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Premium Trust Accounts and Commissions

Question from an IIABNY member: I’ve had a chance to read Regulation 29 a couple of times now and I was wondering if you could just let me know if I understand it completely.  From the way I read it, it sounds like as agents we are not allowed to mix our earned commission with money we’re holding in trust in the same account, except in the instance where the commission hasn’t been taken from that customers payment yet.  And the only time we can make transfers out of that trust account is to pay a company or a customer, or to transfer our earned commission to our operating account. 

So basically, if we’re getting our direct billed commissions directly deposited into a checking account, to comply with this regulation they would have to go directly into our operating account, correct?  And I assume that would also refer to any profit sharing as well?  Does this sound like I’m understanding this? 

Also, do you see a lot of agents getting caught violating this regulation?

Answer: Basically, you can transfer money out of the premium account to: 

• Pay premiums to carriers
• Pay return premiums to clients
• Transfer earned interest to your operating account (assuming you have your carriers’ and clients’ permission to keep it)
• Transfer commissions to your operating account
• Transfer back to your operating account any deposits you made to the premium account voluntarily to maintain a minimum balance.

You are correct in that holding commission in the premium account does not violate the regulation. If your direct-billed commissions are going straight to your checking account, I really can’t think of a reason to move them to the premium account. The premium account is supposed to be only to hold premiums that you’ve received but not yet forwarded on to your carriers and clients. Since your direct-billed commissions aren’t intended for someone else, there’s no reason to put them in the premium account. Ditto for profit-sharing payments.

It’s common for agencies to get fined or worse for mixing up premium and operating funds. To get a feel, check out an of the Disciplinary Actions reports on the Financial Services Department’s Web site (reports issued since last October are here.) Open up one of the reports and do a text search for the word “commingled”. The latest report listed four agencies that were disciplined for that infraction.

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Referral Fees From a Public Adjuster To An Insurance Producer

Question from an IIABNY member: I have a few questions relating to disclosure of compensation. 

1. Does Regulation 194 relate to insurance broker (or insurance agent) compensation only from insurance companies, or does it also apply to compensation from outside vendors such as public adjuster fees?

2. Is it still legal for the broker of record to receive compensation from a public adjuster?

3. Is there a requirement for the broker to disclose the compensation received from the public adjuster to their insured? 

I just heard of a broker that received a letter from the New York Department of Financial Services asking for proof of the compensation disclosure they provided to their insured relating to the public adjuster fee.

Answer: In order -- 

1. It applies to compensation from any party. Section 30.2(a) of Regulation 194 defines producer compensation as:

(A)nything of value, including money, credits, loans, interest on premium, forgiveness of principal or interest, trips, prizes, or gifts, whether paid as  commission or otherwise.

Note that the definition makes no reference to the source of the compensation. Also, Section 30.3(a) states:

(A)n insurance producer selling an insurance contract shall disclose the following information to the purchaser orally or in a prominent writing at or prior to the time of application for the insurance contract:…

(2)  whether the insurance producer will receive compensation from the selling insurer or other third party based in whole or in part on the insurance contract the producer sells…” [EMPHASIS ADDED]

2. Yes, assuming the producer is acting as a broker and not an agent. New York Insurance Regulation 10, Public Adjusters, states in Section 25.3(b): 

(b) No (licensed public adjuster) shall divide any fee or give any fee, commission or other compensation to any person, firm or corporation for procuring, or assisting in procuring, the adjustment of any such loss for any such licensee or sublicensee, unless the person, firm or corporation to whom such fee, commission or other compensation is given or paid had at the time when the loss occurred:

(1) a public adjuster’s license issued and in force pursuant to section 123 of the Insurance Law, or

(2) an insurance broker’s license issued and in force and such licensee either was the broker of record in placing the insurance which was involved in the adjustment of the loss, whether or not designated in writing to act for the insured, or was designated to act for the insured in writing before a loss occurred. 

The Insurance Department issued an advisory legal opinion in 2007 stating that a public adjuster may not compensate an insurance agent for a referral. 

3. Yes. The department said in another 2007 opinion,

(T)he insurance broker must disclose the receipt of the compensation (from the public adjuster) to the insured pursuant to a written memorandum executed in accordance with the provisions of Insurance Law § 2119(c)(1).

This is the same provision in the law that requires a written memorandum to document brokers’ service fees. 

Follow-up question:  Just so I am clear… 

1. Is a broker required to disclose a PA fee at time of loss?

2. Is a producer NOT permitted to receive a PA fee if they are acting as an agent or does this section only pertain to the license held rather than the contract with the insurance company?

3. If a producer has policies renewing and has not sent a Reg194 letter, are they in violation of the law? (understanding is a producer only needs to provide a Reg 194 letter as new policies are written)

Answer: 

1. Section 2119(c)(1) does not specify a timeframe for providing the written memorandum, but the department has said over the years that the amount of a service fee should be reasonable in relation to the service provided. Thus, they are drawing a direct connection between the fee and the service. I think it’s logical to provide the disclosure at the time of the service, which in this case would be the time you arrange the marriage between the claimant and the PA.

2. As I interpret this, the prohibition applies to those policies for which you have acted as an agent. To illustrate, assume you’re a Company X agent. Your client owns a frame two-story office building 400 feet from Long Island Sound. Company X is willing to write the General Liability and Umbrella policies, but they don’t want any part of the property. You submit the property to a wholesaler who obtains a policy that provides better coverage than the New York Property Insurance Underwriting Association would, and the insured agrees to buy it.

The insured has two claims. A hailstorm damages one side of the building; the insured and the carrier get into a dispute about whether the settlement should include an amount to make the undamaged sides match the color and shade of the newly repaired side. You refer the insured to a PA. It would be legal for the PA to pay you a fee in this situation because you are acting as a broker with regard to the property coverage – you’re not an appointed agent of the carrier that wrote the insurance.

The second claim is a disputed liability claim. Again, you refer the insured to a PA. It would be illegal for the PA to pay you a fee because you are an appointed agent of the carrier that wrote the relevant policy (the GL.)

3. No. Section 30.5 of Regulation 194 states,

This (regulation) shall not apply…to renewals, except that if the purchaser requests more information about the producer's compensation less than 30 days prior to a renewal or less than 30 days after a renewal, the insurance producer shall disclose to the purchaser in a prominent writing the information required by subsection 30.3(b) of this Part within five business days.

Therefore, you have no legal obligation to provide a compensation disclosure with regard to a renewal policy unless the insured requests the information. 

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No-Faullt Reimbursement and Trust Clause

Question from an IIABNY member:Can you please explain the Reimbursement and Trust clause of the NY Basic PIP endorsement.  We have a client who was involved in an auto accident and was injured along with two children.  There is an argument between her carrier and the claimants carrier as to who should provide PIP benefits ( a story for another time)  Right now her carrier is providing the PIP benefits with the intent to go to arbitration against the claimant carrier.  In the meantime the liability department of the claimant carrier wants to negogiate a BI settlement and secure a release.  This will be for a nominal amount in the $3,000 range. It is my understanding that the carrier paying the PIP benefits has a right to be reimbursed for the first $50K of benefits.  The claimant's carrier says I'm wrong, it is everything over the first $50K.  I don't see that in the policy form unless I misunderstand it. My end goal (if the PIP carrier has a right to reimbursement) is to ask them to waive the right so the nominal settlement amount to secure the release goes to our client.

Answer: New York Insurance Law Sect. 5104(b) states:

In any action by or on behalf of a covered person, against a non-covered person, where damages for personal injuries arising out of the use or operation of a motor vehicle or a motorcycle may be recovered, an insurer which paid or is liable for first party benefits on account of such injuries has a lien against any recovery to the extent of benefits paid or payable by it to the covered person. No such action may be compromised by the covered person except with the written consent of the insurer, or with the approval of the court, or where the amount of such settlement exceeds fifty thousand dollars. The failure of such person to commence such action within two years after accrual gives the insurer a cause of action for the amount of first party benefits paid or payable against any person who may be liable to the covered person for his personal injuries. The insurer's cause of action shall be in addition to the cause of action of the covered person except that in any action subsequently commenced by the covered person for such injuries, the amount of his basic economic loss shall not be recoverable.

If an injured person can sue for non-economic damages, the no-fault insurer has a lien against the settlement equal to whatever it paid for no-fault first party benefits. The injured person may not “compromise” the action (which I take to mean settle separately with the other party) unless one of the following is true:

• The insurer has given written consent
• The court has approved the settlement
• The amount of the settlement exceeds $50,000 

If none of these is true, the injured person cannot do anything to impede the insurer’s right to recovery. The key amount is the amount of the settlement, not the amount of first party benefits paid. The insurer’s right to recovery is not limited to $50,000, nor does it have a $50,000 “deductible” (which is what it sounds like the claimant’s carrier is saying.) I’m not sure where they’re getting that.

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Can't We Waive the Auto Photo Inspection?

Question from an IIABNY member: A carrier advises that when we submit new business that has a prior automobile photo inspection, they are prohibited from accessing the information that is in the inspection company's database, and in most cases we need to do a new photo inspection. The exception is if the insured has a copy of their inspection or if the agent has one. 

Now they are telling me that the law changed and under Regulation 79 they are not permitted to accept the Bill of Sale and window sticker that we had on file for another carrier when we first added a new unused vehicle. My understanding was the agency has the ability (not required), at their discretion, to waive photo inspection when coverage is transferred, in an independent agency, from one of our carriers to another. Which is correct?

Answer: The waiver section of Reg 79 has not changed since 1997. Here’s the relevant text:

(b) An insurer may waive or dispense with a mandatory inspection under any of the following circumstances:…

(2) Where a new, unused automobile is purchased or leased from a franchised automobile dealership and the insurer is provided with either a copy of the bill of sale which contains a full description of such automobile, including all options and accessories, or a copy of the lease or MV-50 form, provided by the Department of Motor Vehicles, which establishes transfer of ownership from the dealer to the customer and a copy of the window sticker or advanced dealer shipping notice (invoice) showing the itemized options and equipment in addition to the total retail price of the vehicle on which will be added any dealer installed options installed on the vehicle at the time of sale or lease. The physical damage coverage on such new, unused automobile shall not be suspended during the term of the policy due to the insured's failure to provide the required document(s). Payment of a claim shall be conditioned upon receipt by the insurer of such document(s) and no physical damage loss occurring after the effective date of coverage shall be payable until the document(s) are provided to the insurer. If the above document(s) are not submitted by the insured 60 days prior to the annual renewal date, the insurer upon renewal of the automobile physical damage insurance must require a physical inspection, pursuant to the provisions of section 67.7 of this Part…

(6) Where a producer is transferring a book of business from one insurer to other insurer(s).

(7) When an individual insured's coverage is being transferred by an independent insurance agent (as defined in section 2101(b) of the Insurance Law) to a new insurer and said agent provides the new insurer with a copy of the inspection report completed on behalf of the previous insurer, provided the independent agent represents both insurers, and the insured vehicle was physically inspected by the previous insurer.

Based on paragraph (7), I’d say that the new insurer cannot waive the physical inspection if the prior insurer only had the bill of sale and sticker and did not inspect.

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NYS Insurance Fund Policies and Producer Compensation Disclosure

Question from an IIABNY member: Regarding Regulation 194 and producer compensation disclosure, do we need to send the mandatory initial disclosure letter to a client for a New York State Insurance Fund Workers' Compensation policy even though they pay us no commission? We may charge a service fee and we do get the service charge agreement signed by the insured.

Answer: Yes, you must make the initial disclosure. Section 30.3(a) of Regulation 194 states: 

…an insurance producer selling an insurance contract shall disclose the following information to the purchaser orally or in a prominent writing at or prior to the time of application for the insurance contract:

(1) a description of the role of the insurance producer in the sale; 

(2) whether the insurance producer will receive compensation from the selling insurer or other third party based in whole or in part on the insurance contract the producer sells; (emphasis added) 

(3) that the compensation paid to the insurance producer may vary depending on a number of factors, including (if applicable) the insurance contract and the insurer that the purchaser selects, the volume of business the producer provides to the insurer or the profitability of the insurance contracts that the producer provides to the insurer; and 

(4) that the purchaser may obtain information about the compensation expected to be received by the producer based in whole or in part on the sale, and the compensation expected to be received based in whole or in part on any alternative quotes presented by the producer, by requesting such information from the producer.

The rule requires you to tell the insured whether you will receive compensation for the sale. It does not limit the requirement only to those situations where you actually are receiving compensation from the insurer or third party.

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A Tail of One City

Question from an IIABNY member: We have a question about tail coverage we were hoping you could answer. We had a municipal policy for more than 10 years on occurance basis. The account then went to bid and the new broker wrote it on a claims made basis. The municipality is not happy and has requested we re-quote the risk. Our question is, since the current policy is claims made and we will re-write on a occurance basis, how much tail coverage is required?

Answer: New York Insurance Regulation 121 requires the insurer to automatically provide a 60-day tail, but the requirement is 90 days for public entity liability insurance. It also requires the insurer to notify the insured within 30 days after termination of coverage:

“...of the automatic extended reporting period coverage and the availability of, the premium for, and the importance of purchasing additional extended reporting period coverage. For policies subject to audit, retrospective rating or experience rating, the premium for extended reporting period coverage included in the above notices may be quoted on an estimated basis.”

This premium quoting requirement doesn’t apply if the policy cancels for non-payment, unless the insured requests. The insured has 60 days from termination or 30 days from the date the notice is mailed, whichever is greater, to respond.

In general, the insurer has to offer a three-year tail, but it has to offer only a one-year tail for public entity liability.

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Insurer Will Only Pay Discounted Purchase Price For Totaled Car?

Question from an IIABNY member: One of our insured's vehicles was totaled in an accident. The vehicle involved was a 2005 purchased within the last 180 days; the seller knocked it down greatly from the original sales price. The adjuster is stating that it’s New York State law that, if a vehicle is totaled within six months of purchase, they are allowed to settle based on purchase price of the vehicle versus book value. Is this true?

Answer: This is governed by N.Y. Insurance Regulation 64, Unfair Claims Settlement Practices and Claim Cost Control Measures. Section 216.7(c)(1) of that regulation sets the requirements for an insurance carrier’s minimum offer of a cash settlement for a total loss. It must be one of:

• The average of retail values for a “substantially similar vehicle” listed in The Redbook and The N.A.D.A. Official Used Car Guide.
• A quote for a substantially similar vehicle obtained by the carrier from an auto dealer located within 25 miles of the claimant.
• A quote from a computerized database “that produces statistically valid fair market values for a substantially similar vehicle within the local market area.” The Insurance Department has to approve these databases, and the databases must meet criteria in terms of comprehensiveness, data sources, and monitoring.
• Here’s the part the claim adjuster is referring to:

If (one of the first three methods) would result in a settlement offer greater than the purchase price plus the cost of substantiated improvements paid by the insured for a vehicle purchased within the 180 calendar days prior to date of loss, the insurer's offer of settlement may be limited to the purchase price, plus the cost of any substantiated improvements, less the deductible. This method of settlement shall not be applicable to motor vehicles acquired by the insured through a private sale or as a gift. A private sale is one in which the seller does not engage in the sale of motor vehicles as an occupation.

• If it’s not possible for the carrier to arrive at a value using one of these four methods, the carrier must use the next best available method and explain it to the claimant.

If the client bought the car from a private individual and not from a dealership, then the carrier may not use the purchase price as the basis of settlement. However, if he did buy the car from a dealer, then the carrier is within its legal rights to base its minimum offer on the purchase price.

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Do N.Y. Producers Have To Give Compensation Disclosures To Clients In Other States?

Question from an IIABNY member: We just wrote a mono-line Connecticut homeowners. I found directions on page 44 of the booklet about Regulation 194 that addresses multi-state policies. In reading this, I believe we do NOT have to send a compensation disclosure notice to a Connecticut client? Can you verify? OR correct?

Answer: The New York Insurance Department actually addressed this very question in an opinion they issued last month:

Thus, to the extent that the insurance producer is soliciting, negotiating, or selling insurance in this state, via telephone or otherwise, that insurance producer performed those acts using the producer’s New York license. In general, if an insurance producer is required to have a New York license to make the sale, then Regulation 194 applies. The fact that the risk is located in another state has no bearing on the applicability of Insurance Law § 2102; rather the acts that require a license took place in New York. Accordingly, if an insurance producer that is licensed in both New York and another state receives a telephone call in New York from an insured who is purchasing a car in the other state and seeking an auto insurance policy, then the producer must provide compensation disclosure as long as the producer is soliciting, negotiating, or selling insurance in this state.

Based on this opinion, I think Regulation 194 requires you to give the initial disclosure notice to the Connecticut client.

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Insurance Dept. Opinions: Producer Compensation Disclosure and Others

What breaks up the mid-winter doldrums better than 13 new advisory legal opinions from the New York Insurance Department's Office of General Counsel? Okay, that was a rhetorical question; don't stuff the comments section with responses to that. Instead, devote your attention to the following opinions issued in November and December:

• An agent may not add terms or clauses to a certificate of liability insurance that alter, expand, or otherwise modify the terms of the actual policy unless authorized by the insurer that has filed an appropriate endorsement with the Insurance Department and obtained prior approval. An insurer is not required to provide notice of cancellation or nonrenewal to an additional insured, although it may provide notice if it chooses to.
• A homeowners’ insurer may not deviate from its filed and approved policy forms and rates without the Insurance Department’s approval even if the insured consents to the terms and rates.
• A life insurer may offer, in conjunction with an individual life insurance policy, and for no separately identifiable charge, a service that provides a second medical opinion based upon a review of an insured’s medical records when the insured is diagnosed with a certain serious or life-threatening condition, but only if it holds an accident and health insurance license and it specifies the service as a benefit in the policy.
• Where an insured here has a lien agreement with a union benefit fund that provided a disability benefit governed by ERISA, and the agreement requires re-payment of the disability benefit to the fund, a no-fault insurer may not deduct the amount of the disability benefit from the no-fault benefit.
• An insurance agent may not share commission on the sale of long term care insurance with an entity, such as a college, that is not licensed as an insurance agent or broker. An insurance agent may not pay a referral fee to a college that makes the referral by sending to its alumni and supporters correspondence that “explains the benefits” of long term care insurance.
• An appraiser who, in New York negotiates, on behalf of an insurer, with a body shop selected by an insured, to settle upon the cost of repair, must be licensed as an independent insurance adjuster.
• A captive insurer may be owned by an entity that is not licensed as an insurer if it has sufficient net worth.
• A life insurance policy owner who is not a New York resident may elect in writing to have the life settlement laws of the state in which the policy owner resides govern the life settlement contract when the policy owner signs the contract in New York. (Note: This opinion also answered five other questions.)
• Regulation 194, which requires insurance producers to disclose to their clients information about their compensation:
  • Does not apply to renewals unless the purchaser makes a request for more information
  • Applies if a producer procures insurance for identical coverage and limits with a different insurer
  • Does not apply when an insurer re-tiers a property/casualty policy upon renewal unless the purchaser makes a request for more information
  • Does not apply if an insurer issues or offers to issue a superseding policy previously issued by another insurer under common control unless the purchaser makes a request for more information
  • Applies If an insurance producer licensed in both New York and another state receives a telephone call in New York from an insured who is purchasing an automobile in the other state and seeking an auto insurance policy.

Also, an insurer may delegate to a broker the insurer’s obligation to maintain records pertaining to the producers' compensation. If an insurer has delegated the obligation to one of its appointed agents, the agent may in turn delegate it to an authorized broker. A wholesale broker or managing general agent that has no direct sales or solicitation contact with a purchaser has no obligation to maintain producer disclosure records.

The other three opinions pertained to coverage for an "enteral formula" under a health plan, and the permissibility of selling discount dental programs and repatriation and funeral contracts without an insurance license. All opinions the department has issued since 2000 are available on its Web site.

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N.Y. Insurance Dept. Announces ’11 Regulatory Agenda: Trust Accounts, No-Fault, Photo Inspections, and Advertising

Rule changes affecting advertising, producer premium accounts, auto photo inspections, personal lines cancellation notices, and No Fault highlight the New York Insurance Department’s January 2011 regulatory agenda. The agenda appeared on the department’s Web site on Dec. 23. The rule changes the department is working on include:

• An amendment “to permit the use of internet and out-of-state banks for producer premium accounts.”
• An amendment adding and revising the list of risks eligible for the Free Trade Zone and reducing the minimum premium requirements and net premium written limitations for other risks to qualify.
• An amendment to add coverages to the excess line export list (the list of risks for which a broker need not do a diligent search of the admitted market.)
• Amendments to the No-Fault regulations, including changes to the endorsements and requirements for insurer claim practices; changes in the administration of arbitration programs; and changes to comply with a recent change in state law mandating coverage for necessary emergency health services provided to intoxicated drivers. 
• A new regulation “to provide clarification and rules regarding inland and ocean marine insurance.”
• An amendment providing notice and time frame requirements for handling of third party claims.
• An amendment “to include additional circumstances under which an insurer may voluntarily waive mandatory inspection of a motor vehicle for physical damage coverage, and to clarify that the use of digital photography and electronic access to inspection report data are permitted.” The department proposed this change once before but did not adopt it before it expired.
• A new regulation to provide requirements for policies covering wrap-ups.
• A new regulation “to provide that cancellation notices subject to section 3425 of the Insurance Law should include the date and hour of cancellation, the date of the notice, and, for nonpayment of premium cancellations, a statement informing the consumer that cancellation will not take place if the consumer makes timely payment of the premium.”
• A new regulation “to provide rules and guidelines to assure full disclosure of all relevant information within advertisements which describe or solicit the purchase of property and casualty insurance coverage that are published, issued or distributed through various advertising media.”

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