The Office of General Counsel issued the following opinion on December 27, 2004, representing the position of the New York State Insurance Department.
Re: Commissions Payable to Terminated Insurance Agent
With respect to non-commercial automobile insurance subsequent to the termination of an agency contract, does an insurer have an obligation to pay renewal commissions to its former insurance agent at a rate specified in the contract or may it unilaterally reduce the commission rate payable to the terminated agent?
Pursuant to N.Y. Ins. Law § 3425 (McKinney Supp. 2005), the insurer retains certain obligations out of its former business relationship with a licensed agent or broker that may survive the termination of an agency contract for a limited time period. A terminated agency contract between the insurer and the terminated agent may set forth specified commission rates as is the case with the contract in issue. However, the agent's rights to continue to collect commissions following the termination of the contract are controlled by N.Y. Ins. Law § 3425 (j)(1)(D) (McKinney Supp. 2005) at "the insurer's prevailing commission rate", unless the contract provides for a higher amount.
The inquirer represents an insurance agent described as having entered into an independent agency agreement with an insurer on January 4, 2001 to sell non-commercial automobile insurance. The inquirer states that the agreement provided for a 16% commission rate on new insurance policies and a 13% commission rate on renewal policies. The inquirer states that under the terms of the contract, these commission rates were subject to amendment annually, following written notice of 120 days. For a reason other than for cause, the insurer terminated the agency agreement for binding new coverage effective July 2, 2002. The inquirer states that by notice in August 2002, effective January 2003, the insurer unilaterally reduced the commission rate on renewed policies from 13% to 12%, and by notice in June 2003, the insurer stated that such rate would be further reduced from 12% to 5% effective January 2004.
N.Y. Ins. Law § 3425 (McKinney Supp. 2005) applies to non-commercial automobile insurance, other than that written through the New York Automobile Insurance Plan, as well as to certain other property/casualty personal lines of insurance. § 3425(j)(1)(A), (B) & (C) (McKinney Supp. 2005) requires that when an insurer terminates the contract of a licensed agent or broker, depending upon the kind of insurance, the insurer has an obligation to write renewals through the terminated agent or broker for a specified time. None of the exceptions in subparagraph (j)(2) of § 3425 apply to this situation.
The required policy period for a new automobile insurance policy subject to § 3425 that is voluntarily written on or after August 2, 2001 and prior to June 26, 2003, is three years pursuant to § 3425(m) (McKinney Supp. 2005). Where a producer agreement has been terminated, N.Y. Ins. Law § 3425(j)(1)(A) and (m)(2) require an insurer to offer to keep such policy in force for the remainder of the three-year required policy period. The insurer must also offer to continue the policy through the terminated producer for the next one-year policy period that commences within one year following the date of mailing or delivery to the terminated agent of written notice of termination. Thereafter, at the specific request of the insured, the insurer must offer to continue the policy through the terminated producer for the remaining years of the three-year required policy period.
For automobile insurance policies originally issued on or before August 1, 2001, or originally issued on or after June 26, 2003, the required policy period for automobile insurance is one year but the insurer is limited in the number of policies that may be annually non-renewed or conditionally renewed by the "two-percent rule" specified in N.Y. Ins. Law § 3425(f) (McKinney 2000 and Supp. 2005).
Subparagraph (D) provides that: "the terminated agent or broker shall be entitled to receive commissions on account of all business continued or written pursuant to this paragraph [ (j)(1) ] at the insurer's prevailing commission rate for such lines of insurance. . . ." The old rate in the contract may be higher or lower, or the same, as the insurer's prevailing rate. Unless the contractual commission rate is higher, the prevailing rate is the controlling amount.
The producer's rights are subject to the continuation of the policy. An insurer may cancel or non-renew a policy as permitted under N.Y. Ins. Law § 3425 (McKinney Supp. 2005), and, in such circumstances, is not required to make the offers above-described.
We offer no opinion with respect to the agency contract. This opinion is limited to an interpretation of the Insurance Law.
Opinions on this statutory section are on our web site at www.ins.state.ny.us.
For further information you may contact Associate Attorney Jeffrey A. Stonehill at the New York City Office.