The Office of General Counsel issued the following informal opinion on July 18, 2001, representing the position of the New York State Insurance Department.

Re: Responsibility for Unpaid Premiums

Question Presented:

May an insurance broker be held responsible by an insurance agent for the payment of an insured’s unpaid premium?

Conclusion:

Generally speaking, an insurance broker is not responsible for the payment of its insured’s unpaid premium, unless the agreement between the insurance broker and insurance agent states otherwise, or the insurance broker binds coverage without the insured’s authority to do so.

Facts:

An insurance broker has worked with a managing agent/wholesaler ("MGA") for the placement of insurance during the year 2000. With respect to such insurance placement, the insurance broker stated that all but one of its insureds paid the premiums due and that the insurance broker remitted the premiums that it received net of commission to the MGA. The one insured failed to pay the additional premium due on its auto policy. The insurance broker stated that the MGA deducted the additional premium due from the credits on other policies on the insurance broker’s statement. The insurance broker essentially questioned whether the MGA could lawfully hold it accountable for the unpaid premiums of its insureds.

Analysis:

The Insurance Law does not hold an insurance broker responsible for the payment of its insured’s unpaid premium. However, an insurance broker that places insurance without the insured’s authorization may be held responsible for paying the premium earned prior to the expiration or cancellation of the policy. See Aetna Life Ins. Co. v. Pelham, 59 Misc. 225, 110 N.Y.S. 220 (App. Term 1908). But where the facts warrant a court’s finding of a quasi-contract, the insured will be held responsible for paying the earned premium. See C.H. Nelson Agency Inc. v. Gravdahl, 183 A.D.2d 1037, 583 N.Y.S.2d 675 (3^rd Dep’t 1992).

In Rosensweig v. Whitney, 221 A.D. 8, 10, 222 N.Y.S. 87, 91 (1^st Dep’t 1927), the court held that a rating organization may not by rule make all insurance brokers, conditionally or otherwise, responsible for the payment of their insureds’ earned premiums. While the court stated that "[a] provision that a known agent for a known principal shall be liable for the latter’s obligation is not a ‘rule’ at all", the court also stated: "This so-called rule might be effectuated by contract between two willing parties…." Hence, an agreement between an insurance broker and insurance agent may place responsibility for premium payment on the insurance broker. See also Ruby S.S. Corp. Ltd. v. Johnson & Higgins, 12 F.2d 138 (S.D.N.Y. 1926), aff’d by 18 F.2d 948 (2d Cir. 1927), petition denied 275 U.S. 544, 48 S.Ct. 83 (1927), which involved an American insurance broker that was obligated to a British insurance broker, through whom insurance had been placed, for the payment of premium.

An agreement between an insurance broker and insurance agency is a private contract governing the relationship between the parties that the Department will not interfere with, provided that the agreement does not otherwise violate the Insurance Law.

Whether the MGA’s actions that the insurance broker described are lawful depends upon the circumstances under which the additional premium situation arose, and upon the terms of the insurance broker’s contractual agreement with the MGA.

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