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

George E. Pataki
Governor

Howard Mills
Superintendent

The Office of General Counsel issued the following opinion on June 15, 2006, representing the position of the New York State Insurance Department.

Non-payment cancellation based on dishonored premium checks in sweep accounts

Question Presented:

After an insured’s premium check that was deposited in an insurance producer’s premium sweep account was dishonored and the insurer had already withdrawn funds representing the premium from the producer’s account, may an insurer reimburse the insurance producer for the premium, issue a bill directly to the insured for the premium, and issue a notice of cancellation for non-payment of the premium if the insured fails to pay the bill?

Conclusion:

Except with respect to an assigned risk automobile insurance policy, an insurer may not reimburse the insurance producer for the premium, issue a bill directly to the insured for the premium, and issue a notice of cancellation for non-payment of the premium if the insured fails to pay the bill after an insured’s premium check that was deposited in an insurance producer’s premium sweep account was dishonored and the insurer had already withdrawn funds representing the premium from the producer’s account.

Facts:

A New York licensed insurance agent has arranged for the insurers that the agent represents to electronically "sweep" the agent’s premium trust account for premiums that are due. Premiums that are due are automatically withdrawn and transferred to the insurer. Sometimes the agent’s bank will dishonor a customer’s check due to insufficient funds even after the insurer has already withdrawn the premium payment from the agent’s account. The agent then asks for the insurer to reimburse the premium to him/her. After the insurer reimburses the agent, the insurer issues a bill directly to the insured for the premium. Should the insured fail to pay this bill, the insurer will issue a notice of cancellation for non-payment of premium.

Analysis:

This Department has recently opined that, except with respect to an assigned risk automobile insurance policy, an insurer may not cancel a policy for non-payment of premium when the insured’s check that had been deposited in the insurance producer’s sweep account was dishonored and the insurer had already withdrawn funds representing the premium from the producer’s account. Opinion of General Counsel No. 06-05-12 (May 30, 2006).1

In the facts of that May 30, 2006 opinion, the insured’s check was dishonored for insufficient funds, the producer advised the insurer, who returned to the producer an amount equivalent to that of the dishonored check, and a cancellation notice was then issued by the insurer.

The only difference with the May 30, 2006 fact pattern and this fact pattern is that in this case the insurer first issues a bill directly to the insured for the premium and then, after that bill is not paid, the insurer issues a cancellation notice for non-payment of the premium. However, since the insurer has already been paid, the insurer has no basis to bill the insured directly for the premium.

The insurer, once it is paid out of the producer’s account, may not cancel a policy for non-payment. The producer’s remedy is to pursue the insured for the monies owed as a result of the dishonored check.

For further information you may contact Senior Attorney Elizabeth Barrett at the New York City Office.


See opinion at http://www.ins.state.ny.us/ogco2006/rg060512.htm on the Department’s website.