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Bulletin No. 84-12
Financing of premiums by agents
Issued and entered September 21, 1984 by Nancy A. Baerwaldt, Commissioner of Insurance
The Insurance Bureau has received a number of inquiries concerning what interest charge agents may require for advancing or financing insurance premiums for their clients. There is evidence that some agents are operating under the belief that they may charge up to the maximum service charge allowed to premium finance companies under Chapter 15 of the Insurance Code even though these agents are not licensed as premium finance companies under Chapter 15. The purpose of this bulletin is to inform agents that if they are not licensed as a premium finance company under Chapter 15 then the maximum interest rate they may charge for financing premiums is set by the state usury statute at 5 percent per annum for verbal agreements and 7 percent per annum if there is a written agreement.
Chapter 15 of the Insurance Code of 1956, as amended, MCLA 500.1501- 500.1514, requires premium finance companies to be licensed and regulates their activities. Section 1501(e), MCLA 500.1501(e), exempts insurance agents and agencies from the provisions of the chapter when they finance insurance premiums on business they produce. It states that the Chapter shall not apply to:
Any insurance agent or agency, or any wholly owned premium finance company of an insurance agent or agency, financing only insurance premiums on business produced by the agent or agency.
Public Act 326 of 1966, MCLA 438.31, otherwise known as the "usury statute," limits the rate of interest that may be charged on loans to 5 percent per annum for verbal agreements and 7 percent per annum for written agreements unless the loan is regulated by another statute. It reads in part:
The interest of money shall be at the rate of $5.00 upon $100.00 for a year, and at the same rate for greater or less sum, and for longer or shorter time, except that in all cases it shall be lawful for the parties to stipulate in writing for the payment of any rate of interest, not exceeding 7% per annum. This act shall not apply to the rate of interest on any note, bond or other evidence of indebtedness issued by any corporation, association or person, the issue and rate of interest of which have been expressly authorized by the public service commission or the securities bureau of the department of commerce, or is regulated by any other law of this state, or of the United States, nor shall it apply to any time price differential which may be charged upon sales of goods or services on credit. . . .
The financing of insurance premiums by premium finance companies is not subject to the usury statute because of its regulation under Chapter 15. Prior to the enactment of Chapter 15 in 1968, insurance premium financing by premium finance companies as well as agents was subject to the usury statute according to a 1962 Attorney General's opinion. The concluding paragraph of that opinion spoke directly to agents.
If the transaction between the insurance agent and the insured were to be viewed as a contract between such parties for the loan of money, any amount of charge added to the principal amount loaned which exceeded 7% simple interest per annum would be usurious. If the charge is viewed as a part of the premium for the insurance contract, the add-on is illegal as being in excess of the established rate.
If an agent is not licensed as a premium finance company under Chapter 15 and hence not subject to its regulation he or she cannot take advantage of the service charges allowed under the Chapter.
The intent behind the exemption for agents was to permit them to advance or finance premiums for clients as part of their normal business activities without requiring them to become licensed as a premium finance company. The purpose of the usury statute is to generally regulate the interest rates that can be charged on any credit transaction, unless it is expressly regulated under another statute.
If an agent is not licensed under Chapter 15 as a premium finance company then any financing of premiums they may provide is not subject to regulation under Chapter 15. Hence, any premium financing undertaken by an agent who is not licensed as a premium finance company is subject to the provisions of the usury statute. Agents who are not licensed as a premium finance company and who charge interest in excess of 7 percent per annum on any premium financing they provide will be in violation of the usury statute. An agent wishing to use the service charges permitted under Chapter 15 must become licensed under that chapter as a premium finance company.