OGC Op. No. 10-01-05

The Office of General Counsel issued the following opinion on January 19, 2010 representing the position of the New York State Insurance Department.

Re: Terminated agent and § 3425 covered policy of personal lines insurance

QUESTION PRESENTED:

With respect to a personal lines insurance policy, if an insurer terminates its contract with an insurance agent during the policy's first year, and the insured specifically requests to continue the policy through the terminated agent until the conclusion of the three-year required policy period, ¹ must the insurer pay the agent commission?

CONCLUSION:

With respect to a personal lines insurance policy, if an insurer terminates its contract with an agent during the policy's first year, and the insured specifically requests to continue the policy through the terminated agent until the conclusion of the three-year required policy period, the insurer must offer to continue the policy through the terminated agent for any remaining part of the three-year required policy period, and absent any agreement to the contrary, pay the agent the prevailing commission rate.

FACTS:

The inquirer reports the following as facts applicable to the inquiry: (1) the policy is a personal lines insurance policy, specifically, a homeowners’ policy, (2) the agent is terminated in the first year of a three-year required policy period, (3) the insured specifically requests to continue the policy through the terminated agent until the conclusion of the three-year required policy period, (4) the policy is not cancelled or non-renewed, (5) Insurance Law § 3425(j)(2) is not otherwise applicable, and (6) the insurer pays the agent "the insurer's prevailing commission rate" of 20% for each year of the policy, and the.agent's contract or other agreement with the insurer does not provide for greater or different compensation. ²

The inquirer asks OGC whether the insurer must pay the agent the remaining two years of commission.

ANALYSIS:

Insurance Law § 3425 is relevant to the inquiry. That statute governs the cancellation and renewal provisions for most non-commercial property/casualty insurance policies. Insurance Law § 3425(a)(2) states in pertinent part as follows:

(a) This section shall apply to covered policies of insurance as defined in paragraphs one, two and three hereof.

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(2) "Covered policy" also means a contract of insurance, referred to in this section as "personal lines insurance", other than a contract of insurance defined in paragraph one hereof, issued or issued for delivery in this state, on a risk located or resident in this state, insuring any of the following contingencies:

(A) loss of or damage to real property used predominantly for residential purposes and which consists of not more than four dwelling units, other than hotels and motels;

(B) loss of or damage to personal property in which natural persons have an insurable interest, except personal property used in the conduct of a business; and

(C) other liabilities for loss of, damage to, or injury to persons or property, not arising from the conduct of a business, when a natural person is the named insured under the policy.

Although § 3425 does not define the term "homeowners insurance policy", such a policy comes within the above definition of “covered policy”. ³

Insurance Law § 3425(j)(1)(A) governs the insured's and terminated agent’s rights under the facts presented by the instant inquiry. That statute provides:

(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:

(A) with respect to a personal lines insurance policy required to be continued by this section, the insurer shall offer to continue the policy for any remaining part of the required policy period and any statutory extension and the insurer shall offer to continue the policy through the terminated agent or broker for at least its next one year policy period which commences within one year following the date of mailing or delivery to the terminated agent or broker of written notice of termination of such contract or account, and thereafter, at the specific request of the insured, shall offer to continue the policy through such terminated agent or broker for any remaining part of the required policy period including statutory extension[.]

Insurance Law § 3425(j)(1)(A) thus provides that where an insurer terminates an insurer-insurance agent contract, the insurer must offer to keep a personal lines insurance policy—which includes a homeowners’ policy—in force for the remainder of the three-year required policy period. Additionally, the insurer must offer to continue the policy through the terminated agent for at least its next one-year policy period that commences within one year following the date that the termination notice is mailed or delivered to the agent. Thereafter, at the specific request of the insured, the insurer must offer to continue the policy through the terminated agent for any remaining part of the three-year required policy period.

Both the insured's and the terminated agent's rights under Insurance Law § 3425(j)(1)(A) are, however, subject to the continuation of the policy. In that instance, the insurer must pay the terminated agent "the prevailing commission rate" pursuant to Insurance Law § 3425(j)(1)(D), which provides:

the terminated agent or broker shall be entitled to receive commissions on account of all business continued or written pursuant to this paragraph at the insurer's prevailing commission rate for such lines of insurance.

However, an agent's rights under Insurance Law § 3425(j) neither enhance nor diminish the rights accorded to insureds or insurers under Insurance Law § 3425. Thus, an insured may cancel or non-renew a policy that had been placed by a terminated agent at any time. And an insurer may cancel or non-renew a policy that had been placed by a terminated agent based upon any of the grounds, and in the manner, as provided by other applicable provisions of Insurance Law § 3425.

Finally, please be advised that the Insurance Law § 3425(j)(2) provides an exception to the general rule established by Insurance Law § 3425(j)(1). Section 3425(j)(2) reads as follows:

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.

For further information, you may contact Senior Attorney Robert Freedman at the New York City office.

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¹ N.Y. Ins. Law § 3425(a)(7) (McKinney Supp. 2009) states as follows: "With respect to personal lines insurance, ‘required policy period’ means a period of three years from the date as of which a covered policy is first issued or is voluntarily renewed".

² As stated in Office of General Counsel Opinion No. 06-02-12 (02/15/2006): "Section 3425(j) establishes the minimum amount of commission that an insurer may pay to a terminated producer, not the maximum. An insurer may agree by contract or otherwise to pay more than the amount required by § 3425(j)."

³ Insurance Law § 2351(a), in the context of multitier programs, defines a homeowners policy to mean:

[A] contract of insurance insuring against the contingencies described in subparagraphs (A), (B) and (C), or (B) and (C) of paragraph two of subsection (a) of section three thousand four hundred twenty-five of this chapter and which is a "covered policy" of personal lines insurance as defined in such paragraph; provided, however, that the coverages provided under such subparagraphs (B) and (C) shall not apply where the natural person does not have an insurable interest in the real property, or a portion thereof, or the residential unit in which such person resides.