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

George E. Pataki
Governor

Howard Mills
Acting Superintendent

The Office of General Counsel issued the following opinion on March 10, 2005, representing the position of the New York State Insurance Department.

RE: Premium Finance Agreement

Questions Presented:

1) Is a premium finance company required by statute to give notice to an insurer that the premium that the insurer has accepted has been financed by this company, or to provide a copy of the premium finance agreement?

2) To whom must an insurer remit unearned premium upon cancellation of a premium-financed, property/casualty insurance policy?

3) Under an assigned risk policy, when must a premium finance company remit the premium it has agreed to finance to the insurer or agent that is authorized to accept such premium?

Conclusions:

1) N.Y. Banking Law § 577-a (2)(b) (McKinney 2001), as amended by Chapter 527 of the Laws of 2004, provides that where insurance coverage is procured through a wholesale producer for insurance policies financed by a premium finance company (other than policies written through the Assigned Risk Plan), "the premium finance company shall notify, in writing, the wholesale producer and the insurance company of the gross premium, the borrower’s name and address, and, if available, the policy number, within ten (10) business days of acceptance of the agreement."

2) Pursuant to N.Y. Banking Law § 576(1)(f) and (2) (McKinney 2001), and N.Y. Ins. Law § 3428 (McKinney 2000), as amended by Chapter 743 of the Laws of 2004, the insurer must remit unearned premium upon cancellation of a premium-financed, property/casualty insurance policy to the premium finance company.

3) There is no provision in the N.Y. Insurance Law or the New York Automobile Insurance Plan ("Plan") regarding the time in which a premium finance company must remit the premium that it has agreed to finance, to the insurer or agent that is authorized to accept such premium.

Facts:

An employee of an authorized property/casualty insurer inquired about the repayment of unearned premium to a premium finance company upon cancellation. The inquiries involved various scenarios in which the insurer had not been made aware that a premium finance company was involved in the insurance transaction. Also inquired about was the time in which a premium finance company must pay the premium on an assigned risk policy after the insured entered into the premium finance agreement.

Analysis:

N.Y. Banking Law § 577-a (McKinney 2001), as amended by Chapter 527 of the Laws of 2004, states:

§ 577-a Premium finance agreements.

1. Any amount advanced by a premium finance agency, with regard to any insurance policy issued pursuant to any plan established under article fifty-three of the insurance law shall be paid either by check or draft made payable to the insurance company, or, if the company is not known, by check or draft made payable to the entity which pursuant to the plan established under article fifty-three of the insurance law designates which insurer shall insure or service the risk. The check or draft shall not be made payable to the insurance agent or broker.

2. Where insurance coverage is procured through a wholesale producer for insurance policies financed with a premium finance agency, other than policies subject to subdivision one of this section:

(a) Prior to or contemporaneously with the advancement of any funds to an insurance retail producer who has procured an insurance policy through a wholesale producer, the retail producer shall provide the premium finance agency with the name and address of the wholesale producer through whom coverage was procured and, if available, the policy number of the insurance policy being financed, in writing:

(b) The premium finance agency shall notify, in writing, the wholesale producer and the insurance company of the gross premium, the borrower’s name and address, and, if available, the policy number, within ten (10) business days of acceptance of the agreement;

(c) Failure by the retail producer to comply with paragraph (a) of this subdivision shall be a violation of subsection (d) of section twenty-one hundred twenty of the insurance law, and the retail producer shall be liable for actual damages caused by his or her failure to disclose;

(d) For the purposes of this subdivision, a "retail insurance producer" or "retail producer" means an insurance producer who directly deals with an insured; a "wholesale insurance producer" or "wholesale producer" means the producer from whom or through whom the retail producer has procured coverage on behalf of the insured.

Thus, a premium finance company, under certain circumstances, is required by statute to give notice to an insurer that the premium that the insurer has accepted has been financed by this company. However, there is no requirement for a premium finance company to provide a copy of the premium finance agreement to the insurer.

N.Y. Banking Law § 576(1)(f) and (2) (McKinney 2001) state:

(f) The insurer or insurers within a reasonable time not to exceed sixty days after the effective date of cancellation, shall return whatever gross unearned premiums are due under the insurance contract or contracts on a pro rata basis to the premium finance agency for the benefit of the insured or insureds. However, 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.

* * * *

(2) The provisions of subdivision one relating to cancellation by a premium finance agency of an insurance contract and the return by an insurer of unearned premiums to the premium finance agency also apply to the surrender by a premium finance agency of an insurance contract providing life insurance and the payment by the insurer of the cash value of the contract to the premium finance agency, except that the insurer may require the surrender of the insurance contract.

N.Y. Ins. Law § 3428 (McKinney 2000), as amended by Chapter 743 of the Laws of 2004, states in relevant 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 to the bank, lending institution, premium finance agency or sales finance company, for the benefit of the insured.

(e) Whenever an insurance contract, issued by or on behalf of an authorized insurer or insurers, 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, upon such cancellation the authorized insurer or insurers shall return the gross unearned premiums due under the insurance contract or contracts, on a pro rata basis to the bank, lending institution, premium finance agency or premium finance company, for the benefit of the insured, provided, however, that such authorized 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.

Thus, pursuant to N.Y. Banking Law § 576(1)(f) and (2) (McKinney 2001), and N.Y. Ins. Law § 3428 (McKinney 2000), as amended by Chapter 743 of the Laws of 2004, the insurer must remit unearned premium upon cancellation of a premium-financed, property/casualty insurance policy to the premium finance company.

Various scenarios were described in which the insurer had not been made aware that a premium finance company was involved in the insurance transaction. As noted above, under certain circumstances, N.Y. Banking Law § 577-a (McKinney 2001), as amended by Chapter 527 of the Laws of 2004, requires a premium finance company to notify an insurer of its existence.

Lastly, it was inquired as to whether, under an assigned risk policy, a premium finance company must remit the premium that it had agreed to finance, to the insurer or agent that is authorized to accept such premium, within a certain time after the insured and the premium finance company enter into the finance agreement. Neither the New York Insurance Law nor the New York Automobile Insurance Plan address this inquiry. It is, however, obviously in the interest of the premium finance company to timely send the premium to avoid cancellation of the policy.

With respect to whether the N.Y. Banking Law addresses this inquiry, the Banking Department should be contacted for their determination as they are the agency responsible for regulating the business of premium financing. The postal address is New York State Banking Department, One State Street, New York, NY 10004-1417. Their web site address is www.banking.state.ny.us.

For further information you may contact Associate Attorney Sally Geisel at the New York City Office.