Bohlinger v. Zanger

Dye, J.

In this appeal by our permission, we deal with an aspect of the dual agency status of an insurance broker, namely, whether upon the cancellation of policies of insurance pursuant to an order of liquidation, premium moneys in the hands of a licensed broker belong in toto to the statutory liquidator or only so much thereof as represents the prorata premium earned to date of liquidation.

The problem arises in this motion for judgment on the pleadings in an action brought by the State Superintendent of Insurance as statutory liquidator of the Preferred Accident Insurance Company against the defendant, a licensed broker, for insurance premiums collected, but not remitted to the company prior to effective date of the liquidation order. For the purposes of this motion, we treat as true the allegations in the pleadings from which it appears that prior to May 2, 1951 (the effective date of the liquidation order), the company had issued in due course and at the request of the defendant broker, two policies of automobile insurance to two separate individuals who paid the broker the full premium and which the broker had not remitted to the company prior to the effective date of the liquidation order. The liquidator sues to recover such sums in toto.

In his answer the defendant broker admits that he collected and has possession of the full premiums, but denies that plaintiff as liquidator is entitled to anything more than the prorata premium earned on the respective policies to date of termination, less his commissions, which differences he concedes are due and owing and which he is willing and able to pay and consents that a judgment may be entered against him in such an amount and asks that the complaint be otherwise dismissed.

With the issue thus joined, the plaintiff moved at Special Term in Supreme Court, New York County, for judgment on the pleadings, which motion was granted, except that commissions were allowed, on the general ground that in law, the broker in receiving the premiums was acting for the insurance company (Insurance Law, § 121) and while holding same was its fiduciary (Insurance Law, § 125). Upon appeal the Appellate Division, First Department, unanimously affirmed without opinion.

It is a well-settled principle of common law that an insurance broker, when acting for an insured, is deemed the agent of the insured, which principle is now embedded in the statute (Insurance Law, §§ 111, 119) and that at the same time the broker has authority to receive premiums on behalf of the insurer (§ 121). The validity and applicability of these general principles to this case are not challenged nor are the rights of the insured involved.

The dispute turns, rather, on the meaning of these sections when read in connection with section 125 which, so far as pertinent, provides: “ Every insurance * * * broker acting as such in this state shall be responsible in a fiduciary capacity for all funds received or collected as * * * insurance broker and shall not, without the express consent of his or its principal, mingle any such funds with his or its own funds or with funds held by him or in any other capacity. ’ ’

When these sections are read together it cannot reasonably be said that the fiduciary obligation thus created is exclusively for the protection of the company but must be deemed to have reference, insofar as the company is concerned, to those moneys in which the company has an interest. While the statute forbids commingling of funds, it does not, in so many words, require a broker to maintain a separate bank account for deposit of the funds of each such principal so long as the amount “ held for each principal [is] reasonably ascertainable from the books of account and records of such agent or broker, as the case may be ” (§ 125); that the broker has fully complied with the requirement of this section is not challenged here.

Had the Legislature intended to treat all premium moneys in the hands of a broker as belonging to the company, it is reasonable to assume that it would have said so in more particular language. What they unquestionably had in mind was the well-recognized dual agency status of the broker in his dealings with the companies and their insureds and that there would be times in the course of such dealings when a broker would have moneys in his possession subject to the rights of the insurer, particularly in the situation where the policy concerned is terminated prior to settlement of his accounts. We are told — and the Legislature must be deemed to have known about it — that when termination occurs before settlement of accounts, for which a ninety-day period is allowed (§ 121), it is an accepted practice according to general usage for brokers to deal with such accounts by remitting to the company the prorata premiums earned to date of termination less commission and by refunding to the insured the unearned portion. When, on the other hand, the broker has settled his accounts with the company and remitted to it the full net premium prior to the termination date of the policy, the procedure usually followed is for the broker, if so authorized, to make a claim for refund of the unearned part of the premium or, in a given case, the insured may make his claim direct. If, however, the policy is terminated before the insured has paid the premium either to the broker or to the company, the company has a right to collect from the insured only such sum as represents the prorata earned premium to date of cancellation for in truth that is all the insured justly owes. The Legislature must be deemed to have had the situation and practice in mind when it enacted the applicable legislation and this affords strong grounds for construing the statute as a two-way proposition in the public interest aimed at protecting the company for premiums earned and the insured for refunds of premiums unearned. Such a construction gives recognition to the established relationship of principal and agent existing between broker and insured (Clinchy v. Grandview Dairy, 283 N. Y. 39). We see no distinguishing difference when cancellation prior to settlement is accomplished by operation of law (§ 514).

In such event the liquidator concedes that in dealing directly with an insured to recover an unpaid premium, he may collect only the prorata premium earned to date of liquidation or, if the full premium has been paid prior to liquidation, he may eventually retain only so much as represents the earned premium and, if his assets permit, is obliged to refund the unearned portion. Notwithstanding such common-sense rule, the liquidator says that, when liquidation occurs, such reasonable practices are no longer available, but that, on the contrary, the premium moneys in the broker’s possession belong in toto to the liquidator ; that as soon as the liquidation order becomes effective the broker is without power or authority to do other than turn over in toto all premium moneys in his possession; that to permit him to do otherwise would lead to a substitution of his judgment for that of the liquidator and would lead to the giving of unlawful preference and would amount to an avoidance of the restraining order enjoining him from “ dealing with or disposing of the property or assets of said Company, or doing or permitting to be done any act or thing which might waste the assets or allow or suffer the obtaining of preferences that it is only the liquidator who may make distribution of company assets and then only with the approval of the Supreme Court; that a broker may not interpose his business practices as paramount to statutory sanction for the orderly liquidation of insolvent properties by the liquidator. Upon insolvency, assets must be equally distributed among general creditors without preference or priority (Bank of United States v. Braveman, 259 N. Y. 65; Gerseta Corp. v. Equitable Trust Co., 241 N. Y. 418; Pink v. Title Guar. & Trust Co., 274 N. Y. 167).

In liquidation, the liquidator for all practical purposes takes the place of the insolvent insurer. The liquidation order terminates the company’s existence. The liquidator takes immediate possession and control of the assets and proceeds to a liquidation of its affairs. The broker is trustee for moneys belonging to his principal which, in the event of termination prior to settlement, is the prorata earned portion of the premium. The company, while a going concern, has no right to the unearned portion. That belongs to the insured. Liquidation does not change the situation and the liquidator should not and may not be placed in a better position than the company he takes over and demand that which is not owed. The relationship existing between liquidator and broker, as we see it, is no different than the relationship existing between company and broker. It does not arise out of mutual debt but by reason of a fiduciary capacity imposed by statute (§ 125). The obligation running between the parties is that of trustee and beneficiary rather than debtor and creditor. When so viewed, the earned portion of the premiums is not held by the broker as an offset to a debt owing but rather as a trust fund for the benefit of its insurer or, as here, the successor in interest, the liquidator. The defendant concedes his obligation in that regard and as to it stands ready, willing and able to pay. Under such a view, we find nothing in the statute warranting or reauiring the broker under the circumstances of this case to turn over the full premium in toto to the liquidator. As we read section 125 in connection with sections 111, 119 and 121 and in light of accepted usage and business practice, it is not intended to treat funds in the hands of a broker — when termination occurs prior to settlement — any differently in liquidation than before. The circumstance of insolvency does not operate to convert the unremitted unearned portion of a premium into an asset for the liquidator. We pass on no other question.

The judgments appealed from should be modified to the extent that the defendant is directed to pay to the plaintiff the earned premium on the subject policies to the date of termination, less commissions, and, as so modified, affirmed, with costs to the defendant in all courts, and the action remitted to the Supreme Court with the direction that a judgment be entered in favor of the plaintiff in accordance with the opinion herein.