NYSBL 554 and 555 and 566
February 6, 2006
Re: Article XII-B of the New York Banking Law
Dear [ ]:
Your letter dated November 15, 2005 to Sara Kelsey, Esq., New York State Banking Department (the “Department”), has been referred to me for response. In your letter you asked the following questions: (i) Whether Article XII-B of the New York Banking Law imposes a licensing requirement on a person, referred to herein as (the “Premium Finance Arranger”), that arranges a premium finance transaction between an insured and a premium finance agency, but does not itself finance the transaction? Can such Premium Finance Arranger be compensated by either the premium finance agency or the insured?
Article XII-B, Section 555 of the Banking Law prohibits:
[Any] person except a bank, state or federally chartered savings bank or savings and loan association, an authorized insurer or a lender licensed pursuant to article nine of this chapter [to] engage in the business of a premium finance agency without a license therefore obtained from the superintendent, as provided in this article.
Subsection 7 of Section 554 defines “premium finance agency” as:
(a) a person engaged, in whole or in part, in the business of entering into premium finance agreements with insureds, including a bank if so engaged; or
(b) a person engaged, in whole or in part, in the business of acquiring premium finance agreements from insurance agents or brokers or other premium finance agencies, including a bank if so engaged and an insurance agent or broker who is licensed as a premium finance agency and who holds premium finance agreements made and delivered by insureds to him or his order.
From the definition, it appears clear that a license under Article XII-B is required only if: (i) a person is a party to a premium finance agreement, whereby such person “enters into” the agreement; or (ii) a person “purchases” premium finance agreements. Therefore, based on the plain reading of the statute, if a person is merely arranging the transaction between the insured and the premium finance agency, no license is required.
As to your second question, a premium finance agency generally cannot compensate a Premium Finance Arranger, if such payments can be viewed as “inducements” for the Premium Finance Arranger to place contracts with the premium finance agency. This prohibition is clearly stated in Section 566 (2) (a) of the Banking Law, which in part states:
No premium finance agency, and no employee of such an agency shall pay, allow or offer to pay or allow in any manner whatsoever to an insurance agent or broker or any employee of an insurance agent or broker, or to any other person, either as an inducement to the financing of any insurance policy with the premium finance agency or after any such policy has been financed, any rebate whatsoever, either from the service charge for financing specified in the premium finance agreement or otherwise … .
However, if the payments to the Premium Finance Arranger can be viewed as payments for actual services provided, then such payments would not be considered inducements and therefore, not a violation of Section 566 (2) (a) of the Banking Law. In your letter you list the following illustrative services: (i) Searching the market; (ii) Preparing and providing underwriting information concerning policies; and (iii) Complying with documentation requirements. Although the following is not an exhaustive list, they are factors that might be considered in determining whether a payment to a Premium Finance Arranger is for “actual services performed” or a mere “inducement”: (i) Is there some rational relationship between the services performed and the compensation received; (ii) In light of market rate for similar services, is the compensation fair; (iii) Has the premium finance agency “shopped around” in order to determine whether the payment demanded or negotiated by the Premium Finance Arranger is the going rate.
Also, a Premium Finance Arranger, who is an insurance agent or broker, may be compensated by the insured if such compensation is agreed upon by the parties; provided, however, that financing by a premium finance agency should not be contingent upon such payment by the insured to the Premium Finance Arranger, nor should such financing be terminated in the event such payment is not made by the insured to the Premium Finance Arranger.
I trust the foregoing is responsive to your inquiry.
Very truly yours,
Harry C. Goberdhan