By Ken Kukral
As a sales minded agent there is nothing that “takes the wind out of my sails” more than when a premium check comes back NSF (not sufficient funds). What a deflating experience. Just when you thought you had everything all wrapped up the transaction hits the wall.
Though this is kind of a “negative” blog topic, it is one I always wondered about. Just what happens to the transaction? Let me tell you what I found out in my research. I am not a lawyer so please do not take this as legal advice. Consult with your attorney on what your rights are and how to handle these situations.
– Take the emotionality out of the equation. It may be tough to not take it personally but you really will have a difficult time if you take that perspective.
– The potential client (yes, I still call them potential clients) either planned for it to “bounce” or they didn’t. The trick is to find out which one. While it may be a tough way to start a business relationship, remember the client is only human and mistakes happen. See if they want you to redeposit the check, give you a cashier’s check, EFT the payment or put it on a credit card. Make sure you have an internal procedure on how to handle these types of situations so you handle them consistently. This all assuming they did not “intend” to bounce a check on you.
– What if you determine they “intended” to bounce the check on you? While this may seem unconscionable, it does happen. The question is what to do next…….
In getting my business degree I was required to take a business law class. This class gave me enough information in order to be dangerous with legal issues and hopefully helped me to realize really just how little I know about the intricacies of the law. The one thing I did remember is that a contract consisted of an offer, acceptance and consideration. It was a three legged stool and the absence of any of these would result in the stool being unable to stand.
So in looking at an insurance contract:
– Offer = Quote
– Acceptance = Request to bind the quote
– Consideration = Cash, check or promise to pay.
An NSF check now brings the third component into question. Did they really mean to give you consideration? Wikipedia defines consideration as:
– Consideration is the concept of legal value in connection with contracts. It is anything of value promised to another when making a contract. It can take the form of money, physical objects, services, promised actions, abstinence from a future action, and much more
OK, so what’s next?
1. First, it is not your responsibility to determine of the NSF check meets the definition of “consideration”. That would go to either the insurance carrier or the insurance department to make that determination.
2. Contact the insurance carrier that the prospect wrote the check to in order to bind the insurance policy. See what their procedures are and what you need to do in order to comply with their procedure. They may not consider the bounced check as “consideration” and they will then rescind the policy (cancel it flat). Ask the carrier to carbon copy your office when they send their voidance or cancellation notice to the prospect so that you will be kept “in the loop”. Keep in mind that the insurance policy is an agreement between the prospect and the insurance carrier to transfer liability to the carrier in return for an insurance premium.
3. What if the carrier puts the responsibility back on your agency for the collection of the premium? Yikes! It can happen. You may want to review your contract with that carrier and determine of if this position is what you both agreed to. First things first, have notice of cancellation sent immediately for non-payment of premium. Make sure any certificate holders are notified and any additional insured’s or loss payees are notified. This will at least “stop the bleeding”.
4. Collections. What is your agencies collection procedure? Make sure you follow the procedure so you are consistent. This is important since situations like this can lead to E&O issues and you do not want to add these issues on top of your collection issues. This is another point where you may want to contact your attorney. They will be well versed on what your states collection laws are and how you should go about collecting the premium. In states such as Ohio, you can collect 3 times the amount of the NSF check PLUS attorney fees.
5. How do insurance departments look at NSF checks? Good question. In my research, not every insurance department has addressed this or I was not able to find anything on their website regarding this matter. One state, New York, took the following position:
Allow agents to request policy cancellation for nonsufficient funds premium check returns
SUPPORT: Allow agents in New York to request policy cancellation when they accept a client’s check that subsequently bounces, and that agent has paid the company out of the agency account.
Currently, a controlling opinion by the New York State Insurance Department considers the agent in these circumstances to have loaned the client the money, and the company to have been paid—leaving the agent with recourse only against the client [OGC opinion,June 1, 2007].
Unlike New York, both Connecticut and New Jersey allow agents to request cancellation of the policy in such circumstances, provided they fulfill the requirements of the state laws that permit them to do so. In Connecticut, for example, if a producer advances payment of premium on behalf of a commercial lines policyholder and the insured is delinquent in paying the producer, the producer may request pro-rata cancellation unless cured within 15 days of sending the insured a written notice of intent to cancel. [Section 38a-716. (Formerly Section 38a-716). Premium advancing by producer. Cancellation of policy.] Similarly, in New Jersey, a producer is allowed to make a written request for cancellation. [N.J.A.C. 11:17C-2.2(d)].
The New York Insurance Department has long held that where an insurance agent or broker (“producer”) accepts an insured’s check in payment of an insurance premium, deposits the check in its own account, and then uses its own check in payment of the premium prior to the insured’s check being dishonored by the bank on which it was drawn, the producer’s sole recourse is to proceed against the insured for issuing a dishonored check. [See, e.g., OGC Opinion No. 06-08-07 dated Aug. 3, 2006; OGC Opinion No. 05-12-12 dated Dec. 12, 2005; OGC Opinion No. 02-01-06 dated Jan. 4, 2002; OGC Opinion dated Dec. 17, 1996, and OGC Opinion dated Dec. 9, 1975.]
Although the payment of a premium with a dishonored check is not a valid premium payment to the insurer, the insurer is deemed to receive a valid payment of the premium by way of the producer’s check that was honored by the bank. [See OGC Opinion dated Dec. 9, 1975.] By substituting its check for that of the insured, the insurance producer in effect makes a loan to the insured, with the insured’s check serving as security for the loan.
PIANY has long stressed that an insurance producer that receives the premium money in a fiduciary capacity is not, in fact, making a loan or advancing premium, but is merely passing the insured’s money through the premium account and forwarding the producer’s check to the insurer. However, in a Dec. 17, 1996, opinion responsive to that conclusion, the department adhered to its view that, in accepting and depositing the insured’s check into its own account, the producer acts at its peril and has no right to seek reimbursement from the insurer. The sole exception noted in that opinion was with regard to a policy issued under the New York Auto Insurance Plan.
Compounding this situation is the fact that the producer has limited recourse against the insured who has issued a dishonored check. The only viable options include requiring the insured to provide a certified check; declining to advance premium for the insured; having the insured make the check payable to the insurer and then transmitting that check to the insurer; or endorsing a check that has been made payable to the agent or broker and then transmitting it to the insurer. [See OGC Opinion No. 06-08-07 dated Aug. 3, 2006.]
Wow! Not sure I saw that one coming! Makes me think again about what my agencies procedure are regarding the handling of checks. I might want to consider EFT (electronic funds transfer) as a better option and work to get more of my clients to pay that way. With EFT you know within a matter of hours if the payment will be honored by the bank and will not be waiting days to find out like with an NSF check. You may also want to hold off presenting a binder to the insured until you are sure the check has cleared.
What makes it even more confusing is the following opinion I found for New York:
SELECTED OPINIONS OF THE GENERAL COUNSEL INSURANCE DEPARTMENT
OGC Opinion No. 94-75 Cancellation for non-payment of premium
August 30, 1994
You recently requested clarification of an opinion issued by the Office of General Counsel and published in Counsel’s Corner in The Bulletin of December 1993.
The opinion concerned cancellation of insurance policies for non-payment of premium when the insurer subsequently receives the premium payment. That opinion stated that a premium is considered remitted as of the date it is postmarked.
You raised the question of whether the premium is remitted if it is postmarked prior to the cancellation date but the check is subsequently dishonored. If the check is dishonored, the premium has not been remitted, regardless of the date it is postmarked.
Issuance of a reinstatement notice in such a situation, where the check is dishonored subsequent to issuance of the notice, is moot. Mailing the reinstatement notice does not rescind the cancellation notice if the check is dishonored. A dishonored check is not a premium payment.”
In conclusion, I am more confused than when I started to write this blog post. It is not as “cut and dried” as I thought it would be. It may warrant another look at the agency collection procedures, company contracts and regulation in the states where I choose to do business. Sometimes research brings more questions than answers. It also gives me a new appreciation for the people at agencies who are responsible for handling these matters and how they go about doing their job.
Any horror stories any one cares to share? Any resources you were able to find to help deal with these matters?