Court Opinion

ID: 5482858
Source: CourtListenerOpinion
Date Created: 2022-01-10 02:00:04.843813+00
Date Added: 2024-06-11T08:33:38.534358
License: Public Domain

Fuld, J.
(dissenting). The Insurance Law contains a comprehensive scheme for the conduct of the insurance business, the regulation of those engaged in it and the liquidation of insurance companies whose solvency is questionable. The decision now being handed down, I very much fear, distorts the legislative pattern, as well as the pre-existing common law, and establishes a new set of rules governing the rights of those affected.
From a very early date, the courts have uniformly held that, when an insurer entrusts a broker with a policy of insurance for delivery to the insured, the broker acts as agent for the insurer in collecting and receiving the first premium and, consequently, that payment to the broker is deemed payment to the insurer. (See, e.g., Minett v. Forrester, 4 Taunt. 541, 544-545, 128 Eng. Rep. 441; Mord v. Hartford Accident & Ind. Co., 245 N. Y. 279, 283-284; Allen v. German Amer. Ins. Co., 123 N. Y. 6, 16; Matter of Leterman v. Pink, 249 App. Div. 164, 168, affd. sub nom. Matter of Ebenstein v. Pink, 275 N. Y. 613; Matter of Sommer, 12 N. Y. S. 2d 47; Maloney v. Rhode Island Ins. Co., 115 Cal. App. 2d 238; Mishiloff v. American Central Ins. Co., 102 Conn. 370, 379; Indiana Ins. Co. v. Hartwell, 123 Ind. 177, 192; Ocean Accident & Guar. Corp. v. Emporia Tel. Co., 139 Kans. 106, 110; Sun Ins. Office v. Mallick, 160 Md. 71, *23682-83; Gilbert v. Malan, 231 Mo. App. 469, 482; Arthurholt v. Susquehanna Mut. Fire Ins. Co., 159 Pa. 1, 6; Witt v. Employers Liability Assur. Co., 198 Wis. 561; see, also, 2 Mechem on Agency [2d ed., 1914], §§ 2368, 2369, pp. 1939-1942; 16 Appleman on Insurance Law and Practice [1944], p. 164; 2 Couch’s Cyclopedia of Insurance Law, § 452, p. 1297; and cases collected 1 Couch, loc. cit. [1945 Cum. Supp.], § 452, Note 3, pp. 486-487.) And, in 1939, when New York State revised its Insurance Law, that settled rule was written into the statute as section 121:
“ Any insurer which delivers in this state to any insurance broker a contract of insurance pursuant to the application or request of such broker, acting for an insured other than himself, shall be deemed to have authorized such broker to receive on its behalf payment of any premium which is due on such contract at the time of its issuance or delivery or which becomes due thereon in not more than ninety days thereafter.” (Emphasis supplied.)
The language of section 121 is clear, and clear, too, was the legislature’s purpose to reflect “the general custom of the community * * * that payment to the broker constitutes payment to the insurer ” (Report of Joint Legislative Committee on Revision of the Insurance Laws, N. Y. Legis. Doc., 1939, No. 101, p. 13) and to codify “ the rule of law ” that “ payment to the broker is payment to the [insurance] company.” (1 Public Hearing of Joint Legislative Committee for Recodification of the Insurance Law [1937], p. 161. )1
*237As is evident — indeed, as was made manifest by revision notes, committee hearings, legislative reports and the statute itself — section 121 was designed to relieve the insured from all risks stemming from a broker’s possible dishonesty or insolvency. When, therefore, on March 2, 1951, and April 27, 1951, respectively, appellant’s customers paid him the premiums for their policies, they in effect paid the insurer and obtained insurance coverage for a year. Had an order of liquidation not been entered, the insurer, though it might never have received one penny of those premiums, would, nevertheless, have been liable upon the policies and required to pay any and all losses suffered after May 2,1951, the date of the order. The reason is simple: the broker, when he collected the premiums, is deemed to have received their entire amount as the insurer’s agent and “ on its behalf.”
The rule is precisely the same, if and when the insurer subsequently becomes insolvent. Indeed, as long ago as 1811 (Minett v. Forrester, supra, 4 Taunt. 541, 128 Eng. Rep. 441; see, also, Goldschmidt v. Lyon, 4 Taunt. 534, 128 Eng. Rep. 438), and as recently as January of last year, 1953 (Maloney v. Rhode Island Ins. Co., supra, 115 Cal. App. 2d 238), courts have held that, since payment to the broker is payment to the insurer, the premium received by the broker belongs to the insurer’s assignee in bankruptcy or its liquidator. In the Minett case (supra, 4 Taunt. 541, 128 Eng. Rep. 441) an insurance broker was sued by the underwriter’s assignee in bankruptcy for premiums received by the broker before the underwriter became insolvent. In the course of his opinion, upholding the assignee’s right, Mansfield, C. J., wrote, in language most apposite (4 Taunt. 544-545):
“ The broker * * * is agent for the underwriter as to the premium * * * and he is supposed to receive the premium from the insured for the benefit of the underwriter * * *. The insurer, with respect to the insured, is supposed to have received the premium * * *. That being so, there is no doubt that at any time after the premiums have been so received by the broker, the underwriter may call upon him for these premiums and compel immediate payment of them * * * and when he *238became a bankrupt, Ms rigM to the premium was immediately communicated to his assignees; they had a right to call on the broker, and compel him to pay the premium to them for the benefit of the bankrupt’s estate.”
And in the Maloney case (supra, 115 Cal. App. 2d 238) it was unequivocally decided that the fact that the insurer had become insolvent changed nothing; the broker continued to hold the premiums as agent and fiduciary for the insurer and was required to turn over to the statutory liquidator the unearned as well as the earned portion. The opinion reads in part as follows:
“ When the broker accepts the policy from the insurer and the premium from the assured, he has elected to act for the insurer to deliver the policy and to collect the preminum. [p. 244]
* * *
“ Thus the real question is whether or not, when the broker is intrusted with and accepts the policy from the insurer for delivery to the assured, and accepts the premium from the assured for delivery to the insurer, such facts create an actual agency.
“ The English and American cases are uniform in holding that in such cases the broker acts as agent for the insurer, [p. 245]
* * #
“ Thus it must be held that in the instant case appellants were the agent of Rhode Island [Ins. Co.] to deliver the policy and to collect the premium. Therefore, when the premium was delivered to appellants they owed a fiduciary duty to Rhode Island to transmit it and were the agents of Rhode Island for that purpose, [p. 247] ”
And that is as it should be. If the rule, that payment to the broker is payment to the insurer, applies absent insolvency, not only logic and consistency, but reason and fairness as well, dictate that it apply also if insolvency intervenes before the broker transmits the premiums. Assuming, as we must, that, had the insurer continued solvent, appellant’s customers would have enjoyed the same rights and privileges as policyholders *239whose payments had actually been turned over to the insurance company, I do not understand how it may be said that, when the company has met financial misfortune, those insured customers of appellant may, by treating their premiums as unpaid, avoid sharing the loss which the other policyholders will have to bear.
• Nor does anything in either section 111, 119 or 125 of the Insurance Law — upon which reliance is placed to reach a contrary result — change the common-law rule or weaken in the slightest the meaning of section 121. Section 119, which lists the requirements — such as age, moral character and education — for the issuance and renewal, for the suspension or revocation, of a broker’s license, does not even remotely touch upon the question before us. Section 111 simply defines a broker as the agent of the insured for the purpose of “ placing risks or taking out insurance,” and there it stops. Not a word about the broker being the agent of the insured or acting on his behalf in receiving or transmitting premiums.2 And, finally, section 125 does no more than prescribe that the broker is to be responsible “ in a fiduciary capacity ” for any funds received by him as broker. While the language does not specify to whom the “ fiduciary ” duty is owed, it is almost self-evident that, when the broker collects premiums under the circumstances described in section 121, he necessarily becomes a fiduciary for the insurer • — for it is “ on its behalf ” that he receives those funds. A broker may, it is true, serve both insured and insurer, but, in the very nature of things, he cannot be agent for both at one and the same time and with respect to the same transaction. To hold otherwise places an unwarranted gloss on the plain wording of sections 111 and 121.
The legislature has used apt language to deal with a practical situation, and there is nothing recondite or mysterious about *240the arrangements effected. For the purpose of placing insurance, the broker is the agent of the insured (§ 111); for the purpose of delivering the policy and collecting the premium due upon it, he is the agent of the insurer (§ 121; see, also, Hermann v. Niagara Fire Ins. Co., 100 N. Y. 411, 415; Holskin v. Hurwitz, 211 App. Div. 731, 733; Von Wein v. Scottish Union & Nat. Ins. Co., 20 Jones & Sp. 490, 494; Grace v. American Central Ins. Co., 109 U. S. 278; 2 Mechem, op. cit., § 2368, p. 1939; 2 Couch, op. cit., § 452, p. 1297.) That is what this court wrote in the Hermann case (supra, 100 N. Y. 411, 415), and that is what every other tribunal that has considered the matter has, in a variety of contexts, decided. (See cases cited, supra, pp. 235-236, and cases collected, 1 Couch, op cit., § 452, Note 3, pp. 486-487.) As Couch in his Cyclopedia put it (op. cit., p. 1297), “ In fact, it is said to be a general rule that an insurance broker acts for the insured for the purpose of making the application and procuring the policy, and for the insurer for the purpose of collecting and remitting the premium and delivering the policy.”
It may well be that, when a policy is terminated before settlement of the broker’s accounts with the insurer, it is “ accepted practice” or “ general usage,” in the absence of insolvency or an order of liquidation, “ for brokers to deal with such accounts by remitting to the company the prorata premiums earned to date of termination * * * and by refunding to the insured the unearned portion ” (opinion, pp. 232-233). But it does not follow from this that a broker may adhere to his practice once insolvency intervenes or an order of liquidation is entered. When the insurer is fully solvent, and presumably able to pay all claims, nothing turns on the broker’s act, or on the capacity in which he acts, in refunding the unearned premium to the insured. Had the broker not made the refund, the insurer would, of course, have done so; the repayment was handled in the most convenient manner and involved no more than a bookkeeping matter. With the advent of insolvency, however, the rights of creditors must be taken into account, and, for the first time, it becomes important to decide whether the premiums held by the broker belong to the insurer or to the insured. However current or accepted it may be, there*241fore, the practice of brokers in dealing with the funds of a solvent insurer can throw no light whatsoever on the question presented by this appeal, for it is in no way inconsistent with the rule that payment to the broker is payment to the insurer.
Today’s decision may, on superficial consideration, appear to . protect an innocent insured. However, it is pertinent to inquire at whose expense this protection is being afforded. All policyholders who have paid the insurer directly, or whose brokers have transmitted the collected premiums expeditiously, will have to await the orderly liquidation of the insurer’s affairs, and will receive repayment of only so much of their unearned premium as the company’s assets permit. Not so, though, the customers of the broker who delays his remittals; that broker, under the present decision, may conduct a private liquidation and immediately return to his customers the full amount of the unearned premium. Most strangely, therefore, the broker who remits promptly does a disservice to those who employed him to place their insurance.3
Moreover, unless the principles now announced by the court are abandoned when the situation is reversed, and it is the broker who is insolvent, the protection which the legislature intended insured persons to have will be undermined and set at naught. Under the logic and rationale of the present decision, if the insurance broker were to become bankrupt, or if he were to convert the premiums in his hands, the insurer could cancel the policy and throw the loss upon the insured so far as the unearned premium is concerned. That is the other side of the coin, the other “way” — so to speak — that we must travel, if, as Judge Dye puts it (opinion, p. 233), the court is construing the statute as “ a two-way proposition ”. While my views concerning the wisdom of such £ £ a two-way proposition ’ ’ may be irrelevant, the legislature’s plain provision to the contrary, its direction that the broker receives the premium “ in *242a fiduciary capacity ” on 1 ‘ behalf ’ ’ of the insurer, certainly should not be disregarded.
The judgments of the courts below should be affirmed.
Lewis, Ch. J., Conway and Froessel, JJ., concur with Dye, J.; Fuld, J., dissents in opinion in which Desmond, J., concurs; Van Voorhis, J., taking no part.
Judgment accordingly.

. A wealth of other legislative history further confirms the statute’s design. For instance, the Insurance Department, which sponsored the recodification, announced that proposed section 121 — numbered section 54.3 in the Department’s draft — “is based upon general principles of the law of agency, as the possession of the policy gives the broker an implied authority to receive the premium” (Insurance Law Revision of State of New York, Tent. Draft, Prepared by Insurance Department of New York [1937], § 54.3, p. 123; see, also, Supp. No. 2 to Second Draft [1938], § 54.3, p. 17), and this the Department underscored by its Note to section 50.2, later enacted as section 111 of the Insurance Law; “Under § 54.3 [present § 121],” the Note stated, “the insurance broker or his agent is deemed an agent of the insurer in collecting or receiving premiums.” (Insurance Law Revision, Tent. Draft, op. cit., § 50.2, pp. 101-102. See, also, 1 Public Hearing of Joint Legislative Committee, op. cit., pp. 160-163; Hearings Before the Senate and Assembly Committee on Insurance Recodification Bill [1939], pp. 119-122, 137-142, 154-155.)

. Significantly, in its Revision Note to section 111, the Insurance Department, after observing that the definition of “ insurance broker ” does not include such incidental services as “ delivering policies and collecting premiums ”, went on to say that the public is protected without requiring the licensing of persons performing those ministerial duties, “since under § 54.3 [present § 121] the insurance broker or his agent is deemed an agent of the insurer in collecting or receiving premiums” (Insurance Law Revision, Tent. Draft, op. cit., § 50.2, pp. 101-102).

. I know of no authority for the court's statement (opinion, p. 232) that the broker is allowed ninety days within which to remit the premiums collected. Section 121 of the Insurance Law, to which reference is made, does mention ninety days, but manifestly that ninety-day period is a limit on the authority of the broker to receive premiums from the insured, not a latitude to withhold them from the insurer on whose behalf they were received.