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August 2017 -- The E&O Report

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 August 2017
Volume 29, Number 8

Premium Trust Accounts

One of the most frequent subjects of a New York State Department of Financial Services investigation of insurance agents and brokers might be the handling of premium funds. In this issue of The E&O Report, we discuss New York laws and regulations applicable to how insurance agents and brokers should handle premium money and the proper operation and maintenance of premium trust accounts.

​​​On a Related Note
Please also feel free to let us know about any issues or topics that you may want us to address in future issues of The E&O Report. Many of the topics we write about in The E&O Report originate from issues agents and brokers bring to our attention through telephone calls and emails. If you have any ideas in this regard, please reach out to Jim Keidel​ and let him know what you have in mind. From our experience, an issue that one New York insurance agent or broker is facing may actually be much larger and affect many other producers across the state.

New York Insurance Law specifically provides that every insurance agent and broker serves as a fiduciary for all funds received or collected in their capacity as agents or brokers. Generally, this duty means an agent or broker collecting 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 customer. In order to fulfill this fiduciary duty, insurance agencies and brokerages maintain premium trust accounts that are used for premium funds.

Premium trust accounts are regulated pursuant to New York Insurance Law § 2120 and NY Official Compilation of Codes Rules & Regulations, title II, § 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 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 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.

Premium trust accounts are an invaluable tool for insurance agents and brokers to ensure smooth and efficient operation of their businesses and stay in compliance with New York 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 strictly comply with the regulations and guidance set forth by the DFS 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 DFS over it handling of premium funds.

Submitted by:
James C. Keidel, Esq.
Keidel, Weldon & Cunningham, LLP

Keidel, Weldon & Cunningham, LLP concentrates its practice in the defense of insurance agents and broker's errors and omissions claims and litigation, errors and omissions loss control counsel and education, insurance coverage analysis and litigation and insurance regulatory matters. Please direct any comments or questions to James C. Keidel, Esq. by mail to the main office of Keidel, Weldon & Cunningham, LLP, at 925 Westchester Avenue, Suite 400, White Plains, NY 10604, telephone at (914) 948-7000 or e-mail at jkeidel@kwcllp.com. The law firm also maintains offices in Syracuse, New York; New York City, New York; Wilton, Connecticut; Fair Lawn, New Jersey; Warwick, Rhode Island, Philadelphia, Pennsylvania, Williston, Vermont and Naples, Florida.
 
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