The Pennsylvania Insurance Department has rendered a decision in an agency termination case, recognizing for the first time the concept of de facto terminations.

The case focused on Everett Cash Mutual (ECM) eliminating all commission payments to an agency. The carrier never offered any protections afforded by Pennsylvania’s agency termination statute (Act 143), namely a one-year rehabilitation period or a one-year run-off period.

The Insurance Agents & Brokers (IA&B) of Pennsylvania, an affiliate of PIA, represented the agency involved in this case and also intervened as a party to the case to protect the rights of its 1,250 members in the state. IA&B argued that the complete elimination of commission to the agency in essence created a termination, as an agency cannot operate under those conditions. By allowing a company to act in this way, it would defeat the purpose of the termination statute, thereby rendering it useless.

“This ruling is a vital win for the independent agent community,” said Norm Basso, chairman of the Insurance Agents & Brokers (IA&B) of Pennsylvania. “This case was necessary to defend the law, the rights of agents and the dignity of the agency-company relationship. I’m pleased that the Department recognized this need.”

“It is beyond debate that insurance agents expect and intend to be paid for their efforts, and that companies expect and intend the same,” stated the Insurance Department in its decision. “Total elimination of [the agent’s] commissions by ECM represented … intolerable working conditions for the agency and elimination of the contract’s essence. Accordingly, it constituted a de facto termination of the contract.”

Jason F. Ernest, vice president and general counsel for the Insurance Agents & Brokers of Pennsylvania, which represented the Fishel agency, said while there have been incidents like this in the past, this is the first time an agent has gone to the commissioner for an opinion. The decision, he said, helps to clarify the relationship between agents and companies. While the decision only pertains to Pennsylvania agents, it could be used as a precedent in other cases. It could also serve as a wake-up call to agents in other states to examine their termination laws and determine if the protections are strong enough.

A Zero Agent Commission Equals Termination, PA Rules (National Underwriter 12/11)

Agent Commission Reduction to 0% Overturned in PA (IF&A 12/14/09)

Insurance Dept. recognizes de facto terminations (IA&B 12/10/09)

December 15, 2009