OGC Opinion No. 07-01-09

The Office of General Counsel issued the following opinion on January 29, 2007, representing the position of the New York State Insurance Department.

RE: Premium financing - Return of Premium pursuant to Section 3428

Questions Presented:

1. If the premium for an excess line insurance policy is financed pursuant to a premium finance agreement and the policy is cancelled before the end of the policy, is the insurer required to return the unearned premium on a pro-rata basis?

2. If the premium for an insurance policy that is subject to premium audit is financed pursuant to a premium finance agreement and the policy is cancelled before the end of the policy, may the insurer take the difference in premium, if any, into account when calculating unearned premiums to be returned, if any?

Conclusions:

1. Pursuant to N.Y. Ins. Law § 3428(a) and (d) (McKinney Supp. 2006), if the premium for an excess line insurance policy is financed pursuant to a premium finance agreement and the policy is cancelled before the end of the policy period, the unauthorized insurer must return to the bank, lending institution, premium finance agency or sales finance company whatever gross unearned premiums are due under the insurance contract, with the specific amount due to be determined by provisions of the contract. Such unearned premiums must be returned within a reasonable time not to exceed 60 days after the effective date of cancellation.

2. Yes. If the premium for an insurance policy that is subject to premium audit is financed pursuant to a premium finance agreement and the policy is cancelled before the end of the policy, the insurer is to take into account the adjustment to premium resulting from the audit in calculating unearned premiums, if any.

Facts:

The inquirer sent a letter to the Department complaining that his premium finance company had not received a return of premium from ABC Insurance Company, an unauthorized insurer. The policy in question had been cancelled effective February 6, 2006. According to the inquirer's letter to the Department, the reason given by the insurance company for not returning premium under the policy was that the company was awaiting a premium audit.

The inquirer also filed a complaint with the Department against DEF Insurance Company, an authorized insurer, stating that the insurer has reduced the premium to be returned from a cancelled insurance policy financed under a premium finance agreement, by additional premium found to be due as a result of a premium audit. The inquirer contended that the return monies due his finance company were separate from any monies due as a result of premium audits.

Analysis:

N.Y. Ins. Law § 3428 (McKinney Supp. 2006), as amended, provides, in relevant part, as follows:

(a) 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.

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(d) Whenever an insurance contract 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, the insurer or insurers within a reasonable time not to exceed sixty days after the effective date of the cancellation shall return whatever gross unearned premiums are due under the insurance contract or contracts to the bank, lending institution, premium finance agency or sales finance company, for the benefit of the insured.

(e) 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)

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With regard to the inquirer's question about whether the return premium due from an excess line insurer must be calculated on a pro rata basis, the inquirer noted Opinion of General Counsel No. 03-11-09 (November 12, 2003), in which the Department stated that the “insurer must return whatever gross unearned premiums are due under the insurance contract or contracts on a pro rata basis . . . [but] may, however, retain a minimum earned premium of ten percent of the gross premium of $60, whichever is greater.” However, N.Y. Ins. Law § 3428 was subsequently amended by Chapter 743 of the Laws of 2004.

According to the Senate's Memorandum in Support, the purpose of the amendment was to:

clarif[y] that where an excess line insurance policy has been procured by an insured who finances the premium under a premium finance agreement and the policy is terminated, the amount of minimum earned premium an excess line insurer may retain on the policy is subject to the minimum earned premium provision as disclosed in the policy. Id.

In a letter from the Banking Department to the Department, dated August 11, 1994, the Banking Department, interpreting N.Y. Banking Law § 554(8), which has not since been amended, stated that ". . . entities financing policies for unauthorized insurers would be under the purview of Article 12-B [the premium financing article] if payments were made to an insurance broker or agent." In Opinion of General Counsel No. 03-11-09 (November 12, 2003), the Department stated that "[i]n excess line placements, since all transactions by the insured are conducted through the excess line broker and not directly with the insurer, the financing arrangement is a premium finance agreement . . ."

Section 554(8) of Article 12-B of the N.Y. Banking Law (LEXIS 2006) defines "premium finance agreement" as follows:

"Premium finance agreement" means a promissory note or other written agreement by which an insured promises or agrees to pay to, or to the order of, either a premium finance agency or an insurance agent or broker the amount advanced or to be advanced under the agreement to an authorized insurer or to an insurance agent or broker in payment of premiums on an insurance contract, together with a service charge as authorized and limited by law. If the premium finance agreement is payable to, or to the order of, an insurance agent or broker not licensed as a premium finance agency, payments under the agreement must be payable at the office of a premium finance agency named in the agreement, to whom the agreement is by its terms to be and is subsequently assigned. The term "premium finance agreement" does not include a retail installment [sic] credit agreement which complies with the provisions of paragraph (b) of subdivision eleven of section four hundred thirteen of the personal property law.

Pursuant to N.Y. Ins. Law § 3428(a), since unauthorized insurers are not subject to the rate filing provisions contained in Article 23, the terms of the insurance policy govern the amount of premium to be returned by the insurer in the event that an insured that has purchased insurance on an excess line basis and financed the premium under a premium finance agreement where the amount is advanced or is to be advanced under the agreement to an insurance agent or broker in payment of premiums on an insurance contract, and the policy is cancelled before the end of the policy period.¹ N.Y. Ins. Law § 3428(d) requires that any such return of unearned premiums, including from a cancelled excess line policy for which the premium is financed by a premium finance agreement, be provided within a reasonable time not to exceed sixty days after the effective date of the cancellation of the policy. The inquirer also argued that, with respect to a commercial general liability insurance policy that is subject to a premium audit and for which premiums are financed through a premium finance agreement where the policy is canceled prior to its expiration, the return monies due the finance company are separate from any monies due as a result of premium audits. However, pursuant to N.Y. Ins. Law § 3428(e) and (d) (McKinney Supp. 2006), a return of premium is required only when the insurer has gross unearned premiums. If the particular policy provides for a premium audit and the premium audit is conducted, the insurer is to take into account the adjustment to premium resulting from the audit in calculating unearned premiums, if any. If, after taking into account the results of the premium audit, the insurer still has unearned premiums in its possession, the unearned premiums must be returned. Otherwise, no return of premium will be due. Given that the statute provides no exceptions, the fact that a policy provides for a premium audit does not change the insurer's obligation under this section to return unearned premiums within sixty days after the effective date of cancellation. Any audit should be conducted within a sufficient time period to permit the return of the unearned premium within the sixty day period required by the statute.

For further information you may contact Assistant Counsel Brenda Gibbs at the Albany Office.

¹ It must be noted that N.Y. Banking Law § 576(1)(f) provides for a pro rata refund but, as did the prior iteration of N.Y. Ins. Law § 3428, allows a minimum earned premium on a policy in the amount of ten percent of the gross premium or sixty dollars, whichever is greater. Although N.Y. Banking Law § 576(1)(f) has not been amended to make the statute consistent with the 2004 amendments to N.Y. Ins. Law § 3428, it could be argued that the failure to do so at the time amendments were made to N.Y. Ins. Law § 3428 was an oversight by the drafters. See Lichtenstein v. Grossman Const. Corp., 221 A.D. 527, 225 N.Y.S. 118 (2d Dept. 1927) (in interpreting an amendment, the court stated that it was "justified in assuming that it was intended by the Legislature to change the law then existing . . .") mod. 248 N.Y. 390, 162 N.E. 392 (1928). However, the Department offers no interpretation of the provisions of N.Y. Banking Law § 576(1)(f), since such an interpretation is within the jurisdiction of the New York State Banking Department.