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 informal opinion on March 22, 2005 representing the position of the New York State Insurance Department.

RE: Return of Commissions

Question Presented

1. When a property/casualty insurance contract has been cancelled, may an insurer deduct any commissions paid to a broker for such policy from the refund of unearned premiums due the insured?

2. In such circumstances, what is the obligation of the broker, if any, to refund commissions on such cancelled property/casualty insurance policy to the insurer?

Conclusion

1. No, when a property/casualty insurance contract has been cancelled, the insurer may not deduct any commissions paid to a broker for such policy from the refund of unearned premiums due the insured. In addition, a broker who has received such a refund on behalf of the insured may not deduct from that refund, any commissions the broker is obligated to repay the insurer.

2. A broker’s obligation, if any, to refund commissions to an insurer upon cancellation of the property/casualty insurance policy, is governed by the contract between the insurer and the broker. In the absence of an agreement requiring a broker to refund commissions to an insurer upon cancellation of the policy, the broker is not generally required to return any commissions. Western National Insurance Co., v. Haph, 277 A.D. 6 (1st Dept. 1950) aff’d 302 N.Y. 678 (1951) However, there are instances in which the general rule will not apply including where a policy is an audit policy or dependent upon any future agreement between the parties to the insurance contract, or where the broker has induced the cancellation. Id.

Facts

The inquiry is of a general nature. However, the inquirer has stated that the inquirer’s inquiry is limited to property/casualty insurance only.

Analysis

The Office of General Counsel has previously stated that when a property/casualty insurance contract has been cancelled, the insurer may not deduct any commissions paid to a broker for such policy from the refund of unearned premiums due the insured. See Opinions of the Office of General Counsel No. 88-15 (NILS) and 88-19 (NILS).

Opinion of the Office of General Counsel No. 88-19 (NILS) states, in relevant part, that:

With respect to financed insurance policies, in the event of cancellation, a premium finance agency is entitled to gross unearned premiums from the insurer, and the insurer is obligated to make such refund. Any agreement to the contrary is in violation of law. Section 3428(d) of the Insurance Law (IL) states that whenever [such] an

insurance contract is cancelled . . . within sixty days of the cancellation date the insurer "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 effecting the cancellation, for the benefit of the insured."1

* * *

With respect to non-financed insurance policies, Section 3428(a) IL states that after an insurance policy is cancelled, an insurer may retain only its earned premium. If the insurer only remits a net unearned premium . . . the insurer would be in violation of Section 3428(a) IL. This would also improperly impose a burden upon the insured to attempt to collect the balance of the unearned premium from the producer who may or may not be contractually bound with the insurance company to return the unearned portion of his commission.

Opinion of the Office of General Counsel No. 88-15 (NILS) states that:

The payment of commissions on the sale of insurance policies and the return of unearned commissions to the insurer upon cancellation of insurance policies prior to expiration is a matter of agreement or contract between the producer and the insurer. The insured is not a party to such agreement and is not obligated or responsible in any way for the payment of unearned commissions or for the return of unearned commissions.

In addition, a broker who has received such a refund on behalf of the insured may not deduct from that refund, any commissions the broker is obligated to repay the insurer. Opinion of the Office of General Counsel No. 88-19 (NILS).

Whether a broker is required to return any part of the commission received for the cancelled policy is a matter of contract between the broker and the insurer. In the absence of an agreement requiring a broker to refund commissions to an insurer upon cancellation of the policy, the broker is generally not required to return any commissions if the policy is later cancelled. See Western National Insurance Co., v. Haph, 277 A.D. 6, 97 N.Y.S.2d 447 (1st Dept. 1950) aff’d 302 N.Y. 678, 98 N.E.2d 481 (1951) However, there are circumstances in which the general rule will not apply including where the policy is an audit policy or dependent upon any future agreement between the parties to the insurance contract; or where the broker has induced the cancellation. Id.

For further information one may contact Assistant Counsel Brenda M. Gibbs at the Albany Office.


1  Since Opinion of General Counsel No. 88-19 was issued, amendments which do not effect the conclusion of the Opinion have been made to the cited statutes.  For instance, unearned premiums are now calculated on a pro rata basis rather than on a short rate basis.