Insurance Law § 3428(d) provides that when a policy obtained through a premium finance agreement is cancelled, the insurer must return the gross unearned premiums to the finance company.

Recently, in All Island Credit Corp. v. Countrywide, a premium finance company alleged it was entitled to the pro rata return of premium not on the amount of premium that was actually paid – but on the total cost of the policy.  They key facts are as follows.

Plaintiff was a premium finance company that financed an auto insurance policy issued by Country-Wide Insurance Company to Gotham Logistics. Inc.  The cost of the policy was $90,522.  All Island made a payment to Country-Wide for $67,891.00, but soon thereafter cancelled the policy.   The time that the policy was in effect was about 25% of the year, which calculated to $22,493.91 based on the total cost of the policy.  Country-Wide thus returned about $45,000 to All Island.

But All-Island claimed that because the gross value of the policy was $90,337, it was entitled to about $77,000, because the total earned premium should be deducted from the gross value.  All Island argued that the phrase “gross unearned premiums” meant the value of the premiums due for the remaining period following the cancellation or termination of the policy irrespective of whether such premiums were actually paid.

But the court found that argument “illogical and contrary to the plain terms of the statute.”  It held that implicit in the statue was the notion that the insurer actually received the premiums that it was obligated by law to return, as it could otherwise result in a windfall to the insurer.

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