OGC Opinion No. 08-07-13
The Office of General Counsel issued the following opinion on July 17, 2008, representing the position of the New York State Insurance Department.
RE: Gross Unearned Premium
Questions Presented:
1. Does the term “gross unearned premium,” as used in N.Y. Ins. Law § 3428 (McKinney 2007), include additional premium imposed after the inception of a policy on account of a premium audit?
2. Does a retail insurance broker have a duty to inform other parties that an additional premium has been imposed?
3. Does a wholesale insurance producer have the authority to set a policy termination date different from that requested by a premium finance company?
Conclusions:
1. Yes. The term “gross unearned premium” includes additional premium imposed after the inception of a policy on account of a premium audit.
2. No. Neither the Insurance Law nor the regulations promulgated thereunder impose a duty on a retail insurance broker to inform other parties that an additional premium has been imposed.
3. No. Unless the wholesale producer is a managing general agent (“MGA”) of an insurer, a wholesale producer does not have the authority to set a policy termination date different from that requested by the premium finance company that is cancelling the policy.
Facts:
The inquirer presents two scenarios. In the first scenario, a previously insured liability risk, the premiums of which were financed by a premium finance company, was inspected during an insurer audit of the insured’s books and records, which resulted in an additional premium. Subsequently, the policy was cancelled due to the insured’s failure to pay. The insurer calculated the return premium due the premium finance company on the basis of the original premium, plus the additional premium. The premium finance company, which was unaware of the additional premium, received less money back than if the gross unearned premium had been calculated on the basis of the original premium alone. The premium finance company is pursuing the wholesale broker, who also was unaware of the additional premium, for the difference. The inquirer asks whether: 1) the return premium needs to be based on the original premium alone, or the original premium plus the additional premium, and 2) the retail broker has a duty to inform each party that the additional premium was imposed after the inspection.
In the second scenario, a premium finance company requested cancellation of a policy as a result of nonpayment. The cancellation request was sent to a wholesale insurance producer, who revised the cancellation date to some later date. Consequently, the premium finance agency received less unearned premium than it expected. (It is unclear from the inquiry whether the wholesale insurance producer is an MGA.) The inquirer asks whether the wholesale insurance producer has the authority to determine the date of cancellation.
Analysis:
Insurance Law § 3428 is relevant to the first query regarding “gross unearned premium.” That statute reads in pertinent part as follows:
(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.
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(d) Whenever an insurance contract, the premiums for which are advanced under a premium finance agreement as defined in section five hundred fifty-four of the banking law,1 is cancelled, the insurer or insurers within a reasonable time not to exceed sixty days after the effective date of the cancellation shall return whatever gross unearned premiums are due under the insurance contract or contracts to the bank, lending institution, premium finance agency or sales finance company for the benefit of the insured.
(e) Whenever an insurance contract, issued by or on behalf of an authorized insurer or insurers, the premiums for which are advanced under a premium finance agreement as defined in section five hundred fifty-four of the banking law, is cancelled, upon such cancellation the authorized insurer or insurers shall return the gross unearned premiums due under the insurance contract or contracts, on a pro rata basis to the bank, lending institution, premium finance agency of premium finance company, for the benefit of the insured, provided, however, that such authorized insurer or insurers shall be entitled to retain a minimum earned premium on the policy of ten percent of the gross premium or sixty dollars, whichever is greater.
Insurance Law § 3428(a) sets forth the amount of earned premium that may be retained by an insurer after an insurance contract has been terminated or cancelled. The amount of the earned premium that must be retained is based on the applicable rate filing with the Department, if the insurer has made such a filing. If no rate filing has been made and the premium is not stated in the policy, then the amount of the earned premium is based on the insurer’s manual rating rules. See Office of General Counsel (“O.G.C.”) Opinion No. 03-06-18 (June 19, 2003).
However, pursuant to Insurance Law § 3428 (d) and (e), a premium financed by a premium finance company that is cancelled need only be returned to the premium finance company when there are “gross unearned premiums.” The “gross premium” is earned over the course of the policy term, whereas “gross unearned premium” constitutes the portion of the premium charged for the unexpired portion of the policy term. See O.G.C. Opinion No. 08-04-13 (April 7, 2008). Any additional rate premium would be included as part of the “gross unearned premium” if it is included in the insurer’s rate filing, stated in the policy, or is set forth in the insurer’s manual rating rules. If a premium audit is conducted, the insurer must take account of the adjustment of premium resulting from the audit in calculating unearned premiums, if any. If, after taking account of the results of the audit, the insurer still has unearned premiums in its possession, the unearned premiums must be returned. See O.G.C. Opinion No. 07-01-09 (January 29, 2007).
The “gross unearned premium” returned to the premium finance company differs based on whether the insurer is authorized or unauthorized. The amount of money that an unauthorized insurer must return to the premium finance company is the “gross unearned premium” due under the insurance contract pursuant to Insurance Law § 3428(d). A different rule applies for the cancellation of a policy issued by an authorized insurer pursuant to Insurance Law § 3428(e). Such an insurer must return the “gross unearned premium” calculated on a pro rata basis to the premium finance company with the insurer retaining earned premium of ten percent of the gross premium or sixty dollars, whichever is greater. See O.G.C. Opinion No. 06-07-02 (July 5, 2006).
In response to the second query, neither the Insurance Law nor the regulations promulgated thereunder impose a duty on a retail insurance broker to inform the other parties of the additional premium resultant from a premium audit. It is possible that an insured may be under a contractual obligation to inform the premium finance company of the additional premium, but the Department has reviewed no such contracts in connection with the present inquiry.
The third query asks about the authority of a wholesale broker to set a policy termination date different from that requested by a premium finance company. New York Banking Law § 576 (McKinney 2005) governs the methods of prospective cancellation applicable to a premium finance agency with the requisite power to act on behalf of the insured. That statute reads in pertinent part as follows:
(1) When a premium finance agreement contains a power of attorney or other authority enabling the premium finance agency to cancel any insurance contract or contracts listed in the agreement, the insurance contract or contracts shall not be cancelled unless such cancellation is effectuated in accordance with the following provisions:
(a) Not less than ten days written notice shall be mailed to the insured at his last known address as shown on the records of the premium finance agency, of the intent of the premium finance agency to cancel the insurance contract unless the default is cured within such ten day period and that at least three days of mailing such notice is added to the ten day notice. A copy of the notice of intent to cancel shall also be mailed to the insurance agent or broker.
After the notice in paragraph (a) above has expired, the premium finance agency may thereafter, in the name of the insured, cancel such insurance contract by mailing to the insurer a notice of cancellation stating when thereafter the policy be cancelled, and the insurance contract shall be cancelled as if such notice of cancellation had been submitted by the insured himself, but without requiring the return of the insurance contract. A copy of the notice of cancellation shall also be mailed to the insured.
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(b) The insurer or insurers within a reasonable time not to exceed sixty days after the effective date of cancellation, shall return whatever gross unearned premiums are due under the insurance contract or contracts on a pro rata basis to the premium finance agency for the benefit of the insured or insureds. However, upon such cancellation the insurer or insurers shall be entitled to retain a minimum earned premium on the policy of ten percent of the gross premium or sixty dollars, whichever is greater.
By its terms, Banking Law § 576 allows a premium finance agency to prospectively request cancellation of an insurance policy on behalf of the insured. The cancellation of a policy, however, cannot be earlier than the date that the notice of cancellation is received by the insurer. See O.G.C. Opinion No. 07-07-03 (July 3, 2007); O.G.C. Opinion No. 06-08-02 (August 2, 2006). In fact, in order to avoid a retroactive cancellation, the Department has opined that pursuant to General Construction Law § 19 (McKinney 2006), the cancellation does not actually take effect until the calendar day after the request for cancellation is received by the insurer. See O.G.C. Opinion No. 07-07-03 (July 3, 2007); O.G.C. Opinion No. 06-08-02 (August 2, 2006).2
Neither Banking Law § 576 nor any other New York law specifies the latest date that an insurer may cancel the policy after it receives notice from the premium finance company. But the Court of Appeals, relying on the common law, has held that the cancellation occurs upon the insurer’s receipt of the cancellation notice from the premium finance company. See Savino v. Merchants Mutual Ins. Co., 44 N.Y.2d 625 (1978); Crump v. Unigard Ins. Co., 100 N.Y.2d 12 (2003). Thus, the policy is cancelled upon receipt of the cancellation notice by the insurer. See O.G.C. Opinion No. 07-07-03 (July 3, 2007).
Insurance Law § 3428(c), in pertinent part, provides that “[n]o authorized insurer shall honor a power of attorney or other authority to cancel and insurance contract executed by an insured in connection with insurance premium financing, except in accordance with section five hundred seventy-six of the banking law.” Therefore, a wholesale producer does not have authority to cancel the policy for the insured, or change the cancellation date set by the premium finance company. See O.G.C. Opinion No. 04-09-08 (September 15, 2004). In addition, receipt of a cancellation request by a wholesale producer generally does not result in a cancellation.
However, if the wholesale producer is an MGA, the cancellation would take effect upon receipt of the cancellation request by the MGA. An MGA is defined in Section 33.1 of the N.Y. Comp. Codes R. & Regs. (“NYCRR”) tit. 11, Part 33 (Regulation 120) as follows:
Any person, firm, association or corporation that:
(1) manages all or part of the insurance business of an insurer (including the management of a separate division, depart or underwriting office);
(2) acts as an insurance agent as defined in section 2101(a) of the Insurance Law for such insurer, whether known as a managing general agent, manager, or other similar term, or acts as an insurance broker as defined in section 2101(c) of the Insurance Law; and
(3) with or without the authority, either separately or together with affiliates, produces, directly or indirectly, and accept or reject risks on behalf of the insurer (underwrites) an amount of gross direct written premium equal to or more than five percent of the policyholder surplus as reported in the last annual statement of the insurer in any one quarter or year together with one or more of the following activities related to the business produced:
(i) adjusts or pays claims in excess of $25,000; or
(ii) negotiates reinsurance on behalf of the insurer.
An MGA may act for an insurer once the appointing insurer files a prescribed form with the Department within thirty days of the appointment pursuant to 11 NYCRR § 33.3(b).3 However, it is unclear based on the facts presented whether the producer about which the inquirer asked is an MGA.
Please be advised, too, that any questions about the scope or interpretation of provisions in the N.Y. Banking Law may be directed to the New York State Banking Department.
For further information you may contact Associate Counsel Alexander Tisch at the New York City Office.
1 Banking Law § 554 (8) (McKinney 2005) defines a premium finance agreement as follows:
“Premium finance agreement” means a promissory note or other written agreement by which an insured promises or agrees to pay to, or to the order of, either a premium finance agency or an insurance agent or broker the amount advanced or to be advanced under the agreement to an authorized insurer or to an insurance agent or broker in payment of premiums on an insurance contract, together with a service charge insurance agent or broker in payment of premiums on an insurance contract, together with a service charge as authorized or limited by law. If the premium finance agreement is payable to, or to the order of, an insurance agent or broker not licensed by a premium finance agency, payments under the agreement must be payable at the office of a premium finance agency named in the agreement, to whom the agreement is by its terms to be and is subsequently assigned. The term “premium finance agreement” does not include a retail installment credit agreement which complies with the provisions of paragraph (b) of subdivision eleven of section four hundred thirteen of the personal property law.
2 General Construction Law § 19 defines the meaning of a day as follows: “A calendar day includes the time from midnight to midnight. Sunday or any other day of the week specifically mentioned means a calendar day.”
3 An MGA that is properly licensed as an insurance agent in New York, and is a member of a holding company system is exempted from the requirements of 11 NYCRR § 33, et seq. See O.G.C. Opinion No. 02-12-17 (December 18, 2002).