New York State Seal
STATE OF NEW YORK
INSURANCE DEPARTMENT
25 BEAVER STREET
NEW YORK, NEW YORK 10004

David A. Paterson
Governor

James J. Wrynn
Superintendent

OGC Op. No. 10-02-07

The Office of General Counsel issued the following opinion on February 23, 2010, representing the position of the New York State Insurance Department.

Re: Premium Financed Policies: Pro-Rata Refund

Question Presented:

Must an authorized insurer make a pro rata return of a financed insurance premium to a premium finance agency for the benefit of the insured irrespective of who cancels the policy?

Conclusion:

Yes. Pursuant to N.Y. Ins. Law § 3428(e) (McKinney 2009), an authorized insurer must return the gross unearned premium due under the financed insurance contract on a pro rata basis to the premium finance agency for the benefit of the insured. However, the insurer is entitled to a minimum earned premium of 10 percent of the gross premium or $60, whichever is greater.

Facts:

The inquiry is of a general nature, without reference to particular facts.

Analysis:

Insurance Law § 3428 is relevant to the query. The statute, which addresses the calculation of a return insurance premium, reads as follows:

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.

Insurance Law § 3428(e), however, provides that:

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.

Insurance Law § 3428(e), in setting forth the calculation necessary to determine an authorized insurer’s retained premium and unearned premium return to the premium finance agency, makes no distinction regarding who cancels the policy or for what reasons. See Opinion of Office of General Counsel No. 08–04–13 (April 7, 2008). The statute requires the insurer to return the gross unearned premium due under the insurance contract on a pro rata basis, because the gross premium is considered to be earned over the course of the policy term. Id. Thus, the insurer must return the portion of the premium charged for the unexpired portion of the policy term to the premium financed agency for the benefit of the insured. Id. However, the insurer is entitled to a minimum earned premium of 10 percent of the gross premium or $60, whichever is greater.

For further information you may contact Supervising Attorney D. Monica Marsh at the New York City Office.