OGC Opinion No. 07-04-05

The Office of General Counsel issued the following opinion on April 4, 2007 representing the position of the New York State Insurance Department.

Re: Licensed resident reinsurance intermediaries

QUESTIONS PRESENTED:

1. May a licensed resident reinsurance intermediary establish and maintain a fiduciary account in a foreign bank for the benefit of its client?

2. May a licensed resident reinsurance intermediary establish and maintain a fiduciary account in a New York depository for the benefit of its client whereby the funds are held in a foreign currency?

CONCLUSIONS:

1. No. A licensed resident reinsurance intermediary may establish and maintain a fiduciary account for its client, but not in an out-of-state depository, not even an overseas branch of a New York bank.

2. Yes. With respect to maintaining a fiduciary account in New York with monies denominated in a foreign currency, the Department, in this particular instance, has no objections.

Facts:

The inquirer reports that it is a licensed reinsurance intermediary that is domiciled in New York and that it represents a ceding Canadian insurer, which has entered into a contract with a Bermuda reinsurer. Pursuant to the agreement between the parties, all monetary transactions will use Canadian dollars. Therefore, the inquirer expresses an interest in establishing a separate fiduciary account for the benefit of the ceding insurer whereby all deposits will be in Canadian currency. The inquirer wishes to know if there are restrictions to maintaining the account, including the location of the depository.

Analysis:

A reinsurance intermediary acts as a broker in soliciting, negotiating, or selling any reinsurance contract or binder, or acts as an agent in accepting any reinsurance contract or binder on behalf of the insurer (New York Insurance Law § 2106 (McKinney 2006)).

Insurance Law § 2120 (McKinney 2006) governs the fiduciary capacity of insurance agents, insurance brokers and reinsurance intermediaries. It reads, in relevant part, as follows:

(b) Every reinsurance intermediary acting as such in this state shall be responsible, in a fiduciary capacity for all funds received or collected in such capacity, and shall not, without the express consent of his or its principal or principals, mingle any such funds with his or its own funds or with funds held by him or it in any other capacity.

(c) This section shall not require any such agent, broker or reinsurance intermediary to maintain a separate bank deposit for the funds of each such principal, if and as long as the funds so held for each such principal are reasonably ascertainable from the books of account and records of such agent, broker or reinsurance intermediary, as the case may be.

Section 32.3 of N.Y. Comp Codes R. & Regs. (“NYCRR”) tit. 11, Pt. 32 (Regulation 98) (2005), which was promulgated pursuant to, among other sections, Insurance Law §§ 2120(b) and (c), applies to reinsurance intermediaries and is relevant to your inquiry. Section 32.3 provides:

(a) Every person, firm, association or corporation acting as reinsurance intermediary in this State, is responsible as a fiduciary for funds received by such reinsurance intermediary, in such capacity. All such funds shall be held in accordance with the following rules:

(1) A reinsurance intermediary shall deposit funds received in one or more appropriately identified accounts in a bank or banks duly authorized to do business in this State, from which no withdrawals shall be made except as hereinafter specified (any such account is hereinafter referred to as "a premium and loss account"). A licensed nonresident reinsurance intermediary may use a bank not authorized to do business in this State, provided such bank is a member of the Federal Reserve System. [Emphasis supplied].

The pertinent language in 11 NYCRR § 32.3 is identical to the language in 11 NYCRR § 20.3, which applies to agents and brokers. Consequently, the Department construes these provisions in pari materia.

In interpreting 11 NYCRR § 20.3, the Department has opined that an agent or broker may maintain an interest bearing premium account in a financial institution duly authorized to transact business in New York and duly authorized by the governmental departments or agencies having jurisdiction over it to maintain such accounts. Such institutions include state and national banks, savings banks, and state and federal savings and loan associations, but out-of-state depositories, including overseas branches of New York banks, are not acceptable. See Office of General Counsel Opinions dated October 7, 1968, August 12, 1987, and October 23, 2000.

Based on the foregoing, the inquirer may, as a licensed resident reinsurance intermediary, maintain a separate fiduciary account for the funds of its foreign client. However, the account must be with a financial institution that is located in New York and that is duly authorized to transact business in this State.

With respect to maintaining a fiduciary account in New York with monies denominated in a foreign currency, the Department, in this particular instance, has no objections. The inquirer represents a ceding Canadian insurer who has an agreement with a Bermuda reinsurer that all transactions will occur in Canadian dollars. Furthermore, all the risks of the ceding insurer are located in Canada, and the reinsurer will pay these claims in Canadian dollars. Given these facts, it is reasonable that the fiduciary account would be maintained in Canadian dollars.

Please note that since a reinsurance intermediary has a fiduciary relationship—a relationship in which one person is under a duty to act for the benefit of another on matters within the scope of the relationship¹—with its client, the inquirer is subject to prudent rules of investing. As a fiduciary, it is incumbent on the inquirer to ensure that all premium monies are protected under federal insurance limits. See Office of General Counsel Opinions dated September 28, 1990 and October 23, 2000.

Federal banking laws are relevant when deposits in this State are maintained in a foreign currency. Banks and Banking, Federal Deposit Insurance Corporation, 12 C.F.R. § 330 (1999) governs federal deposit insurance coverage. 12 C.F.R. § 330.3(c) provides:

Deposits maintained by foreigners and deposits denominated in foreign currency. The availability of deposit insurance is not limited to citizens and residents of the United States. Any person or entity that maintains deposits in an insured depository institution is entitled to the deposit insurance provided by the Act and this part. In addition, deposits denominated in a foreign currency shall be insured in accordance with this part. Deposit insurance for such deposits shall be determined and paid in the amount of United States dollars that is equivalent in value to the amount of the deposit denominated in the foreign currency as of close of business on the date of default of the insured depository institution. The exchange rates to be used for such conversions are the 12 PM rates (the "noon buying rates for cable transfers") quoted for major currencies by the Federal Reserve Bank of New York on the date of default of the insured depository institution, unless the deposit agreement specifies that some other widely recognized exchange rates are to be used for all purposes under that agreement, in which case, the rates so specified shall be used for such conversions.

The Federal Deposit Insurance Corporation (FDIC) limits its insurance coverage of foreign currency by its equivalent US dollar value at the close of each business day. Because a reinsurance intermediary is a fiduciary with a responsibility to invest funds prudently, the inquirer is responsible for ensuring that when there are fluctuations in the currency market, the dollar value of the fiduciary account does not exceed the insurable amount.

For further information you may contact Assistant Attorney Sapna Maloor at the New York City office.

¹ Black’s Law Dictionary (Bryan A. Garner., Ed., 8th Ed. 2004)