OGC Op. No. 08-06-11
The Office of General Counsel issued the following opinion on June 25, 2008, representing the position of the New York State Insurance Department.
RE: Electronic Commerce Pursuant to Insurance Law § 6611
May an advance premium co-operative property/casualty insurance company pass a resolution that provides for electronic funds transactions and remain in compliance with Insurance Law § 6611?
Yes. An advance premium co-operative property/casualty insurance company may pass a resolution that provides for electronic funds transactions and comply with the Insurance Law, provided that the company also maintains the underlying records required pursuant to Insurance Law § 6611.
The inquirer reports that his company is an advance premium co-operative property/casualty insurance company that is considering passing a resolution that provides for electronic funds transactions pursuant to Insurance Law § 6611. The inquirer points out that Insurance Law §§ 6611(a)(4)(B) through (D) refer to physical checks and cash, but do not mention electronic fund transactions, on-line banking, direct deposit of paychecks, or Automated Clearing House (ACH) Network debits and credits for accepting and returning policy premiums and making commission payments and other expenses. ACH is an electronic funds transfer system.
The inquirer submitted the proposed resolution of The Board of Directors for the Department’s review, and asks whether it complies with the Insurance Law. The proposed resolution reads as follows:
The undersigned certifies that the following resolution was duly adopted at a meeting of the Board of Directors of … [“Corporation”]…at which a quorum was present and acted throughout:
WHEREAS, the Corporation maintains records under section 6611 of the New York Insurance Law, and;
WHEREAS, the Corporation collects and disburses funds; and
WHEREAS, the ACH Network is a very reliable and efficient nationwide batch-oriented electronic funds transfer system governed by the NACHA operating rules which provide for the interbank clearing of electronic payments for participating depository financial institutions; and
WHEREAS, the Corporation now has the capability to remit and receive funds electronically by ACH:
THEREFORE BE IT RESOLVED that the Board of Directors authorize (sic) the officers of the Company to initiate ACH debits and credits in compliance with procedures conforming to section 6611 of the New York Insurance Law and NACHA operating rules.
BE IT FURTHER RESOLVED, that the President of the Corporation is hereby authorized and directed to take all actions necessary or appropriate to implement the foregoing resolutions, including, but not limited to:
1. The execution of required bank agreements;
2. The procurement and maintenance of authorization agreements;
3. The establishment of Company policies and procedures; and
4. The execution of any notification or agreements required by the New York State Insurance Department.
The inquiry centers around electronic funds transactions. The New York Insurance Law does not impose any particular restrictions on the use of electronic fund transfers by insurers and/or their employees for the acceptance or distribution of funds, but New York’s Electronic Signatures and Records Act (ERSA) governs such matters. See N.Y. State Tech. Law §§ 301 – 309 (McKinney 2005); Opinion of Office of General Counsel No. 05-12-21 (December 27, 2005). Under ESRA and the Department’s precedents, an insurer may not require fund transactions to be made electronically, and must obtain from its insureds approval to transfer funds in such manner. Further, although the Insurance Law does not specifically require an insurer to institute security measures to prevent fraudulent financial transactions by its employees, the Department expects insurers to adhere to practices that ensure that adequate safeguards are in place.
Insurance Law § 6611 governs how every co-operative property/casualty insurance company must keep and maintain books of account and records. Insurance Law § 6611(a)(4) reads in relevant part as follows:
(A) The books of account shall include a cash book and general ledger together with the necessary supplemental and subsidiary records including a loss register showing all losses of which the corporation has had notice and the disposition or settlement thereof and a record of its investments.
(B) All cash and checks collected including policy and survey fees shall be reported as income.
(C) All checks issued shall be signed either by two officers or by one officer upon the written order of another officer, except as otherwise provided by resolution of the corporation's board of directors or in its by-laws for handling of miscellaneous expenses.
(D) Checkbook stubs, bank statements and cancelled checks shall be kept on file for at least seven years.
Thus, whether the company may accept and return policy premiums and make commission payments electronically, the company still must comply with the requirements of Insurance Law § 6611.
As the inquirer notes, Insurance Law §§ 6611(a)(4)(B) through (D) refer to physical checks and cash, but make no mention of electronic fund transactions, on-line banking, direct deposit of paychecks, or ACH Network debits and credits for accepting and returning policy premiums and making payments for commissions and other expenses. However, Insurance Law § 6611(a)(4)(C) requires that “[a]ll checks issued shall be signed either by two officers or by one officer upon the written order of another officer…”. The Department has interpreted that provision to permit electronic signatures. See Circular Letter No. 33 (November 4, 1999). Therefore, so long as the company’s checks either are signed electronically by two officers or signed electronically by one officer upon the written order of another officer, the requirements of Insurance Law § 6611 will be satisfied.
The only exception in Insurance Law § 6611(a)(4)(C) to the signatory requirements discussed in the preceding paragraph arises with regard to the handling of miscellaneous expenses. Pursuant to Insurance Law § 6611(a)(4)(C), the company may provide by resolution of the corporation's board of directors or in its by-laws for the handling of miscellaneous expenses.
Please be advised, too, that, the company must retain records according to the standards set forth in 11 NYCRR Part 243 (Regulation 152), which governs the format and retention of records held by insurers. Financial records are one of the many types of records that a company must maintain in accordance with Regulation 152. Such records may be kept in any “durable medium,” 11 NYCRR § 243.3(a)(1), which “may include paper; facsimile; or photographic, micrographic, magnetic, optical, mechanical or electronic media,” 11 NYCRR § 243.1(c). Thus, the company may lawfully retain financial records electronically as long as the electronic format constitutes a durable record within the meaning of 11 NYCRR § 243.1(c).
For further information you may contact Associate Attorney Elizabeth Barrett at the New York City Office.