Banking Interpretations


April 14, 2005

Sapna Maloor
Legal Intern
Office of General Counsel
New York State Insurance Department
25 Beaver Street
New York , NY 10004

Re: Premium Finance Agency

Dear Ms. Maloor:

Your e-mail to Gene Brooks of the New York State Banking Department (the "Department") has been referred to me for a response. In your e-mail you inquired as to whether a premium finance company agency may pay a referral fee to an insurance company.

Section 566 (2)(a) of the Banking Law reads as follows:

"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, or shall give or offer to give any valuable consideration or inducement of any kind directly or indirectly, other than an article of merchandise not exceeding one dollar in value which shall have thereon the advertisement of the premium finance agency, but a premium finance agency may purchase or otherwise acquire a premium finance agreement, provided that it conforms to this article in all respects, from an insurance agent or broker or another premium finance agency with recourse against the agent, broker or agency on such terms and conditions as may be mutually agreed upon."

According to your e-mail, the Vice President of [ ] (the "Insurance Company") stated that the Insurance Company plans to provide various insurance brokers with finance agreements, which may be used to procure financing for consumer's insurance policies. As stated, in the event the insurance brokers use the services of Premium Finance Company (the "Premium Finance Company"), then the Premium Finance Company would pay the Insurance Company a flat fee for each accepted agreement.

Section 566 (2)(a) is very broad with reference to parties to whom premium finance agencies are prohibited from making payments to: It prohibits payments to "insurance agent[s] or broker[s], or any employee of an insurance agent or broker, or to any other person." As you can see, this is prohibited group, to whom payments as an inducement to financing cannot be made, is very inclusive and, would therefore, certainly include the Insurance Company. Further, the statute prohibits "any rebate whatsoever" after an insurance policy has been financed. The "flat fee" proposed to be paid by the Premium Finance Company to the Insurance Company fits squarely within this prohibition. Therefore, the arrangement proposed by the Vice President of [ ] Is a clear violation of § 566 (2)(a) of the Banking Law.

I trust the foregoing is responsive to your inquiry.

Very truly yours,

Harry C. Goberdhan

Assistant Counsel