October 2020 |  Volume 35, Number 10

During the past year we have seen an increase in the number of regulatory investigations of insurance agents and brokers by the New York Department of Financial Services (“NYDFS"). One frequent area that insurance agents and brokers may be the subject of an investigation by the NYDFS concerns the handling of premium funds.   In this issue of the E&O Report, we will discuss the New York laws and regulations applicable to how insurance agents and brokers should be handling premium money and the proper operation and maintenance of premium trust accounts.

The New York Insurance Law specifically provides that every insurance agent and broker is a fiduciary for all funds received or collected in their capacity as agents or brokers.  Generally, this means that an agent or broker who collects money owes a duty of good faith and loyalty to the person for whom the money is being held, whether it be the insurer or the customer.  In order to fulfill this fiduciary duty, insurance agencies and brokerages maintain premium trust accounts that are used for the premium funds. 

Premium trust accounts are regulated pursuant to NY Insurance Law § 2120 and NY Official Compilation of Codes Rules & Regulations, title 11, § 20.3(b) (Regulation 29).  NY Insurance Law § 2120(a) provides, in pertinent part as follows:

[e]very insurance agent and every insurance broker acting as such in this state shall be responsible in a fiduciary capacity for all funds received or collected as insurance agent or insurance broker, and shall not, without the express consent of his or its principal, mingle any such funds with his or its own funds or with funds held by him or it in any other capacity.

Based upon the above Insurance Law provision, an insurance agent or broker receives insurance premiums in trust for transmission of the funds to the insurer.  Additionally, Insurance Regulation 29, provides the framework for understanding the fiduciary responsibilities of agents and brokers with respect to what must be done concerning the transmittal of premiums to insurers and the return of premiums to insureds.

Preliminarily, it should be noted that agents and brokers are not required to maintain premium trust accounts provided that 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 do 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 NYDFS 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 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 to be made if the balance remaining in the premium account after the withdrawal would be less than aggregate net premiums received but not remitted.  The most important thing for any agent or broker to remember when operating a premium trust account is that the agent or broker should never comingle their own funds with the funds being held in trust, without the written consent of their clients or insurers.  In fact, this is expressly set forth in the 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 NYDFS 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 the commingling of funds.  The payment of agency or brokerage commissions is one of the approved “withdrawals" from a premium trust account.

Premium trust accounts are an invaluable tool for insurance agents and brokers to ensure smooth and efficient operation of their businesses and compliance with NY Laws and Regulations.  However, the holding of money for another in a fiduciary capacity is a significant responsibility and must be handled properly.  The prudent insurance agent or broker should be sure to comply strictly with the regulations and guidance set forth by the NYDFS concerning the maintenance and operation of premium trust accounts.  Doing so will help ensure that the agency or brokerage does not run into trouble with the NYDFS related to its handling of premium funds.  

Submitted by:

James C. Keidel,Esq.

Keidel, Weldon & Cunningham, LLP