As we have written in The E&O Report and discussed during recent seminars and webinars, regulatory investigations of insurance agents and brokers by the New York Department of Financial Services (“NYDFS") have risen tremendously over the past several years. One of the most frequent areas of an investigation concerns the handling of premium funds. In this issue of the E&O Report, we 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.
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 is the insurer or the customer. In order to fulfill this fiduciary duty, insurance agencies and brokerages maintain premium trust accounts that are only used for the premium funds.
Premium trust accounts are regulated pursuant to NY Insurance Law §2120, (a Statute), and NY Official Compilation of Codes Rules & Regulations, title II, §20.3(b) (a Regulation...# 29). NY Insurance Law §2120(a) provides, in pertinent part as follows:
Based upon the above provision, an insurance agent or broker that receives insurance premiums from an insured, or return premiums from an insurer, holds those funds in trust as a fiduciary. Additionally, NY Insurance Regulation 29, provides the framework for the fiduciary responsibilities of insurance agents and brokers with respect to what must be done concerning the transmittal of premiums to insurers and insureds.
Under NY Law insurance agents and brokers are not required to maintain premium trust accounts, provided that they make immediate remittance to insurers and insureds of any premium funds that they receive, such as premiums to the insurers or return premiums to the insured. Unfortunately, NY Regulation 29, does not define the time frame considered to be an “immediate remittance" to an insurer or insured. Accordingly, as a practical matter, most agencies and brokerages maintain one or more premium trust accounts to handle premium 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". It is very important that the identification of the bank 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 exactly as it is 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. But withdrawals from premium trust accounts are only permitted for the following purposes:
- As payment of premiums to insurers or payment of return premiums to insureds.
- 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 the aggregate net premiums received by the agency or brokerage 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. 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, a fine 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.
We are aware that 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 NYDFS has approved the use of sweep accounts as premium trust accounts provided, however, these accounts 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 FDIC federal insurance 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 NYDFS 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.
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.