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

George E. Pataki
Governor

Gregory V. Serio
Superintendent

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:

(d) Whenever an insurance contract the premiums for which are advanced under a premium finance agreement, as defined in section five hundred fifty-four of the banking law, is cancelled the insurer or insurers within a reasonable time not to exceed sixty days after the effective date of the cancellation shall 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. Upon such cancellation the insurer or insurers shall be entitled to retain a minimum earned premium on the policy of ten percent of the gross premium or sixty dollars, whichever is greater.

N.Y. Banking § 554(8) provides:

"Premium finance agreement" means a promissory note or other written agreement by which an insured promises or agrees to pay to, or to the order of, either a premium finance agency or an insurance agent or broker the amount advanced or to be advanced under the agreement to an authorized insurer or to an insurance agent or broker in payment of premiums on an insurance contract, together with a service charge as authorized and limited by law. If the premium finance agreement is payable to, or to the order of, an insurance agent or broker not licensed as a premium finance agency, payments under the agreement must be payable at the office of a premium finance agency named in the agreement, to whom the agreement is by its terms to be and is subsequently assigned. The term "premium finance agreement" does not include a retail instalment [sic] credit agreement which complies with the provisions of paragraph (b) of subdivision eleven of section four hundred thirteen of the personal property law."

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.


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

(a) Except as provided in subsection (d) of this section, whenever an insurance contract made or issued in this state is cancelled or otherwise terminated by the insured before the expiration thereof in accordance with the terms of such contract, the earned premium to be retained by the insurer shall be determined by the applicable rate filing, if any, otherwise in accordance with the provisions of such contract.

(b) No authorized insurer or its agent may knowingly accept payment of premiums, for an insurance contract made or issued in this state, advanced under a premium finance agreement as defined in section five hundred fifty-four of the banking law by or for any person, firm, corporation or association who is not authorized either to engage in the business of a premium finance agency or to make loans for the purpose of financing insurance premiums in accordance with the banking law, or to include an amount for insurance in a retail instalment contract or obligation in accordance with the personal property law.

(c) 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. Voluntary advancement of a premium to the insurer by an agent or broker, where no additional charge over and above the premium has been imposed upon the insured and the insured has not signed a note or other obligation to pay the premium shall not be construed to be within the meaning of insurance premium finance agreement as defined in article twelve-b of the banking law.