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 July 5, 2006, representing the position of the New York State Insurance Department.

RE: Return Premium to Premium Finance Company

Questions Presented:

1) When insurance premiums are advanced under a premium finance agreement as defined in N.Y. Banking Law § 5541 and the policy for which such premiums have been financed is canceled, is it the obligation of the insurer to return the unearned premiums to the premium finance agency, regardless that the premiums are in the possession of the insurance agent that placed the insurance?

2) When must the unearned premiums be returned to the premium finance agency?

3) May commissions paid to an insurance agent or broker be deducted from the refund of unearned premiums that are to be remitted to the premium finance agency?

Conclusions:

1) Yes, when insurance premiums are advanced under a premium finance agreement as defined in N.Y. Banking Law § 554 and the policy for which such premiums have been financed is canceled, it is the obligation of the insurer to return the unearned premiums to the premium finance agency, regardless that the premiums are in the possession of the insurance agent that placed the insurance, pursuant to N.Y. Ins. Law § 3428(d) and (e).

2) The unearned premiums must be returned to the premium finance agency within a reasonable time after the effective date of the cancellation, which is not to exceed 60 days, pursuant to N.Y. Ins. Law § 3428(d).

3) No, commissions paid to an insurance agent or broker may not be deducted from the refund of unearned premiums that are to be remitted to the premium finance agency.

Facts:

An employee of a premium finance agency noted in his inquiry that N.Y. Banking Law § 576(f) requires an insurer to remit return premiums to a premium finance agency, which had financed premium on a policy that is later canceled, within 60 days after policy cancellation. He inquired as to whether an insurance agent that is in possession of the return premium is under the same obligation to return the premium due to the premium finance agency within 60 days after cancellation.

The inquirer also presented a hypothetical situation in which the insurer sends the unearned commission on the financed policy to its managing general agent, who then sends the unearned commission to the insurance agent. The insurance agent then fails to remit the unearned commission to the premium finance agency. The inquirer questioned whether it is the obligation of the insurer or the insurance agent to refund the unearned commission to the premium finance agency, regardless that the insurance agent is in possession of the return commission.

Analysis:

N.Y. Ins. Law § 3428(d) and (e) (McKinney Supp. 2006) state:

(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 insurer2 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, when insurance premiums are advanced under a premium finance agreement as defined in N.Y. Banking Law § 554 and the policy for which such premiums have been financed is canceled, the amount that an unauthorized insurer would have to return to the premium finance company would be the gross unearned premiums due under the insurance contract. The amount that an authorized insurer would have to return to the premium finance company would be the gross unearned premiums calculated on a pro rata basis less ten percent of the gross premium or sixty dollars, whichever is greater. Either way, the statute places the responsibility for remitting the unearned premium to the premium finance company upon the insurer. The statute makes no exception for a situation where the insurer is not in possession of the premium; it is still the obligation of the insurer to remit the payment.

As stated in the statute, the payment must be remitted to the premium finance agency within 60 days after the effective date of cancellation.

Whether an insurance agent or broker is required to return any part of the commission received after the policy is canceled is determined by the contract between the insurer and the agent or broker. In the absence of such a contractual requirement, the agent or broker is generally not required to return already-received commissions to the insurer.3 See Western Nat’l Ins. Co. v. Haph, 277 A.D. 6, 97 N.Y.S.2d 447 (1st Dep’t 1950), aff’d 302 N.Y. 678 (1951).

However, that does not excuse the insurer from having to remit the unearned premium that is due the premium finance agency. The Department has consistently maintained its position that commissions paid to an insurance agent or broker may not be deducted from the refund of unearned premiums that are to be remitted to the premium finance agency. See Office of General Counsel Opinions dated 3/22/05, 12/5/02, 10/3/96, and 8/3/95.

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


1  N.Y. Banking Law § 554(8) defines a premium finance agreement as: “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 credit agreement which complies with the provisions of paragraph (b) of subdivision eleven of section four hundred thirteen of the personal property law.”

2  N.Y. Ins. Law § 107(a)(10) defines an authorized insurer as: “an insurer authorized as such to do an insurance business in this state in compliance with this chapter, by reason of a license so to do issued and in force pursuant to the laws of this state or of a corporate charter granted and in force pursuant to the laws of this state, but not including any insurer herein exempted from compliance with the requirement that it obtain a license to do business.”

2  However, The New York Automobile Insurance Plan and the New York Property Insurance Underwriting Association rules provide that in the event of the cancellation of a policy placed through them, the producer of record shall return the unearned portion of the commissions.