STATE OF NEW YORK
25 BEAVER STREET
NEW YORK, NEW YORK 10004
|George E. Pataki
RE: Fiduciary Accounts
1. May an insurance agent deposit fiduciary funds in a "sweep account"?
2. May an insurance agent keep the interest earned from the "sweep account"?
1. Yes, an agent may deposit fiduciary funds in a "sweep account". However, the "sweep account" must be properly identified as a premium account and must comply with N.Y. Comp. Codes R. & Regs. tit. 11, Part 20 (2005) (Regulation 29), which governs the use of premium accounts.
2. No, the agent may not keep the interest earned on a "sweep account" unless the agent has received permission to do so from the principal.
An insurance agent who collects premium payments from clients and deposits them into a premium account inquired whether funds from a premium account may be deposited into a "sweep account." The funds would be transferred to the "sweep account" nightly in order to earn interest, and deposited back into the premium account the following morning.
Insurance agents and insurance brokers are responsible in a fiduciary capacity for all funds received or collected as an agent or broker. Premium accounts of insurance agents and insurance brokers are regulated pursuant to N.Y. Ins. Law § 2120 (McKinney 2005) and § 20.3 of N.Y. Comp. Codes R. & Regs. tit. 11, pt. 20 (2005) (Regulation 29).
N.Y. Ins. Law § 2120(a) states in pertinent part:
Every insurance agent and every insurance broker acting as such in this state shall be responsible in a fiduciary capacity for all funds received or collected as insurance agent or insurance broker, and shall not, without the express consent of his or its principal, mingle any such funds with his or its own funds or with funds held by him or it in any other capacity.
Section 20.3(b)(4) (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:
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(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
An insurance agent or broker may utilize a "sweep account" to satisfy the requirements of § 2120 and Regulation 29 and transfer funds from another premium account into the "sweep account". However, both accounts must be clearly identified as premium accounts; the agents or brokers own funds may not be mingled with the premium funds, and both accounts must comply with Regulation 29.
With respect to interest earned on premium funds, the Department concluded in Office of General Counsel Opinion dated 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 agents 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 agents operating account.
The above is applicable to interest earned on premium funds regardless of the type of premium account utilized to maintain the funds.
For further information you may contact Principal Attorney Paul A. Zuckerman at the New York City Office.