Deposit into the trust account or operating account?

[April2000]

I wanted to get the opinion of other brokers and agents.

If an insured pays with a check, and commission needs to be taken out of the payment, which would be better:

A. Deposit the insured's check into the trust account, and write a check to your agency from the trust account for the commission amount, and deposit that into your operating account.

B. Deposit the insured's check into the operating account, and write a check to your agency from the operating account (minus the commission) and deposit that into the trust account.

I feel that option B would be the correct choice, as the insured's check is a premium payment, and premium payments should always be deposited into the trust account. My colleague disagrees, and claims that option A is better, because option B shows you taking money from the trust account, which should only be for insured's premium payments.

Your thoughts?

[JimatJKD]

Hi,

In most states, it is a voilation of law to co-mingle client funds and agency operating funds. That is why you have a Trust account. Also, you have a fiduciary duty associated with that account to make sure the funds go where they are supposed to (similar to an escrow company). When you accept a check from a client, you deposit it into your Trust account. It is owned by the client until the coverage is bound, at which moment the premium and fees are owned by the carrier, subject to the terms of the policy bound (i.e. cancellation, minimum earned, etc.), and the commission is owned by you. You can then transfer the commission to your operating account.

[CFO]

Option A is what I recommend especially if you consider that this transaction does not happen once a month but multiple times a day and week. Therefore, deposit all the insured's trust fund into your trust checking account and pull out your remaining commission at the end of the month.

Get used to seeing your commissions on a monthly basis instead of moving funds around on a "per transaction" basis so you are not living daily, hand-to-mouth, but monthly. That way, when a large negative happens, like in the case of a return premium WC audit, you have untouched commissions in your trust fund to cover it and are not stretched to come up with the funds. This method also mirrors direct bill activity where the insurance company pays you monthly for your commission.

Of course, you need good insurance accounting software to track all this properly. Insurance trust fund accounting is the biggest difference in the insurance world of accounting, so get used to it and do it right when you receive the money so you do not have the headaches later.

[sacman]

I concur- Option A is the correct procedure.

[TheFieldman]

I would add that Option A, deposit to the Trust Account is correct; and in a perfect world, commission would not be moved to the operating account until it is earned, or as earned. But then again, it's not a perfect world is it......