Preliminarily, it should be noted that agents and brokers are not required to maintain premium trust accounts, provided they make immediate remittance to insurers and insureds of funds, such as premiums to the insurers or return premiums to insured. Regulation 29, however, does not define the time frame considered to be an “immediate remittance” to an insurer or insured. Therefore, as a practical matter, most agencies and brokerages maintain one or more premium trust accounts to handle these funds.

Agents or brokers who do not make immediate remittance of funds to insurers and insureds are required to deposit such funds in an “appropriately identified” account in a bank that is duly authorized to conduct business in New York state. An “appropriately identified” account should be designated as “premium fiduciary account,” “premium account” or “premium trust account.” Simply stated, the identification of the account should make it clear that the account is fiduciary in nature, as opposed to the operating account of the agency or brokerage. The name on the account must also be the name of the agency as approved for its operations by the DFS and cannot differ in any way.

Apart from funds received from insurers or insureds as the case may be, agents and brokers are permitted to make “voluntary deposits” into premium trust accounts. Pursuant to Regulation 29(b)(3), voluntary deposits are defined as “deposits made in excess of net premiums received but not remitted” and are used to maintain a minimum balance for the account, to guarantee that the account balance is adequate, or to pay premiums due but uncollected. Withdrawals from premium trust accounts are only permitted for the following purposes:

1. As payment of premiums to insurers or payment of return premiums to insureds.
2. To transfer to an operating account of an agency or brokerage under the following:
   a.     Interest on the amount held in trust, provided that the insurer or insured for whom the money is ultimately payable gives written consent for the agency or brokerage to retain such interest;
   b.     Commissions and withdrawal of voluntary deposits.

However, no withdrawals are permitted if the balance in the account after the withdrawal would total less than the aggregate net premiums received but not remitted. The most important thing for any agent or broker to consider when operating a premium trust account is that their agency or brokerage should never comingle its own funds with the funds being held in trust without the written consent of the client or insurer. In fact, this is expressly set forth in N.Y. Ins. Law § 2120 and Regulation 29. The commingling of funds and use of trust funds by an agent or broker, apart from those uses approved by Regulation 29, are serious violations that could lead to a state DFS investigation, fines and/or a suspension/revocation of the agency or brokerage license.

With respect to commissions owed to an insurance agency or brokerage, Regulation 29(b)(5) provides that a deposit of the full premium into a trust account (i.e., the net premium plus commissions owed to the agency or brokerage) is not considered a commingling of funds. The payment of agency or brokerage commissions is one of the approved “withdrawals” from a premium trust account.

We are aware a number of insurance agencies and brokerages use “sweep” accounts as premium trust accounts. A sweep account is an account in which the available cash balance is automatically and regularly transferred into another account that typically bears a higher return of interest. The state Department of Financial Services has approved the use of sweep accounts as premium trust accounts provided, however, these accounts should comply with Regulation 29. That is, the sweep account must be identified as a premium trust account established with a bank located in New York state, and all premium funds must be insured under Federal Deposit Insurance Corporation limits.

Sweep accounts holding U.S. Treasury Bills, accounts at brokerage firms, short-term obligations of federal or quasi-federal government agencies, non-bank money market accounts or other mutual funds have been deemed by the DFS as unacceptable because they are not bank accounts. Additionally, the interest generated on premiums collected or return premiums maintained in premium trust accounts (including higher-interest sweep accounts) belongs to the insurer or insured, respectively, unless the insurance agency or brokerage has a written agreement with the insurer or insured for the agency or brokerage to retain the interest.