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 August 12, 2003, representing the position of the New York State Insurance Department.

Re: Premium Finance Agreements.

Questions Presented:

1. Is a premium finance agreement deemed to be an insurance product or a banking product?

2. Is the procurement by an insurance broker, not licensed as a premium finance agency, of a premium finance agreement for a fee that is borne, either directly or indirectly, by the insured, deemed to be "other services in connection with any contract of insurance"/"other services on account of insurance policies or contracts", as that phrase is used in N.Y. Ins. Law § 2119(c) (McKinney 2000), or is it banking services related to insurance policies or contracts?

3. May an insurance agent, not licensed as a premium finance agency, procure a premium finance agreement for a fee that will be borne, either directly or indirectly, by the insured?

4. Is the fee associated with the placement of a premium finance agreement deemed to be a charge or demand of a "rate" or receipt of a "premium" as those terms are used in Insurance Law § 2314?

Conclusions:

1. An insurance contract is defined in N.Y. Ins. Law § 1101(a)(1) (McKinney 2000). A premium finance agreement, as defined in N.Y. Banking Law § 554 (McKinney 2003), is not an insurance contract.

2. Procurement by an insurance broker, not licensed as a premium finance agency, of a premium finance agreement for a fee that is borne, either directly or indirectly, by the insured would be deemed to be "other services in connection with any contract of insurance"/"other services on account of insurance policies or contracts", as that phrase is used in N.Y. Ins. Law § 2119(c) (McKinney 2000). Accordingly, it may only be done in compliance with that section.

3. Procurement by an insurance agent, not licensed as a premium finance agency, of a premium finance agreement for a fee, borne either directly or indirectly by the insured, is prohibited.

4. An insurer would not be involved with procuring a premium finance agreement for an insured and, accordingly, such fee would not be part of the policy premium.

Facts:

No facts were presented.

Analysis:

Question 1

An "Insurance contract" is defined in N.Y. Ins. Law § 1101(a)(1) (McKinney 2000) as:

(A)ny agreement or other transaction whereby one party, the "insurer" is obligated to confer benefit of pecuniary value upon another party, the "insured" or "beneficiary", dependent upon the happening of a fortuitous event in which the insured or beneficiary has, or is expected to have that the time of such happening, a material interest which will be adversely affected by the happening of such event.

A premium finance agreement does not come within the definition of an "insurance contract". Rather, it is defined in N.Y. Banking Law § 554 (McKinney 2003) as:

(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 credit agreement which complies with the provisions of paragraph (b) of subdivision eleven of section four hundred thirteen of the personal property law.

Premium finance agencies are regulated and licensed pursuant to the New York Banking Law. Pursuant to N.Y. Banking Law § 555(1) (McKinney 2003):

No person except a bank, state or federally chartered savings bank or savings and loan association, an authorized insurer or a lender licensed pursuant to article nine of this chapter shall engage in the business of a premium finance agency without a license therefor obtained from the superintendent, as provided in this article.

N.Y. Banking Law § 567 (McKinney 2003) provides the required form and content for premium finance agreements.

Questions 2

Assuming that the insurance broker is not licensed as a premium finance agency and that the fee will be borne, either directly or indirectly, by the insured, the broker’s procurement of a premium finance agreement for a fee would be would be deemed to be "other services in connection with any contract of insurance"/"other services on account of insurance policies or contracts", as that phrase is used in N.Y. Ins. Law § 2119(c) (McKinney 2000). Accordingly, it is permissible only if it is done in accordance with N.Y. Ins. Law § 2119(c)(1) (McKinney 2000), which provides:

No insurance broker may receive any compensation, other than commissions deductible from premiums on insurance policies or contracts, from any insured or prospective insured for or on account of the negotiation or procurement of, or other services in connection with, any contract of insurance made or negotiated in this state or for any other services on account of such insurance policies or contracts, including adjustment of claims arising therefrom, unless such compensation is based upon a written memorandum, signed by the party to be charged, and specifying or clearly defining the amount or extent of such compensation.

Question 3

Assuming that the insurance agent is not licensed as a premium finance agency and that the fee will be borne, either directly or indirectly, by the insured, the procurement of a premium finance agreement by such agent is prohibited. As a general rule, agents act on behalf of and represent insurers, and, consequently, may receive their compensation only from such insurers. This compensation stems from an insurer’s filed or manual rate (the gross amount the insurer may charge under the law), which incorporates commissions payable to agents. Any additional compensation paid by insureds directly to the agent, which is beyond the incorporated commissions of an insurer’s filed or manual rates, violates the filing and rate approval provisions of the New York Insurance Law. Office of General Counsel Opinion 1-7-2003 (#6). 1

Question 4

N.Y. Ins. Law § 2314 (McKinney 2000) provides:

No authorized insurer shall, and no licensed insurance agent, no employee or other representative of an authorized insurer, and no licensed insurance broker shall knowingly, charge or demand a rate or receive a premium which departs from the rates, rating plans, classifications, schedules, rules and standards in effect on behalf of the insurer, or shall issue or make any policy or contract involving a violation thereof.

Certain fees are built into the rate, while others are not. Policy placement fees and origination fees are part of the insurer’s expenses in issuing the policy and generally relate to underwriting and arise in relation to every policy issued. As such, they are part of the policy rate. In contrast, fees that develop independently from the issuance, underwriting, and general maintenance of insurance policies and which have no association with any expenses incurred on behalf of insureds generally are not included in the policy rate and, thus, may be charged separately. An insurer would not be involved with procuring a premium finance agreement for an insured and, accordingly, would not charge such fee. Consequently, such fee would not be part of the policy rate.

For further information you may contact Supervising Attorney Joan Siegel at the New York City Office.


1 An agent who acts as the producer under an assigned risk automobile insurance policy written through the New York Automobile Insurance Plan may collect such additional compensation because the agent is not acting in the capacity of insurer’s agent under such circumstances. Office of General Counsel Opinion No. 02-01-05 (2002).