New York State Seal
STATE OF NEW YORK
INSURANCE DEPARTMENT
ONE COMMERCE PLAZA
ALBANY, NEW YORK 12257

George E. Pataki
Governor

Howard Mills
Superintendent

The Office of General Counsel issued the following opinion on April 4, 2006 representing the position of the New York State Insurance Department.

Re: Use of Sweep Account for Premium Funds; Account Interest.

Question Presented:

If a licensed insurance producer maintains a "sweep account" for premium funds, who is entitled to the interest that is earned on the deposits?

Conclusion:

Under New York Ins. Law § 2120(a) (McKinney Supp. 2006) and N.Y. Comp. Codes R. & Regs. tit. 11, § 20.3(b)(4) (Regulation 29), interest generated on premiums collected or return premiums belongs to the insurer or insured, respectively, unless the insurance producer has an agreement with such insurer or insured for the insurance producer to retain the interest.

Facts:

The inquirer represents several insurance agents in his area. He states that some of his clients believe that Opinion of General Counsel No. 06-01-09 (January 6, 2006) indicates that insurance agents "can earn interest on premium funds by utilizing a ‘sweep account’ as long as the account is an FDIC insured money market account and not a mutual fund." It is presumed that his clients believe that they have an ownership right to such interest for the reason that the funds have been deposited in a sweep account.

Analysis:

The manner in which the inquirer's clients have interpreted Opinion of General Counsel No. 06-01-09 (January 6, 2006) is incorrect. The opinion addressed only whether "sweep accounts" could be used by insurance producers and under what circumstances; and did not alter the Department’s position on the ownership of the interest earned on such accounts.

With respect to "sweep accounts", the Department stated in Opinion of General Counsel No. 06-01-09 as follows:

Transfer of premium funds above the minimum required for a checking account into a money market account does not violate New York State Insurance Law § 2120 or Regulation 29 as long as both accounts are properly identified as premium accounts kept in banks authorized to do business in this State. N.Y. Ins. Law § 2120(a) makes insurance agents and brokers responsible in a fiduciary capacity for all funds received or collected as an agent or broker and the agent or broker, without the express consent of his or its principal, cannot mingle funds with his or its own funds or with funds held by him or it in any other capacity.

Section 20.3(b)(4) of N.Y. Comp. R. & Regs. tit. 11, Part 20 (Regulation 29) provides, in relevant part, as follows:

(b) Every insurance agent and every insurance broker is responsible as a fiduciary for funds received by such agent or broker in such capacity; all such funds shall be held in accordance with the following paragraphs:

* * *

(4) No withdrawals from a premium account shall be made other than for payment of premiums to insurers, payment of return premiums to assureds, transfer to an operating account of (i) interest, if the principals have consented thereto in writing .

With respect to the ownership of interest earned on premium funds, the Department concluded in Opinion of General Counsel No. 02-03-19 (March 21, 2002) that pursuant to N.Y. Ins. Law § 2120 (a) and § 20.3(b) of N.Y. Comp. Codes R. & Regs. tit. 11, Part 20 (Regulation 29):

[U]nless the agent has a written agreement with the principal that allows the agent to retain the interest generated on the funds deposited in an interest bearing account, such interest belongs to the principal. Thus, in instances where the funds on deposit represent premiums collected plus interest, the written consent of the principal/insurer is required before the interest can be transferred to the agent’s operating account. In instances where funds on deposit represent return premiums plus interest, the written consent of the principal/insured is required before the interest can be transferred to the agent’s operating account.

The above is applicable to interest earned on premium funds regardless of the type of account utilized to hold the funds.

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