representing the position of the New York State Insurance Department.
N.Y. Insurance Law § 2120 and Regulation 29
Is the broker in the transaction described herein required to utilize a premium account at a New York bank for the payments herein?
In the circumstance described, the payments sent by the insureds to the broker do not constitute premium or return of premium payments. Therefore, the payments should not be deposited in the brokers New York premium account.
The Inquirer represents a national bank ("Bank") authorized to do business pursuant to authority granted it by the Office of the Comptroller of the Currency ("OCC"). The Bank has a division that operates a finance company. This division provides premium financing arrangements for a number of companies nationwide. The Bank has entered into an agreement with a New York broker ("Broker"), which has established a relationship with a large number of franchisees of a national franchise. The Bank has agreed to provide premium financing for approximately 3,500 separate franchisees nationwide (all but approximately 150 of these are located outside of New York State).
Under the arrangement contemplated, the Bank will provide premium financing for each of the individual franchisees by paying the insurance premiums for the franchisees to the Insurer. The Broker will provide servicing of these loans. The repayments by each franchisee will be made to the Broker who will deposit the monies in a bank account and then, from the account, remit the payments to the Bank. The principal source of repayment for the obligations of the franchisees will be the individual payments made by them.
Insurance agents and insurance brokers are responsible in a fiduciary capacity for all funds received or collected as an agent or broker. Premium accounts of insurance agents and insurance brokers are regulated pursuant to N.Y. Ins. Law § 2120 (McKinney 2000) and N.Y. Comp. Codes R. & Regs. tit. 11, § 20.3(b) (1996) (Regulation 29). N.Y. Ins. Law § 2120(a) (McKinney 2000) provides:
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.
Regulation 29 provides, in pertinent part:
Every insurance agent and 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:
(1) An agent or broker who does not make immediate remittance to insurers and assureds of such funds shall deposit them 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
N.Y. Comp. Codes R. & Regs. tit. 11, § 20.3(b)(1) (1996).
The applicable statute and regulation require that agents and brokers maintain premium accounts at banks authorized to do business in New York State. In addition, the Department has generally required that the fiduciary accounts of resident agents and brokers be maintained at bank branches maintained within New York State. See Office of General Counsel Opinion, New York State Insurance Department Monthly Bulletin (November, 1970); Office of General Counsel Opinion No. 96-8 (February 12, 1996), and Office of General Counsel Opinion No. 00-10-06 (October 23, 2000) (available on the Departments website).
This requirement, however, does not appear to be implicated in the instant case. The funds paid by the franchisees to the Broker represent a repayment of amounts owed by the franchisees to the Bank and not a premium or return of premium payment. The funds are not received by the Broker in its capacity as such but as agent for the Bank. Therefore, the amounts received by the Broker from the (New York) franchisees may not be kept in the Brokers New York premium trust account.
For further information you may contact Supervising Attorney Michael Campanelli at the New York City Office.