The Office of General Counsel issued the following opinion on July 7, 2003 representing the position of the New York State Insurance Department.

Re: Cancellation by Excess Line Insurer of Financed Policy.

Question Presented:

If an insured purchases an insurance policy on an excess line basis and finances the premium, then decides to cancel the policy after three months, does the insurer have to pro rate the return unearned premium?

Conclusion:

Yes, if an insured purchases insurance on an excess line basis and finances the premium under a premium finance agreement and the amount is advanced or is to be advanced under the agreement to an insurance agent or broker in payment of premiums on an insurance contract, and the insured then decides to cancel the policy after three months, the unauthorized insurer must return whatever gross unearned premiums are due under the insurance contract or contracts on a pro rata basis to the bank, lending institution, premium finance agency or sales finance company, for the benefit of the insured. The insurer may, however, retain a minimum earned premium of ten percent of the gross premium or $60 dollars, whichever is greater.

Facts:

Mr. A is a licensed insurance broker in New York. He states that a New York based company bought a general liability policy from an unauthorized insurer on an excess line basis utilizing a New York licensed insurance broker and a licensed excess line broker. The premium for the policy was financed. Mr. A was unsure whether the amount was advanced or is to be advanced under the agreement to an insurance agent or broker in payment of premiums on an insurance contract, or paid directly to the insurer. The insured cancelled the policy after three months and five days. The policy had a 25% minimum earned premium clause. Since the policy went three days longer than the minimum earned premium period, the insurer wants to short rate the policy, which Mr. A states is significantly more expensive than the 25% minimum earned premium. Mr. A inquires whether the insurer is required to pro rate the return and whether the insurer may charge any additional penalties.

Analysis:

N.Y. Ins. Law § 3428(d) (McKinney 2000) provides in pertinent part:

N.Y. Banking § 554(8) provides:

In an opinion dated August 11, 1994, after consultation and in agreement with the New York Banking Department, this Department concluded that § 3428(d) applied to financed policies issued by an unauthorized insurer where payment was made to an insurance agent or broker. In its July 27, 1994 response to this office, the first issue that was addressed by the Banking Department was whether the financing arrangement was a "premium finance agreement" as defined in Banking Law § 554 since the definition of premium finance agreement references "authorized insurer". The Banking Department stated that "…entities financing policies for unauthorized insurers would be under the purview of Article 12-B [the premium finance article] if payments were made to an insurance broker or agent. It is my understanding that payments are typically made to insurance agents and brokers and that payments are typically made to insurers only in ‘assigned risk’ situations." In excess line placements, since all transactions by the insured are conducted through the excess line broker and not directly with the insurer, we would expect that the payment would be made to the insurance broker or the excess line broker. Hence, under such a set of circumstances, the financing agreement would be a Banking Law premium finance agreement.

The next issue that was addressed was the applicability of § 3428(d) itself. While subsections (b) and (c) of § 3428 by their terms specifically limit their applicability to authorized insurers, subsection (d), like subsection (a), is not so limited.¹  In the August 11, 1994 opinion, the Department concluded that subsection (d) applied to unauthorized insurers in regard to policies that were financed under a premium finance agreement. This Department has similarly concluded in a September 5, 2001 opinion that subsection (a) also applied to both authorized and unauthorized insurers.

Accordingly, it is our opinion that where the policy is financed pursuant to a premium finance agreement, as defined in N.Y. Banking § 554(8) (McKinney 2000), and the amount is advanced or is to be advanced under the agreement to an insurance agent or broker, an unauthorized insurer must return whatever gross unearned premiums are due under the insurance contract or contracts on a pro rata basis to the bank, lending institution, premium finance agency or sales finance company, for the benefit of the insured. The insurer may, however, pursuant to § 3428(d), retain a minimum earned premium of ten percent of the gross premium or $60 dollars, whichever is greater.

Since Mr. A was not sure whether the amount was advanced or is to be advanced under the agreement to an insurance agent or broker in payment of premiums on an insurance contract, or paid directly to the insurer, such fact would have to be ascertained to determine whether § 3428(d) was applicable in this matter.

For further information you may contact Principal Attorney Paul A. Zuckerman at the New York City Office.

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¹ The text of subsections (a) through (c) of § 3428, entitled Cancellation of insurance contracts; return premiums; financed insurance premiums, reads as follows: