Proper Binder Billing Procedure
When invoicing clients on a binder bill basis, the brokerage must ensure that clients are properly invoiced otherwise the binder billed policy cannot be accrued and counted as a trust receivable.
There must also be proper reversing mechanisms in place for when the actual policy or endorsement is received to prevent the double counting of trust asset and liability balances which would result in the overstatement of the trust position by the corresponding commission element.
As with all agency billed premiums, binder billed premiums must also be consistently aged. The aging process should commence with the latter of the effective date or the invoice date (i.e. if the binder is 60 days old when the policy comes in, then it should be 60 days old after it has been issued and invoiced and balances on the aged list should not be flipped from 60 days old to current as a result of the policy being issued). The parameters for this process should be set to segregate those premiums that are current from those premiums that exceed 90 days.
When the brokerage permits clients to pay premiums by post-dated cheques, problems with Trust account adequacy may result where the cheques are payable more than 90 days from the effective date of the policy.
Premiums receivable over 90 days are deducted from the total premium receivable for the purposes of calculating “trust assets” on the Form 1 Position Report. Thus, the deduction of these over 90 day post-dated cheques may place a brokerage in a “technical” trust deficit when the brokerage may be actually in an “earned position”. When the brokerage is in an “earned position”, the brokerage could cancel any policy for non-payment if a post-dated cheque were NSF and still be in sufficient funds, already cashed, to cover the time-on-risk earned premium due to the insurer for the policy.
Generally, if a brokerage is in a “technical” trust deficit situation, and if the brokerage is able to satisfy RIBO that an adequate system for the accounting and collection of trust receivables is in place and operating, the brokerage may be permitted to include, in determining the trust position, the over 90 day balances represented by post-dated cheques provided that for each over 90 day receivable the brokerage has an unearned premium balance of at least 60 days against earned premium may be applied if the policy is cancelled.
However, if the brokerage offers a system of in-house premium financing to the brokerage’s customers and the total amount financed represents more than 10% of the total trust assets, NO post-dated cheques applied to over 90 day balances will be considered as allowable trust receivables, for the purpose of determining the trust position.