New York State Seal
STATE OF NEW YORK
INSURANCE DEPARTMENT
25 BEAVER STREET
NEW YORK, NEW YORK 10004

The Office of General Counsel issued the following informal opinion on May 6, 2002, representing the position of the New York State Insurance Department.

Re: N.Y. Ins. Law § 3425(j)- New Business Acceptance Requirements

Questions Presented:

1. Does a suspension by a property/casualty insurer of sub-producers from writing new personal lines and new non-commercial automobile policies in certain geographic areas of New York count as a "termination" for N.Y. Ins. Law § 3425(j)(1)(C) (McKinney 2000 & Supp. 2001-2002) purposes, in order to trigger the 120-day period following the date of notice of such termination?

2. Can an executed letter agreement between an insurer and producer that suspends sub-producers from writing new business, affect the termination rights of sub-producers under N.Y. Ins. Law § 3425(j)(1)(C)?

3. Does the obligation of an insurer to continue to accept new business for the 120-day period following the date of notice of termination continue to apply if a sub-producer becomes insolvent, abandons business, or commits gross or willful misconduct, or fails to pay over to the insurer moneys due to the insurer after a written demand, if such acts are committed subsequent to the termination but during the period requiring acceptance of new business?

Conclusions:

1. The suspension by a property/casualty insurer of sub-producers from writing new personal lines and new non-commercial automobile policies in certain geographic areas of New York does not count as a "termination" because it constitutes geographic redlining and is illegal in New York, pursuant to N.Y. Ins. Law § 3429 (McKinney 2000).

2. No, an executed letter agreement between an insurer and producer cannot limit the termination rights of sub-producers provided by N.Y. Ins. Law § 3425(j)(1)(C), regarding new business by terminated sub-producers.

3. If a sub-producer becomes insolvent, abandons business, or commits gross or willful misconduct, or fails to pay over to the insurer moneys due to the insurer after a written demand, and if such acts are committed subsequent to the termination but during the period requiring acceptance of new business, the obligation of an insurer to continue to accept new business for the 120-day period following the date of notice of termination would not continue to apply upon the insurer providing notice to the sub-producer.

Facts:

In September, 1999, a property/casualty insurance company ("Insurer") entered into an independent agency contract ("Agency Agreement") with an agency services company ("Agency"), whereby Agency would act as agent for Insurer in approximately 23 states, including New York, with over 600 sub-producers countrywide. Approximately 150 sub-producers of Agency are New York licensed insurance agents. Agency’s sub-producers are authorized and appointed by Insurer to accept and bind applications for insurance, among other things. Agency’s representation of Insurer is non-exclusive.

Pursuant to the Agency Agreement, the commissions on business placed by Agency with Insurer are paid by Insurer directly to Agency, not to the sub-producers. Agency has a separate contract with its sub-producers that cover the sharing of commissions with them.

The Agency Agreement provides that it automatically terminates upon the occurrence of certain events. It also provides that Insurer may terminate it for cause upon written notice, and that Insurer may terminate the Agency Agreement without cause upon 120-days prior written notice to Agency.

In April, 2001, Insurer directed Agency to cease approximately 65 of its sub-producers from writing some new personal lines and some new automobile policies. According to Agency, the restriction was of a geographic nature. The sub-producers were restricted from writing new business in the following counties: Bronx, Brooklyn, Manhattan, Queens, Staten Island, Nassau, and Suffolk. However, they were permitted to write new business elsewhere in New York State.

In June, 2001, in response to requests by Insurer to suspend new business under the Agency Agreement, Agency sought arbitration of Insurer’s right to suspend new business, among other things. The parties settled that request for arbitration by agreeing to certain actions memorialized in a letter agreement of August 8, 2001 ("Letter Agreement"). Pursuant to the Letter Agreement, Agency agreed to suspend new business for certain producers with loss ratios of 65.1% or more and who had been appointed by Insurer for 9 months or longer. These sub-producers were to be reviewed in 6 months and those with loss ratios below 65.1% were to be considered for eligibility to resume writing new business. This affected 36 sub-producers. None of the sub-producer’s appointments were terminated by Insurer.

On January 23, 2002, Insurer gave written notice to Agency that the Agency Agreement was being terminated without cause and provided 120-days notice. Agency then notified its sub-producers.

Agency contested the validity of this termination in federal court and filed a lawsuit on January 4, 2002, in anticipation of the termination of the Agency Agreement. The parties are currently considering a settlement of the lawsuit.

Analysis:

N.Y. Ins. Law § 3425(j)(1)(C) states:

(j)(1) Where an insurer or an agent who is authorized by such insurer to accept lines of insurance from licensed agents or brokers notifies a licensed agent or broker that its contract or account shall be terminated:

(C) with respect to all new personal lines and automobile insurance business offered by such terminated agent or broker which is subject to the provisions of this section, the insurer shall accept all such business meeting the insurer’s then current underwriting standards during the period of one hundred twenty days next following the date of mailing or delivery to the agent or broker of written notification of such termination . . . .

Question No. 1:

The suspension by a property/casualty insurer of sub-producers from writing new personal lines and new non-commercial automobile policies in certain geographic areas of New York does not count as a "termination" because it constitutes geographic redlining.

In April, 2001, when Insurer directed Agency and approximately 65 of its sub-producers to stop writing new business for personal lines and non-commercial automobile policies in only the Bronx, Brooklyn, Manhattan, Queens, Staten Island, Nassau, and Suffolk Counties, a violation of N.Y. Ins. Law § 3429 (McKinney 2000) occurred. This is geographic redlining and is illegal in New York.

N.Y. Ins. Law § 3429 (McKinney 2000) states, in relevant part:

No insurer shall refuse to issue or renew or shall cancel a policy of:

(1) fire insurance or fire and extended coverage insurance, or

(2) automobile insurance subject to section three thousand four hundred twenty-five of this article

based solely on the geographical location of the risk within this state . . . .

In addition, N.Y. Comp. Codes R. & Regs. tit. 11, § 218.1 et seq. (1996) (Regulation 90) deals with the prohibition of geographic redlining in writing private passenger automobile and fire or fire and extended coverage insurance policies.

Section 218.1, the Preamble, states:

The purpose of this Part is to make fire or fire and extended coverage insurance and private passenger automobile insurance readily available in the voluntary market by prohibiting companies from engaging in redlining practices through refusal to issue or renew, or from cancelling policies based on the geographic location of the risk; or by terminating or cancelling contracts or accounts of agents or brokers based on their geographic location of the risk; or by terminating or cancelling contracts or accounts of agents or brokers based on their geographic location or the geographic location of the risks or properties for which coverage is being provided by such producers.

Section 218.2, Applicability, states:

This Part shall be applicable on and after October 1, 1979 only to:

(a) applicants for, and policies of, fire or fire and extended coverage insurance covering properties located in this State;

(b) applicants for, and policies of, automobile insurance covering risks in this State which are subject to section 3425 of the Insurance Law; and

(c) contracts and accounts of agents and brokers writing insurance subject to this Part.

Thus, the action that Insurer employed in suspending sub-producers from writing new business (as stated above) in certain geographic areas, was illegal geographic redlining and in violation of the Insurance Law. Accordingly, there was no termination pursuant to section 3425(j)(1)(C) as a result of Insurer’s actions in April, 2001.

This matter is being referred to the appropriate bureau for investigation.

Question No. 2:

You inquire if an executed letter agreement between an insurer and producer that suspends sub-producers from writing new business, can affect the termination rights of sub-producers under N.Y. Ins. Law § 3425(j)(1)(C).

In New York, a contract between an insurer and producer cannot usurp the requirements of N.Y. Ins. Law § 3425(j)(1)(C) and contract away the statutory rights of sub-producers. In this matter, that is the 120-day new business requirement period, as stated above in N.Y. Ins. Law § 3425(j)(1)(C). N.Y. Ins. Law § 3425(j)(1)(C) mandates the 120-day notice period for "licensed agents or brokers" when notice of termination is given. In this case, the sub-producers are the "licensed agents or brokers." The sub-producers have been appointed by Insurer, as stated in Insurer’s letter dated August 8, 2001 to Agency, and authorized to act as agents for Insurer. Therefore, Insurer may not now argue that the sub-producers were not their agents1 and thus not entitled to statutory rights under the Insurance Law.

Accordingly, Insurer was required to accept new business for 120 days after the date of the termination notice—January 23, 2002. Insurer was accepting new business for the 120 days after January 23, 2002, and therefore, Agency’s argument that the 120-day period should begin to run effective from the date of this Department’s decision, has no merit. The 120-day notice period began to run with the issuance of termination notices to the sub-producers following the date of mailing or delivery of such written notification of termination.

Question No. 3:

You also inquire if a sub-producer becomes insolvent, abandons business, or commits gross or willful misconduct, or fails to pay over to the insurer moneys due to the insurer after a written demand, and if such acts are committed subsequent to the termination but during the period requiring acceptance of new business, the obligation of the insurer to continue to accept new business for the 120-day period following the date of notice of termination would not continue to apply upon the insurer providing notice to the sub-producer.

N.Y. Ins. Law § 3425(j)(2) states in relevant part:

This subsection shall not apply to an agent who agrees to represent exclusively one insurer or a group of insurers under common management or an agent or broker whose license has been revoked by the superintendent or whose contract or account has been terminated for insolvency, abandonment, gross and willful misconduct, or failure to pay over to the insurer moneys due to the insurer after receipt of a written demand therefor.

The above section does not directly pertain to your question because in your question, the act takes place after the termination notice was given to the sub-producer. However, the intent of the statute would still apply. The rights that section 3425(j) grant to a terminated producer or sub-producer (i.e. continue existing policies and receive new business), do not apply where the producer or sub-producer has been terminated for insolvency, abandonment, gross and willful misconduct, or failure to pay over to the insurer moneys due to the insurer after receipt of a written demand from the insurer, and section 3425(j) was not intended to protect a producer or sub-producer in such a case.

Therefore, if a sub-producer becomes insolvent, abandons business, or commits gross or willful misconduct, or fails to pay over to Insurer moneys due after a written demand is made, and if such acts are committed subsequent to the termination but during the period requiring acceptance of new business, Insurer or its producer, should provide written notification to the sub-producer that it will no longer be accepting new business from that sub-producer effective immediately, with an explanation for the reason why the sub-producer is being terminated for cause.

For further information, you may contact Senior Attorney Meredith S. Kaufer at the New York City Office.


1 Insurer argues that the mandated 120-day period to accept new business "should not apply to sub-producers of a cluster or agency aggregator with whom the insurer has no contractual relationship and who were suspended for new business with the consent of the cluster agency with whom the insurer has its only contract prior to termination of the agency agreement . . . ."