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Commingling of Funds.

* As recent New York State Department of Financial Services' disciplinary actions show, several brokers have been the subject of disciplinary action for commingling funds insurance premium funds with business operating expense funds and/or using premium funds for personal expenses. Other related actions have involved insurance agents collecting premium payments and failing to timely remit such funds to the applicable insurer. As a general rule, under New York law, an insurance broker has a duty not to commingle premium funds it receives for transmissions to an insurance company nor to commingle return premiums it receives for transmission to an insured and funds must be transmitted promptly.

Specifically, New York Insurance Law [section] 2120 imposes a fiduciary duty upon insurance agents and brokers regarding funds received or collected. This statute prohibits the commingling of any such funds with the insurance agent's or broker's own funds, unless there is consent to commingle. This statute further requires "prompt" remittance of such funds, although no set number of days is specified.

In addition, New York State Insurance Regulation 29 ("Fiduciary responsibility of insurance agents and brokers; premium accounts"), which was promulgated to facilitate compliance with Section 2120, sets forth requirements for holding such funds and imposes limitations on withdrawals from premium accounts. Specifically, it prohibits withdrawals from a premium account for anything "other than for payment of premiums to insurer, payment of return premiums to assureds, transfer to an operating account of (i) interest, if the principals have consented thereto in writing and (ii) commissions, or withdrawal of voluntary deposits, provided, however, that no withdrawal may be made if the balance remaining in the premium account thereafter is less than aggregate net premiums received but not remitted."

Although no New York Insurance Law or regulation sets forth a specific time frame upon which an insurance agent or broker must remit such collected premiums, a standard of reasonableness would likely be imposed. Indeed, the Office of General Counsel has opined that "where it is obvious that an insurance agent or broker failed to remit collected premiums within a reasonable period of time (i. e., keeping collected premiums until a notice of cancellation has been sent, and until the day before the policy is set to cancel, when the premiums had been sent by the insured in a timely fashion), such circumstance may be evidence of an agent's or broker's untrustworthiness and may form the basis of a Department investigation." Thus, unless there is a specific agreement with the principal, any unnecessary delays in remitting premium funds should be avoided.

In short, absent certain exceptions, an insurance agent or broker may not commingle premium funds with non-premium funds. Nor may an insurance broker deduct unpaid commissions from premiums collected absent a written agreement without authorization. All funds collected should be remitted promptly, and without unnecessary delay, particularly a delay that could prejudice the insured. It is advisable to frequently review premium accounts and any automatic payments or other withdrawals or debits that may be inappropriate such as bank services fees and to be extremely careful in delegating any online bill pay and bookkeeping duties. A sub-licensee is the designated responsible person and therefore accountable for shortfalls in a premium account or mishandling of funds, which may go unnoticed until a check bounces or an investigation calls for the production of bank account statements.

SARI GABAY, ESQ.

Sari Gabay is a go-to Insurance regulatory lawyer representing insurance agents, brokers and public adjusters in Department of Financial Services' investigations, complaints, and hearings and In relicensing applications. She represents sellers and purchasers of insurance agencies and other businesses. Sari also reviews and interprets Insurance policies and advises homeowners, venues, and other policyholders in insurance coverage disputes, in addition to her general law practice. Sari is a frequent speaker and author on issues in the insurance industry, and most recently spoke on October 3, 2018 on DFS' Regulation 208 and the ensuing Article 78 proceeding. Sari is also among PIA's Circle of Consultants.
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Title Annotation:[LEGAL UPDATE]
Author:Gabay, Sari
Publication:Insurance Advocate
Date:Jun 10, 2019
Words:663
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