The office of General Counsel issued the following informal opinion on January 24, 2002, representing the position of the New York State Insurance Department.
Re: Agents Right to Request Nonpayment Cancellation
May an agent or broker request an insurer, that has received the premium payment in the form of an agent or brokers check, to cancel a policy for nonpayment of premium if: (1) the insured fails to pay the agent or broker; (2) the insureds check to the agent or broker is dishonored; or (3) the insured places a stop payment on the check issued to the agent or broker?
An insurance agent or broker that advances premium payment for its insureds may not order the insurer to cancel the policy when the insured fails to reimburse the insurance agent or broker for the premium advanced. However, with respect to an assigned risk automobile insurance policy, the insurer shall, at the request of the producer, cancel the entire policy where a producer submits proof that a check, tendered by the insured to be used for the payment of premium, and which has been deposited in the producers premium account, has been refused payment by the bank upon which it was drawn.
No facts were presented. The question is general in nature.
As was requested, the Department has reconsidered its previous opinions on this subject but the Departments opinion remains unchanged. As was stated in the January 12, 2001 letter to which the inquirer makes reference, it is the Departments position that, if payment in the form of the producers check has been remitted by the agent or broker, received by the insurer and honored by the bank, the insurer has received a valid payment of the premium. N.Y. Ins. Law §3425(c)(1) (McKinney 2000) contains the permissible grounds for canceling an automobile insurance policy, governed by that section, that has been in effect for sixty days. N.Y. Ins. Law §3425(c)(2) (McKinney 2000) contains the permissible grounds for canceling a personal lines insurance policy, governed by that section, that has been in effect for sixty days. N.Y. Ins. Law § 3426 (McKinney 2000) contains the permissible grounds for canceling a policy of commercial risk insurance, professional liability insurance or public entity insurance that has been in effect for sixty days. With respect to each of these sections, one of the permissible grounds is nonpayment of premium. However, in the scenario described above, the insurer has received payment of the premium and consequently, this ground is not a valid reason for canceling the policy.
Except with respect to an assigned risk automobile insurance policy, discussed infra, an insurance agent or broker may not order cancellation of a policy because of an insureds failure to reimburse the premium voluntarily advanced by the agent or broker. The Insurance Law does not authorize cancellations to be made on such basis. Thus, an insurer that has received such advance by an insurance agent or broker may not cancel the policy for nonpayment of premium because premium has been paid to it.
With respect to an assigned risk automobile insurance policy, § 18(4) of the Rules of New York Automobile Insurance Plan (2001) provides that:
An insurer shall, at the request of a producer, cancel the entire policy in conformity with the Vehicle and Traffic Law where a producer submits proof that a check, tendered by the insured to be used for the payment of premium, and which has been deposited in the producers premium account, has been refused payment by the bank upon which it has been drawn. Such cancellation shall be on a pro rata basis, subject to the minimum retained premium charge prescribed in the Minimum Premium Rule in the Plan Manual, whichever is greater, and the unearned portion of the paid premium, if any, shall be returned to the producer to the extent of the amount of the dishonored check.
The Plan permits a producer to order cancellation under such circumstances because producers are required under the Plan to make immediate payment to an insurer upon receipt of payment by an insured. The Plan, in effect, requires (rather than permits) a producer to advance premium payment when it has received payment in the form of a check that has not yet cleared in the producers premium account. Consequently, it expressly provides for cancellation in the event that the bank upon which it was drawn subsequently dishonors the insureds check.
The agent or broker can take steps to protect against the result described by requiring a certified check, declining to advance premium for the insured; by having the insured make the check payable to the insurer and then transmitting that check to the insurer; or by endorsing a check that has been made payable to the agent or broker and then transmitting it to the insurer.
For further information you may contact Supervising Attorney Joan Siegel at the New York City Office.