The Office of General Counsel issued the following opinion on December 20, 2006 representing the position of the New York State Insurance Department.
Re: Insurance Producers Requirement to Return Commission
When a property/casualty policy is canceled midterm, is the insurance producer obligated to return the unearned commission to the insured?
When a property/casualty policy is canceled midterm, the insurance producer is not obligated to return the unearned commission to the insured. The insurer must return the entire unearned premium and may not deduct the unearned commission received by the producer from the return premium. Whether the insurance producer must return the unearned commission to the insurer is dependent on the terms of their contract. Under the New York Automobile Insurance Plan, the producer is obligated to return any unearned commission to the insured.
An attorney representing a trade association of insurance agents in New York inquired whether an insurance agent is required to return unearned commission on a property/casualty insurance policy that was canceled by the insured.
N.Y. Ins. Law § 3428 states in pertinent part:
(a) Except as provided in subsection (e) of this section, whenever an insurance contract made or issued in this state is cancelled or otherwise terminated by the insured before the expiration thereof in accordance with the terms of such contract, the earned premium to be retained by the insurer shall be determined by the applicable rate filing, if any, otherwise in accordance with the provisions of such contract.
The producer has no obligation to return the commission to the insured. Section 3428(a) states that, after an insurance policy is canceled, an insurer may retain only its earned premium. Therefore, it is the insurers obligation to return the gross unearned premiums to the insured or, in cases of financed policies, to the financing agency. The insurer may not compensate for the commissions paid to a producer by deducting the amount of the commission from the amount returned to the insured.
Whether a producer is required to return any part of the commission received on the canceled policy to the insurer depends on the terms of the producer-insurer contract. In the absence of an agreement requiring the producer to return commissions to the insurer upon cancellation of the policy, the producer 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) affd 302 N.Y. 678, 98 N.E.2d 481 (1951).
Producers are required to return unearned commissions for policies issued under the New York Automobile Insurance Plan (NYAIP). NYAIP part 14(D) provides in pertinent part:
In the event the policy is cancelled or insurance thereunder terminated, or a change is made resulting in a return premium to the insured, the producer of record shall return the unearned commission portion of such return premiums within 30 calendar days from the date of mailing of the notice to the producer.
A producer who sells a NYAIP policy must return the unearned commission to the insurer in the event of change or cancellation.
For further information you may contact Principal Attorney Paul Zuckerman at the New York City office.