Commingling of Funds.

AuthorGabay, Sari

* 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...

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