The Office of General Counsel issued the following opinion on June 1, 2007, representing the position of the New York State Insurance Department.
RE: OGC Opinion No. 06-06-05; Non-payment cancellation based on dishonored premium checks in sweep accounts
After an insured’s premium check that was deposited in an insurance producer’s premium sweep account was dishonored and the insurer already had withdrawn funds representing the premium from the producer’s account, must an insurer reimburse the insurance producer for the premium, or may the insurer either issue a bill directly to the insured for the premium or issue a notice of cancellation for non-payment of the premium if the insured fails to pay the bill?
Except with respect to an assigned risk automobile insurance policy,1 an insurer need not reimburse the insurance producer for the premium, and may not either issue a bill directly to the insured for the premium or issue a notice of cancellation for non-payment of the premium, when an insured fails to pay the bill after the insured’s premium check that was deposited in an insurance producer’s premium sweep account was dishonored, and the insurer already had withdrawn funds representing the premium from the producer’s account.
A representative of a producers’ trade association in the State of New York questioned the validity of a June 15, 2006 opinion furnished by the Department’s Office of General Counsel. Specifically, the organization disagreed with the conclusion set forth above, and took the contrary position that “when an insurance agent accepts the insured’s check in good faith, deposits it in their premium account, and makes it available to be ‘swept’ by the insurer, they [sic] have stood in the insurer’s place.” The organization contended that where an insured’s bank has dishonored the insured’s check for insufficient funds, the insurer has in fact not been paid, and therefore is entitled to bill the insured directly for the premium. The organization further expressed concern that under the opinion in question, the agent has little recourse against the insured who acted improperly. The organization asked that the Department’s Office of General Counsel reconsider and reverse its position on this matter.
The position of the Department’s Office of General Counsel remains unchanged. The Insurance Department has long held that where an insurance agent or broker (“producer”) accepts an insured’s check in payment of an insurance premium, deposits the check in its own account, and then uses its own check in payment of the premium prior to the insured’s check being dishonored by the bank on which it was drawn, the producer’s sole recourse is to proceed against the insured for issuing a dishonored check. See, e.g., OGC Opinion No. 06-08-07 dated August 3, 2006; OGC Opinion No. 05-12-12 dated December 12, 2005; OGC Opinion No. 02-01-06 dated January 4, 2002; OGC Opinion dated December 17, 1996 and OGC Opinion dated December 9, 1975. Although the payment of a premium with a dishonored check is not a valid premium payment to the insurer, the insurer is deemed to receive a valid payment of the premium by way of the producer’s check that was honored by the bank. See OGC Opinion dated December 9, 1975. By substituting its check for that of the insured, the insurance producer in effect makes a loan to the insured, with the insured’s check serving as security for the loan.
The Department was asked to reconsider this issue in a prior inquiry, which posited that an insurance producer that receives the premium money in a fiduciary capacity is not in fact making a loan or advancing premium, but is merely passing the insured’s money through the premium account and forwarding the producer’s check to the insurer. In a December 17, 1996 opinion responsive to that inquiry, the Department adhered to its view that, in accepting and depositing the insured’s check into its own account, the producer acts at its peril and has no right to seek reimbursement from the insurer. The sole exception noted in that opinion was with regard to a policy issued under the NYAIP.
The Department acknowledges that under the circumstances presented, the producer has limited recourse against the insured who has issued a dishonored check. However, the agent or broker can take steps to protect itself against such defaults in a number of ways: by requiring the insured to provide a certified check; by declining to advance premium for the insured; by having the insured make the check payable to the insurer and then transmitting that check to the insurer; or by endorsing a check that has been made payable to the agent or broker, and then transmitting it to the insurer. See OGC Opinion No. 06-08-07 dated August 3, 2006.
In sum, given the Department’s longstanding position on this issue, and the lack of compelling statutory or case law to the contrary, we reaffirm OGC’s opinion that it would be improper (except to the limited extent authorized by the NYAIP rules) for an insurer to cancel a policy in the scenario presented.2
For further information you may contact Principal Attorney Paul A. Zuckerman at the New York City Office.
1 See NYAIP § 18(4), which states that under the New York Automobile Insurance Plan (NYAIP), a producer is required, rather than simply permitted, to advance premium payment when it has received payment in the form of a check that has not yet cleared in the producer’s premium account, and therefore may request cancellation in the event that the bank upon which the check was drawn subsequently dishonors the insured’s check.
2 The Department’s position does not extend to a managing general agent (MGA), which administers on behalf of the insurer and essentially acts as the insurer itself in servicing the policies.