The Office of General Counsel has issued the following informal opinion on April 3, 2000, representing the position of the New York State Insurance Department.
Negotiated Reductions in Agent's Commissions
May a New York licensed insurance agent agree to reduce a commission on a commercial property/casualty insurance policy and ask the insurance company in turn to reduce its quoted premium to the insured?
No. A New York licensed insurance agent who agrees to reduce her commission on a commercial property/casualty insurance policy, asking the insurance company in turn to reduce its quoted premium, would thereby violate the statutory prohibitions against improper inducements or an improper rebate contained in New York Insurance Law § 2324(a) (McKinney 1985). Were the insurance company to agree to go along with the foregoing scheme, agreeing to reduce its premium quote to the insured on the basis of an agreement with the agent to reduce its commission, the insurance company would also violate § 2324(a).
A new insurance application came in for a store. The insurance company put together a quote and the agent felt that she would not be able to sell it to the customer. The agent then suggested that since she has controlled the account for many years (with another carrier) she does not have to collect as much information or visit the risk. To reduce the premium she agrees to a 10% commission reduction asking that, in turn, the insurance company reduce the quoted premium by 10%. The requester wishes to have the Department clarify whether the foregoing constitutes rebating in violation of § 2324 of the Insurance Law (McKinney 1985).
New York Insurance Law § 2324 (McKinney 1985) prohibits specified kinds of inducements and rebating. Subsection (a) of the statute provides, in pertinent part, as follows:
(a) No authorized insurer, no licensed insurance agent, no licensed insurance broker, and no employee or other representative of any such insurer, agent or broker shall , or shall directly or indirectly, by giving or sharing a commission or in any manner whatsoever, pay or allow or offer to pay or allow to the insured or to any employee of the insured, either as an inducement to the making of insurance or after insurance has been effected, any rebate from the premium which is specified in the policy, or any special favor or advantage in the dividends or any valuable consideration or inducement of any kind, directly or indirectly, which is not specified in such policy or contract, other than any article of merchandise not exceeding five dollars in value which shall nor shall the insured, his agent or representative knowingly receive directly or indirectly, any such rebate or special favor or advantage [Emphasis added]
The insurance company and the insurance agent determine between themselves the amount of commission that the insurance company will pay the agent. This expense to the insurance company is part of its projected expenses which are filed with the Superintendent as part of the rate filings made in accordance with Article 23 of the New York Insurance Law (McKinney 1985 and Supp. 1999-2000). Producer commission is a factor upon which the rate is based, even if the policy itself is not required to be filed with the Superintendent. Commissions are included in the premium charged the insured.
Section 2344 of the New York Insurance Law (McKinney Supp. 1999-2000) provides that the Superintendent, by regulation, shall establish flexible rate limitations for problem markets. Pursuant to subsection (e) of § 2344, the Superintendent shall establish standards for rating plans designed to modify rates in the development of premiums for individual risks insured in a property/casualty market. Such standards have been set forth in Department Regulation No. 129 (N.Y. Comp. Codes R. & Regs. tit. 11 § 161). Section 161.1(f) defines "expense reduction plan" as follows:
(f) An expense reduction plan is any rating plan or system whereby a base rate for property or liability insurance is reduced based upon a reduction in acquisition, underwriting or loss adjustment expenses associated with the risk.
Such a plan may be filed with and approved by the Superintendent by the insurance company and one such cost of underwriting may be a reduction in agent's commission. If such a plan has been filed and approved by the Department and if the conditions set forth in the plan are met, there may be a resulting reduction in the premium to a specific insured. However, under Section 161.8(f)(3) of the Regulation, an expense reduction plan shall not provide for a reduction in the insured's premium based upon a reduction in the agent's commission, unless made a part of the plan and such reductions are applied in a fair and nondiscriminatory manner to all eligible classes of risk. If a premium reduction is negotiated on an individual insured, single policy basis, the reduction would not be applied in a nondiscriminatory manner to all eligible classes, only to the individual insured on whose behalf the reduction was negotiated. Therefore, a premium reduction based upon an expense saving attributable to an isolated instance of agent commission reduction cannot be given to one insured and not to another insured with an identical insurance risk.
Moreover, under § 2303 of the New York Insurance Law (McKinney Supp. 1999-2000) standards are set for rates. The purpose of what has been proposed is to reduce the premium to be paid by a particular insured or applicant for insurance. By doing so, there would be a variance from the rates filed with the Superintendent, which might render the final premium inadequate or discriminatory in violation of the rate standards set forth in §2303 in that other similarly situated risks may not obtain the benefit of a lowered premium even if it had been using the same insurance producer for years.
By offering to the insurer to reduce its commission on a particular insurance application or the renewal of a policy, the insurance agent would thereby be agreeing to indirectly, by having the insurance company agree to pass on the savings in lower premium to the insured, give a commission to the insured which constitutes offering an improper inducement to purchase the insurance in the nature of a rebate from the premium, a violation of § 2324(a) of the New York Insurance Law (McKinney 1985).
Furthermore, if the insurance company agreed, in response to the request of the insurance agent, to reduce the premium charged to an insured in an individual case, it would also be offering an inducement to purchase the insurance in the nature of a rebate from the premium in violation of § 2324(a) of the New York Insurance Law (McKinney 1985).
The practice of negotiating commissions for the benefit of insureds has, historically, not been condoned by the Department and constitutes a rebate or an unlawful inducement to the making of insurance, which is prohibited by § 2324.
For further information, you may contact Associate Attorney Barbara A. Kluger at the New York City office.