On the most basic level, choosing a career as an insurance producer means having the opportunity to sell insurance products to clients. However, deciding to become an insurance producer also means signing up for a heightened level of responsibility, which means acting as a fiduciary for your clients when handling premiums and following stringent commission protocols dictated by legislation.
In this article, insurance agents can find an outline of some of the most important things to keep in mind when complying with all legal responsibilities of the profession in connection with premium trust accounts and commissions.
Premium trust accounts
Under insurance code, agency owners and producers are required to receive premiums in the capacity of a fiduciary.[1] That means that they are not owners of the funds, but rather just custodians[2] of them. A fiduciary is someone who manages someone’s money and/or property—and his or her responsibility extends, at a minimum, to acting in that person’s best interests, keeping good records, managing the money and/or property carefully, and keeping the person’s money and/or property separate from that of his or her clients’ money.[3]
The law requires that agency owners and producers maintain separate trust bank accounts for these premiums, as well as return these premiums, separate from the agency’s and/or producer’s business operating funds.[4] By getting a separate trust bank account for these premium funds, an agency and/or producer also are protecting them from any agency creditors.[5] Laws regulating premium trust accounts may vary from state to state, as may legislation regarding penalties for violations of the laws governing these accounts.
Any funds that are deposited into an agency’s and/or producer’s trust bank account become fiduciary funds, which are subject to insurance regulations. They are not allowed to be withdrawn without the proper documentation of the amount of commission that was earned, as well as an audit trail.[6] Premium accounts must be identified as such, and depending on the state, may have other identification requirements.
Insurance producers may not use collected premiums to pay for office expenses or employee salaries—even if a producer’s principals expressly have authorized any commingling of funds. If an insurance producer has engaged lawfully in commingling, the only funds that may possibly be utilized by an insurance producer to pay for his or her own expenses are the producer’s own funds that were deposited in that account. It must be stressed that insurance producers are fiduciaries, and as such, with respect to premiums collected, premiums can never be considered the agent’s or broker’s own funds.
While falling under some federal legislation—such as Federal Deposit Insurance Corp.’s requirements—premium trust accounts mostly are regulated by state, except in Connecticut. For the state-specific regulations, see New Hampshire: N.H. Code Admin. R. Sections 4301.03-4301.05; New Jersey: N.J. Admin. Code Section 11:17C-2.1 and Section 11:17C-2.3; New York: NY ISC Section 2120 and N.Y. Comp. Codes R. & Regs. Tit. 11 Section 20.3 (b) (Regulation 29); and Vermont: Vt. Code R. 21-020-036-X.
There may be additional duties in connection with creating and maintaining premium trust accounts (i.e., the duty to maintain federal deposit insurance protection). For example, under this duty as discussed in New York’s OGC Op. No. 07-02-12, since insurance producers are acting as fiduciaries and therefore subject to the prudent rules of investing “consistent with securing the value of the funds,” all premium funds are required to be federally insured by the FDIC.
This may require multiple fiduciary accounts or that such accounts be opened in more than one appropriate bank to receive full federal insurance protection. New York state also carries a duty to maximize insurance protection.
Legal requirements of insurance producer commissions
Another responsibility, and requirement of the profession, is to ensure that insurance producers only accept commissions for the sale, solicitation or negotiation of an insurance policy for which they legally are entitled. In all the states in the PIA Northeast footprint, it is required that an insurance producer be rightfully licensed in each state to sell, solicit or negotiate insurance products.
These licensing requirements also extend to the ability of an insurance producer to receive a commission. Receiving a commission is considered a regulated activity and therefore also requires a license to receive such. Therefore, no commission payments can be offered to, or accepted by, an unlicensed person for the sale, solicitation, or negotiation of an insurance policy.
Sometimes, to conduct business with an unlicensed individual, licensed insurance producers may feel that they can pay commissions to unlicensed individuals disguised as referral fees. While referral fees paid to nonlicensed parties are legal, a commission fee masked as a referral fee is not. A referral must not include any discussion of specific insurance policy terms and conditions, and payment of a referral fee should not be dependent upon the purchase of insurance by the referred person. For example, a referral fee that is structured as a percentage of a premium paid by a referred person is not legal, as the payment and amount of the fee is dependent upon the sale of that insurance policy by the referred person. As a licensed insurance producer, it is of utmost importance to avoid paying any type of commission disguised as a referral fee to escape violation of the law and punishment by your state’s regulation agency. And, as an unlicensed individual—especially if you have plans to apply for a license in the future—it also is your responsibility to avoid accepting these types of illegal fees.
Each state outlines potential punishment for violation of the law in connection with the illegal collection of commissions. For example, in New York state, the law allows the revocation, suspension or declination of a renewal of a licensee’s license, following a hearing, when the licensee is found to have committed a prohibited activity such as unlawfully collecting a commission.[7] This extends liability to businesses that “knowingly accepted insurance business from an individual who is not licensed” as well. The other states in the PIA Northeast footprint all have similar legislation regarding punishment of violations.[8]
These responsibilities are not optional, and insurance producers must comply. Professional insurance agents can ensure proper compliance with the law in connection with premium trust accounts and commissions by further familiarizing themselves with the regulations of the states in which they sell, solicit and negotiate insurance policies. For more information, PIA Northeast members can contact PIA’s Industry Resource Center at resourcecenter@pia.org.
This article originally appeared in the December 2023 issue of PIA Magazine.
[1] Insurance Journal, 2012 (tinyurl.com/ptz26kev)
[2] Ibid.
[3] Consumer Financial Protection Bureau, 2023 (tinyurl.com/32fe66kt)
[4] Insurance Journal, 2012 (tinyurl.com/ptz26kev)
[5] Ibid.
[6] Ibid.
[7] NY ISC Section 2110
[8] Ibid.
Danielle Caswell, Esq.
Danielle Caswell joined PIA Northeast as associate counsel in the Government & Industry Affairs Department in 2023. She earned her bachelor’s degree from New York University and her law degree from Brooklyn Law School with a particular focus on intellectual property, information, and media law. Prior to joining PIA, Danielle was an associate at a law firm in New York City where she focused primarily on intellectual property and entertainment-related transactional and litigation matters.
