OGC Opinion No. 06-02-12

The Office of General Counsel issued the following opinion on February 15, 2006, representing the position of the New York State Insurance Department.

Take-out credit program-producer commissions

Question Presented

When an insurer obtains "take-out" credit for a policy that had been written in the New York Automobile Insurance Plan (the "Plan"), do the current rules of the Plan require the insurer to pay the insurance producer no less than the Plan rate of commission on every renewal of the policy?

Conclusion

Subject to certain limitations discussed below, the rules of the Plan currently require the insurer to pay the insurance producer no less than the Plan rate of commission on every renewal of a policy for which the insurer has received take-out credit.

Facts

In 1993, the Superintendent of Insurance directed the New York Automobile Insurance Plan (the "Plan") to add Section 6.A.6.c, entitled "Take-out Credit". Section 6.A.6.c(i) provides that an insurer shall receive a take-out credit, one time for one year only, for each private passenger nonfleet automobile policy¹ presently in the Plan that the insurer voluntarily writes, subject to the other provisions of Section 6.A.6.c.

Sections 6.A.6.c(iv) and (v) address the rights of the insurance producer. It specifies:

The inquirer asks how long the insurer has to pay commission to the producer at no less than the Plan commission rate. The inquirer included a memorandum he had written that concluded that "the current Plan rules support the position that a producer of a former Plan policyholder is entitled to commission for each renewal of that policy at no less than the rate applicable to Plan business except where a producer is terminated, in which case the terminated producer would be entitled to receive the insurer's prevailing commission rate in accordance with Section 3425(j)."

Analysis

As a general rule, the amount of commissions earned is a contractual matter between the insurer and the producer and not regulated under the Insurance Law. There are, however, certain significant exceptions. For example N.Y. Ins. Law § 3425(j) (McKinney 2000 & Supp. 2005) and N.Y. Ins. Law § 3426(k) (McKinney 2000 & Supp. 2005) address commission rates when an insurer terminates an insurance producer's contract or account; and § 3425(n) addresses commissions of insurance agents when the Superintendent has determined that an insurer's elimination of premium installment plans, reduction in commission, or other marketing action was implemented to effectuate a withdrawal or substantial withdrawal from writing automobile insurance or the insurer intends to materially reduce the volume of homeowners' policies. In addition, Section 21 of the Plan rules establishes mandatory commission rates, which for private passenger nonfleet automobile, would be 10% of the policy premium. The Plan's take-out program is another provision that provides certain restrictions on what an insurer shall pay in commissions.

We concur with your conclusion that the current Plan rules mandates that the insurer shall pay no less than the producer commission rate applicable to Plan business not only for the first policy period voluntarily issued but so long as the insurer continues to renew the policy, subject to certain caveats discussed below. By the plain language of Section 6.A.6.c(v), the obligation applies not only for the policy when it is "written voluntarily" but also for the policy when it is "renewed voluntarily." Nothing in the Plan rules limits the renewal requirement to one or two terms; hence, on its face, the rule imposes an on-going obligation on the insurer.

The requirement is subject to the three exceptions specified therein: decertification or suspension by the Plan; termination of the producer relationship initiated by the insured; and the existence of an exclusive agency that precludes the producer from dealing with other insurers.

In addition, there are certain statutory limitations that are not expressed in the Plan rule that would obviously preempt the rule. First, if the producer is an insurance agent, the agent must be appointed, or become appointed, by the insurer, as required by N.Y. Ins. Law § 2115(a) (McKinney 2000 & Supp. 2005.) Second, the producer's license may not have been revoked or suspended by the Superintendent.

In a memorandum written by the inquirer, the inquirer subjected the Plan rule to a third exception; namely that of the requirement in N.Y. Ins. Law § 3425(j) (McKinney 2000 & Supp. 2005) that the insurer need only pay the prevailing commission rate if the insurer terminated the relationship with the producer. However, the Insurance Department disagrees. Section 3425(j) establishes the minimum amount of commission that an insurer may pay to a terminated producer, not the maximum. An insurer may always agree by contract or otherwise to pay more than the amount required by § 3425(j). Under the Plan rules, the insurer must pay no less than the Plan producer commission rate in order for the insurer to obtain take-out credit. Hence, the insurer remains bound by its agreement with the Plan and shall continue to pay no less than the Plan commission rate so long as the producer remains the producer of record. If, however, the prevailing commission rate were greater, the insurer would have to pay that amount. We further note that the same result applies with respect to § 3425(n) and § 3426(k).²

The amount of commission paid to a particular producer would not have an impact on the actual premium charged the insured because, generally, commission amounts are treated as a component of expense costs in rate-filings made to the Department and averaged into the premium. Hence, even if the insurer paid Broker A a five percent commission for non-take-out business but had to pay the same or different broker ten percent for the take-out business, the insured's premium would be the same.

If the Plan believes that the rules should be modified, it must submit the amendment to the Superintendent for approval in accordance with N.Y. Ins. Law § 5301(b) (McKinney 2000) along with its reasons to modify the rule.

For further information you may contact Principal Attorney Paul A. Zuckerman at the New York City Office.

¹  "Private passenger nonfleet automobile" is not defined as such in the Plan rules.  Section 1 states, in pertinent part, that the purpose of the Plan is:

(a) To make motor vehicle liability insurance available to

1.   private passenger automobile risks; and
2.   all other motor vehicle risks including garages;
3.   all-terrain vehicles (ATVs) in accordance with the provisions of Regulation 35-C promulgated by the Department of Insurance;
4.   snowmobiles in accordance with the provisions of Regulation 35-B promulgated by the Department of Insurance;
5.   low speed vehicles as defined by Vehicle and Traffic Law section 121-f.

(b) To make medical payments coverage available with respect to private passenger vehicles not for hire, and motor vehicles used for private passenger purposes.

(c) To provide the coverages required under the Comprehensive Automobile insurance Reparations Act to all motor vehicle risks subject to the act.  "Motor vehicle" shall have the meaning described in section three hundred eleven of the Vehicle Traffic Law except that (1) it shall also include fire and police vehicles and (2) it shall not include a motorcycle.

(d) To make automobile physical damage coverage available to the following types of motor vehicles not for hire written on a specified car basis:

1.   Private passenger
2.   Motorcycles
3.   Recreational trailers excluding trailers used as residences
4.   Light commercial vehicles, as defined in Rule 120 of the Physical Damage Section of the New York Automobile Insurance Plan Manual
5.   Motor homes and camper bodies, as defined in the New York Automobile Insurance Plan Manual
6.   Church buses, as defined in Rule 126 of the New York Automobile Insurance Plan Manual
7.   Driver education cars, as defined in Rule 128 of the New York Automobile Insurance Plan Manual

"Nonfleet" is defined in Section 6.A.1.e to mean "...four or less motor vehicles of any type."  Fleet is defined as "five or more motor vehicles of any type."  "Private passenger" is not defined; however, Section 6.A.1.e states that "Miscellaneous nonfleet personal vehicles" includes such vehicles as motor homes, campers, dune buggies, all-terrain vehicles, antique autos and snowmobiles.

Section 17 of the Plan distinguishes between a "private passenger auto insurance policy" and "commercial auto coverage part program." Section 17.A.1.a states that the private passenger auto insurance policy shall be utilized, in pertinent part, for "Private passenger automobiles, as defined in Rule 15 of the New York Automobile Insurance Plan Manual, that have four wheels and are owned or hire under a long-term contract by an individual or by husband and wife who are residents in the same household or jointly by relatives other than husband and wife, or jointly by resident individuals."  Other vehicles that use the same policy form include "snowmobiles, motorcycles, or motor homes used for pleasure or driven to and from work that are owned or hired under a long-term contract by an individual or husband and wife who are residents in the same household, and written on a specified car basis" and low-speed vehicles.  Section 17.B states that "all other risks, except for-hire vehicles, excess liability policies, or all-terrain vehicle policies, assigned under the Plan" shall be provided coverage under the Commercial Auto Coverage Part program.

Rule 15 provides, in pertinent part:

²  As noted, "private passenger nonfleet automobile" is not defined in the Plan, but from the definitions and discussion contained in Footnote one above, it appears that the term includes some risks that come within the definition of a "covered policy" as defined in § 3426(a)(1) and therefore would become subject to §3426 upon being taken-out from the Plan.  For the purposes of this letter, however, we need not establish for which policies that would be the case.