The Office of General Counsel issued the following opinion on November 12, 2003, representing the position of the New York State Insurance Department.
Re: Cancellation by excess line insurer of financed policy
If an insured purchases an insurance policy on an excess line basis and the premium is financed under a premium finance agreement, and the policy is thereafter cancelled before the end of the policy period, does the insurer have to return the unearned premium on a pro rata basis?
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 policy is cancelled before the end of the policy period, pursuant to N.Y. Ins. Law § 3428(d) (McKinney 2000), 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.
The Insurer is an excess line insurer domiciled in Illinois. It issued the above-referenced policy to the Insured on July 14, 2002. The policy was placed through the Insureds excess line broker ("Broker"), which collected and remitted the premium for the policy to the Insurer. Unknown to the Insurer, payment of a portion of the premium was paid to the Broker by PFC, a premium finance company. The Insurer was not given notice of the premium finance arrangement or notice of PFCs premium finance agreement. The policy provided that if the Insured cancelled the policy, the Insurer was entitled to its pro rata share of the annual premium plus 25% of the premium. On January 21, 2003, the policy was cancelled by PFC in the Insureds name. It was about this time that the Insurer first became aware that the policy had been financed.
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 Law § 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 installment [sic] credit agreement which complies with the provisions of paragraph (b) of subdivision eleven of section four hundred thirteen of the personal property law."
The applicability of this provision to the excess line market was first addressed in a Department opinion dated August 11, 1994. At that time, the Department consulted with the New York State Banking Department because the issues involved interpretation of the New York Banking Law. In the Banking Departments 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 N.Y. Banking Law § 554 since such definition 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." Therefore, the opinion concluded that, under those circumstances, the financing agreement would be a Banking Law premium finance agreement. In excess line placements, since all transactions by the insured are conducted through the excess line broker and not directly with the insurer, the financing arrangement is a premium finance agreement and § 3428(d) would apply.
The August 11, 1994 letter also addressed 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 Therefore, in that August 11, 1994 opinion, the Department concluded, after consultation and in agreement with the Banking Department, 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. This opinion was also followed in a July 7, 2003 opinion of this office.
Additional issues include:
1. The Insurer was unaware that the premiums for the policy would be financed. It is argued that if the Insurer had been aware that the premiums would be financed and that it might be subject to § 3428(d), then it would have priced the policy differently. It is also argued that PFC presumably had reviewed a copy of the policy before it had agreed to finance the premiums and hence it knowingly financed the policy under the terms of the policy, including the cancellation provision. Therefore, it is argued that the provisions of the contract should bind FIFC.
Section 3428(d) was originally added to the Insurance Law as § 153(d), as part of Chapter 488 of the Laws of 1960, which also added Article XII-B to the Banking Law and what is now subsections (b) and (c) of § 3428. Article XII-B regulates the activities of premium finance agencies and provides certain protections for insureds under premium finance agreements. Section 3428(d) and its predecessor originally permitted an insurer to return premiums on a short rate basis when the policy was cancelled by the insured of premium finance agency. However, § 3428(d) was amended by Chapter 735 of the Laws of 1991 to require insurers to refund premiums on a pro rata basis, subject to a short-rate exception for minimum premium. As the Department noted in a December 17, 1991 letter to the Governors office, "[a]s a consequence of the legislation, a smaller cash deposit from consumers will be required by premium finance companies. While the bill does not make explicit provision in these regards, its effect would enable insureds to spread their payments more evenly. If so, premium financing for consumers may be enhanced in terms of availability of affordability."
Neither the language of § 3428 nor its legislative history suggests that the insurer did not know at the inception of the policy that the premiums were being financed excuses it from having to comply with the requirements of § 3428(d). The statute does not require knowledge by the insurer of the premium finance agreement.
2. Section 3428(d) does not apply to unauthorized insurers. It is argued that the Banking Departments construction of N.Y. Banking Law § 554(8), which provides, in relevant part, that a premium finance agreement is "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," is incorrect. [emphasis supplied]. It is believed that since the phrase "to an insurance agent or broker" immediately follows the phrase "an authorized insurer" that it is reasonable to conclude that the Legislature must have meant that the payment was to be made to an insurance agent acting on behalf of an authorized insurer or an insurance broker acting on behalf of the insured of an authorized insurer. It is noted that other provisions of § 3428, specifically subsections (b) and (c) specifically apply only to authorized insurers and believe that it is reasonable to construe subsection (d) in the same manner. Therefore, it is argued that the phrase "insurance agent or broker" does not include excess line brokers.
The Department disagrees with such reading of the statute. When the Legislature intends to limit the applicability of provisions of the law to authorized insurers, it expressly does so, as is the case in subsection (b) and (c) of § 3428. If the Legislature had intended such a limited applicability, it could have clearly stated that N.Y. Banking Law § 554(8) was applicable only where an authorized insurer was involved.; instead, it clearly refers to authorized insurer or an insurance agent or broker. The Department sees no reason to read in "authorized insurer" in the latter circumstances. Nor did the Banking Department in interpreting the law within its province.
The Departments position that § 3428(d) applies to excess line policies that are subject to premium financing agreements is a long standing position and has been expressed consistently in the opinions of the office, as discussed above. Please take note that the opinions of the Office of General Counsel represent this Departments interpretation of the Insurance Law and the Department will enforce the law in accordance with those opinions. Under the circumstances as described, it appears that the Insurer must refund all amounts in excess of the pro rata premium that had been earned as of the date of cancellation of the policy. If the Insurer fails to do so, the Department will take appropriate regulatory action.
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.