April 2021 |  Volume 36, Number 4

In this E&O Report, we would like to address several scenarios that we have seen concerning the return of premium and its relationship to the commission earned by an insurance agent or broker.  As this is a very generalized writing this month, we encourage any readers with specific questions relating to the issues that we cover in this E&O Report to contact us

We begin with this predicate. As one of my coverage partners correctly often says as the default position of any coverage analysis “What does the insurance contract say?" That simple, but powerful, statement applies to the examination of the rights and duties of anybody that is a party to a contract. Thus, it applies to an insurance broker or agent as to the payment, or repayment, of commissions to the insurer.

Having set that foundation, the issue that we would like to address is twofold.

1.  When a property/casualty insurance contract has been cancelled, may an insurer deduct any commissions paid to an insurance agent or broker for such policy from the refund of unearned premiums due to the insured?
2. In such circumstances, what is the obligation of the agent or broker, if any, to refund commissions on such cancelled property/casualty insurance policy to the insurer?

The facts that we recently dealt with for a client concerned the following scenario. The insured had a policy but wound up not doing the business that the policy provided coverage for, and, thus, it was cancelled. For the sake of this E&O Report, assume that there was no Minimum Earned Premium provision and no Pro Rata earned premium issue. Also, the policy was cancelled flat with the full amount of the premium required to be returned to the Insured.

Exaggerating the amounts for the sake of making the point, the premium charged was $180,000.00 and of that total the commission was $30,000.00. The insurer returned $150,000.00 to the insured without saying anything more in the letter accompanying the return premium check. The insured, getting bad advice from others, thought that the broker was legally required to return its commission to the insured to make it whole. Clearly, the insurer, without explicitly saying so, was suggesting that “sotto voce" as they say. That is when we got involved for the broker.

First, one factor that the insured thought supported its position was the fact that the broker was able to deduct its commission from the full premium payment to the insurer before remitting to it the $150,000.00. We pointed out that the premium was charged by and to be paid to the insurer. That the insurer chose to reduce certain administrative steps by allowing the broker to deduct its commissions rather than have the insurer send the commission back, (or make some other credit or debit adjustment), does not change the fact that the insurer charged and is owed the full premium by the insured. Thus, this notion of the insured was negated as wrong.

Second, there is a New York Department of Financial Services Office of General Counsel opinion on this issue and we recite the substance of the Department position herein.[1] As to question #1, the opinion states that when a property/casualty insurance contract has been cancelled, the insurer may not deduct any commissions paid to a broker for such policy from the refund of unearned premiums that are due the insured. [In addition, a broker who has received such a refund on behalf of the insured may not deduct from that refund, any commissions the broker is obligated to repay the insurer].

As to question # 2, the answer is more nuanced. The default position is that, as we stated above, a broker's obligation, if any, to refund commissions to an insurer upon cancellation of the property/casualty insurance policy, is governed by the contract, if any, between the insurer and the broker. Critical to know is the New York courts have held that in the absence of an agreement requiring a broker to refund commissions to an insurer upon cancellation of the policy, the broker is not generally required to return any commissions.[2]  

As an aside, the Department opinion, and also the Western National Insurance Company court case referred to above, both state that there are instances in which the general rule will not apply, including where an insurance policy is an auditable policy or dependent upon any future agreement between the parties to the insurance contract, or where the broker has induced the cancellation.

As we previously stated, this is an E&O Report painted with the broadest of brush strokes concerning the return of premium and its relationship to the earning of a commission by an insurance agent or broker.  If any of the insurance agents or brokers reading this E&O Report have any specific questions relating to the issues that we cover, or anything else, please do not hesitate to contact us.

Submitted By:

Howard S. Kronberg, Esq.
Keidel, Weldon & Cunningham, LLP

[1] New York Department of Financial Services, Office of General Counsel Opinion No. 05-03-29, Return of Commissions, issued March 22, 2005.

[2] Western National Insurance Co. v. Haph, 277 A.D. 6 (1st Dept. 1950) aff'd 302 N.Y. 678 (1951).