OGC Op. No. 11-06-04
The Office of General Counsel issued the following opinion on June 21, 2011 representing the position of the New York State Insurance Department.
Re: Two or More Producers Earning Interest on Premium Funds
If a retail agent were to collect an insured’s premium and retain the interest on that premium before remitting the premium to a wholesale agent who, in turn, would retain interest on the premium before submitting it to an insurer, then who is the “principal,” as defined by § 20.3 of New York Comp. Codes R. & Reg., tit. 11 (“11 NYCRR”), Part 20 (“Regulation 29”), with whom a written agreement must be made to retain the interest?
With respect to premiums collected, a wholesale agent should in all instances have an agreement with the insurer to retain the interest generated on the funds deposited, because the interest on the premium belongs to the insurer. Where a retail agent also retains some of the interest, the retail agent is doing so based on the wholesale agent’s agreement with the insurer to retain the interest. In other words, the retail agent is retaining interest that, by virtue of the agreement with the insurer, belongs to the wholesale agent. Accordingly, the retail agent’s principal, for purposes of § 20.3 of Regulation 29, is the wholesale agent.
The inquirer states that he represents a licensed producer acting as a wholesale agent. He further states that the wholesale agent has an agreement with various insurers to remit the premium to them within different lengths of time from when it is due. For example, with one insurer, the wholesale agent has an agreement to remit the premium within 10 days of the due date, whereas with another, the wholesale agent has an agreement to remit the premium within as much as 60 days from the due date. In some instances, a retail agent sells a policy and retains the premium in its account for a certain length of time pursuant to an agreement with the wholesale agent, but never exceeding the time within which the wholesale agent has agreed to submit the premium to the insurer. In those instances, in order for the retail agent to retain the interest earned on the premium, wholesale agent asks whether the retail agent must enter into a written agreement with the wholesale agent or with the insurer.
Insurance producers, agents and brokers alike serve as fiduciaries for all funds received or collected as an agent or broker. Premium accounts of insurance agents and brokers are regulated pursuant to N.Y. Ins. Law § 2120 (McKinney 2006). Insurance Law § 2120 provides:
Every insurance agent and every insurance broker acting as such in this state shall be responsible in a fiduciary capacity for all funds received or collected as insurance agent or insurance broker, and shall not, without the express consent of his or its principal, mingle any such funds with his or its own funds or with funds held by him or it in any other capacity.
In turn, § 20.3(b)(4) of Regulation 29 provides:
No withdrawals from a premium account shall be made other than for payment of premiums to insurers, payment of return premiums to assureds, transfer to an operating account of (i) interest, if the principals have consented thereto in writing and (ii) commissions, withdrawal of voluntary deposits; provided, however, that no withdrawal may be made if the balance remaining in the premium account thereafter is less than aggregate net premiums received but not remitted.
Accordingly, unless the agent has a written agreement with the principal that allows the agent to retain the interest generated on the funds deposited in an interest bearing account, such interest belongs to the principal. Thus, in instances where the funds on deposit represent premiums collected plus interest, the insurer is the principal and the written consent of the insurer is required before the interest can be transferred to the agent’s operating account. In instances where funds on deposit represent return premiums plus interest, the principal is the insured and the written consent of the insured is required before the interest can be transferred to the agent’s operating account. See Office of General Counsel Opinion dated March 21, 2002.
In the facts that the inquirer presents, there is more than one agent: a retail agent that collects the premium from the insured, and a wholesale agent, who receives the premium from the retail agent and submits the premium to the insurer. The inquirer asks whether the “principal” under Regulation 29 is the wholesaler or the insurer.
Assuming that the question asks about premiums collected and not return premiums, if the wholesale agent retains the interest, it must have an agreement with the insurer to retain the interest, because the interest on the premium belongs to the insurer. In such a case, where the retail agent also retains some of the interest, the retail agent is doing so based on the wholesale agent’s agreement with the insurer to retain the interest. In other words, the retail agent is retaining interest that, by virtue of the agreement with the insurer, belongs to the wholesale agent. Accordingly, the retail agent’s principal, for purposes of Regulation 29, is the wholesale agent. Thus, the retail agent must have the written consent of the wholesale agent before transferring interest into the retail agent’s operating account. If, however, the wholesale agent has no agreement with the insurer, then the insurer remains the principal and consent must be obtained from the insurer.
For further information, you may contact Senior Attorney Sapna Maloor at the New York City office.