OGC Op. No. 09-01-06

The Office of General Counsel issued the following opinion on January 15, 2009, representing the position of the New York State Insurance Department.

RE: Return of Unearned Premium from Producer-Canceled Assigned Risk Policy

Question Presented:

1) May an insurer cancel an assigned risk policy that is subject to a premium finance agreement at the behest of a producer because the insured’s check, which was deposited in the producer’s premium account, was dishonored by the bank upon which it was drawn?

2) To whom must the insurer return the canceled policy’s unearned premium?

Conclusion:

1) Yes. An insurer may cancel an assigned risk policy that is subject to a premium finance agreement at the behest of a producer that requests cancellation in accordance with New York Auto Insurance Plan (“NYAIP”) § 18(4).

2) The insurer must return, from the canceled policy’s unearned premium, the amount paid by the premium finance agency, pursuant to N.Y. Ins. Law § 3428(d) (McKinney 2007). Further, the insurer must return the remainder, if any, to the producer that requested cancellation, as authorized by NYAIP
§ 18(4), because the insured’s check, which was deposited in the producer’s premium account, was dishonored by the bank upon which it was drawn.

Facts:

An inquirer set forth the following as facts applicable to the inquiry:

Insured applied for coverage under NYAIP and gave producer a deposit of $247.00 by personal check, with intent to finance the balance via premium finance agency. Producer then issued an agency check payable to NYAIP for $172.00 and a finance company draft for $112.00 and submitted application and deposits to the Plan. The required 25% deposit was met, as was the required split between producer check and finance company draft, 15%/10%. The insurer . . . issued the policy with a premium of $1,118.00. The insured’s check subsequently was returned unpaid by his bank for the reason “Account Closed.” . . . The proceeds of the finance agreement were never received from the premium finance company. The earned premium was computed to be $149.00.

Although the inquirer originally stated that the premium finance agency never remitted the policy premium, he later confirmed that $112 of the $284 received by the insurer as deposit premium was submitted as a draft drawn on the premium finance agency’s account. Thus, the premium finance company paid 40% of the deposit premium and the producer paid the remaining 60%.

Based on the information provided, there is a balance of $135 that is returnable as unearned premium on the canceled policy. The inquirer asked whether the unearned premium should be remitted to the producer or to the premium finance agency.

Analysis:

A producer of an assigned risk policy may cancel an insured’s coverage pursuant to NYAIP § 18(4), which states:

4. Cancellation at the Request of Producer

An insurer shall, at the request of a producer, cancel the entire policy in conformity with the Vehicle and Traffic Law where a producer submits proof that a check, tendered by the insured to be used for the payment of premium, and which has been deposited in the producer’s premium account, has been refused payment by the bank upon which it has been drawn. Such cancellation shall be on a pro rata basis, subject to the minimum retained premium charge prescribed in the Minimum Premium Rule in the Plan Manual, whichever is greater, and the unearned portion of the paid premium, if any, shall be returned to the producer to the extent of the amount of the dishonored check.

An assigned risk policy that has been premium financed may be also subject to Banking Law § 576, which reads in relevant 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 for 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.

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(d) 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 shall 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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(f) 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.

NYAIP § 18(4) and Banking Law § 576 are not in conflict. The Banking Law provision merely establishes the procedures by which a premium finance agency may cancel a policy when it is not paid by the insured. NYAIP § 18(4), by contrast, provides a narrow exception to the usual rule that precludes a producer from canceling a policy. A producer of an assigned risk policy may request cancellation if the insured’s check is dishonored, pursuant to NYAIP § 18(4), regardless that the policy is subject to a premium finance agreement.

Insurance Law § 3428(e) also is relevant to the inquiry. That statute states:

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 or 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. (Emphasis added.)

Indeed, in stating “[w]henever an insurance contract . . . is cancelled,” Insurance Law

§ 3428(e) denotes that a premium financed policy may be canceled by someone other than the premium finance agency.

Although Insurance Law § 3428(e) provides that the unearned premium on a canceled policy must be returned to the premium finance agency, regardless as to who canceled the policy, it would be patently unfair, and unjustly enrich the premium finance agency, to construe the statute to require an insurer to return all unearned premiums to the premium finance agency in a situation such as that presented here, where the agency did not pay the entire premium. Instead, the unearned premium should be returned to the premium finance agency only to the extent that it advanced the premium.

Thus, under the facts presented the unearned premium is $135, and the premium finance agency advanced $112 on behalf of the insured. Hence, the insurer should return $112 to the premium finance agency, pursuant to Insurance Law § 3428(e). The remaining $13 should be returned to the producer, pursuant to NYAIP § 18(4).

For further information you may contact Associate Attorney Sally Geisel at the New York City Office.