"I would like to know where I can find information or get clarification regarding bank accounts for an independent agency. I have two separate bank accounts for the agency:

 1)   Premium Trust Account. This account handles all incoming clients' monies and/or deposits, monies to insurance companies via sweep and commissions, outgoing refunds, etc.

2)   Operating Account. This account pays the rent, phones, buys the office supplies, disburses payroll, etc.

“My understanding is that you NEED two accounts for this reason so you do not comingle funds. Certain agency owners are telling me I am incorrect and I was unable to find anything on this from your website or our insurance department. Can you please provide me with credible information so I can pass it along so these agencies to make sure they will do the RIGHT thing by way of transactions.”

You've heard the expression, "It's not only a good idea, it's the law"? Sometimes dual accounts may be legally mandated but, if not, it's still a good idea. We ran this by the VU faculty and got the following comments:

Because regulation is at the state level, this question needs to be answered by your DOI. In New York State, the inquirer is absolutely correct about the separation of premium and operating accounts and the premium trust account at all times must have adequate money to reflect the fiduciary any funds an agent has collected on the companies’ behalf. In order to escape this condition, an agent must have a letter of permission from EVERY carrier it represents to allow comingling of funds at the companies’ specific permission. What is permissible in your state may be another matter.

Regardless of whether a state requires separate bank accounts, it is an excellent idea to have two different bank accounts just as you describe. Some insurance company contracts require separate contracts too and nothing is lost by having two. If you want to go one step further, list the Premium Trust account as a fiduciary account with your bank. In the event of a banking crisis or just your bank being taken over, the FDIC limits might not be applied as strictly if the account is designated in this manner.

I have not researched your state's law. But, even if not required by law, it is the Best Practice for insurance agencies to do so. There are federal laws that prohibit comingling of funds as well. Bottom line….it is not your money until you pay the carrier their account current, then you can transfer the commission portion to your operating account. Two accounts are the standard.

I think it depends upon the law in your state. In our state, an agency can use one bank account, but they need to keep the funds separate in their internal accounting system so the fiduciary funds can be identified at any point in time. I was one of the few agents I knew who kept two separate accounts, but somehow it felt better to do that. It wasn’t a legal requirement. Check with your insurance department.

There are many states that have a mandatory Trust Account requirement. Your state is not one, at least not yet. I believe that they are working their way towards this though. Agencies that have been audited by your DOI have in all cases been required as part of the audit (usually triggered by a complaint) to separate funds. In addition, from my experience, all "new" agencies are required to have a trust account.

In my experience, handling funds in two separate accounts is the right way to run your agency. It is never a good idea to comingle funds that are entrusted to you. Today there is so much direct bill that in my experience of working with agencies (a lot of them in your state) the amounts in the trust account certainly don't add up to the massive amounts of say 20 years ago. But, if you have the two accounts, keep them. That way, when it becomes law, you won't have to go through the process that other agencies will need to do.

This link will take you to an extremely well presented article in the Insurance Journal on trust accounts.

Not all states are “trust account states,” meaning it isn’t a regulatory requirement that the agency maintain both a trust and operating account. However, even in states that don’t require that agencies not comingle funds, we find that most agencies still have both a trust and operating account.

You are absolutely correct in how those accounts should be used. What the other agencies who seem to disagree MIGHT be saying is that not all states require trust accounting, but that is not the important thing. What is important is that any business should keep track of what is ITS money vs. other people's money and not use other people's money to pay its own bills. That is misdirection of funds/larceny/petty larceny in every state!

It is also important to note that an agency should move commission as part of month end processing from the trust account (because you pay your carriers "net") to the operating account.

Many carriers who authorize and do sweeps from the agency accounts for direct bill payments made at the agency require the agency to have a separate sweep account, separate from the agency bill premium trust account, and I agree that is a good idea. If an agency does direct bill "sweeps," then it should probably have THREE accounts.

One more thing: the premium trust account should be set up with the bank as a "secure escrow" account so that any holds (allegations from creditors or bank issues that can arise from the Dodd-Frank banking bill) leave the trust fund untouched. Another very good reason to have a trust account.

This is one of my favorite subjects and I find that even really, really smart agencies are not up-to-speed on it.

Last Updated: May 20, 2016