Carrier do’s and don’ts: Commission cuts

To anyone who works in the insurance industry, it is clear that the marketplace is going through a period of transition. The increasing occurrence of severe weather, growing interest rates, and increasing replacement cost are a few of the drivers that are creating this transition—which is leading many carriers to change their underwriting appetites. Unfortunately, this means disruption for both insurance agents and their clients. For clients, this may mean increased premiums or policy cancellations. For agents, this may mean a reduction of commission levels.

When it comes to carrier actions, one of the most frequently asked questions I get is: Is an insurance carrier permitted to reduce agency commissions? Unfortunately, the answer is almost always yes. But, why can carriers do this? And, what rights do agents have?

Making the cut

There are pages upon pages of insurance law and regulation related to some carrier actions (e.g., policy cancellations). However, there is little law or regulation related to the payment of commission to an insurance agent. Commissions levels—as well as the rules that a carrier must follow when it comes to adjusting those levels—are controlled almost exclusively by the agency agreement that is executed between the insurance carrier and an individual agent or agency. Since commission protection emanates from a private contract instead of a law or regulation, there is a little more variance in what agents may experience. It’s helpful to discuss some of that variance to better understand an agent’s rights.

Since attorneys like me need to stay employed, there is no standard commission clause. Instead, a commission clause generally will have some combination of two elements: 1. commission level, and 2. notification requirements. The more elements a commission clause has the more complete it is. For an agency, a complete commission clause isn’t better or worse than an incomplete one. However, the more complete the commission clause is, the clearer the picture of an agency’s rights.

There are some agreements that have both elements and others that have none. That’s right. I have seen multiple agency agreements that make no mention of agency commission, or they do so in an almost passing manner. In those situations, my advice is: Put some perimeters around what a carrier can and cannot do with your commissions. A contract that is silent on commissions is one that is much more difficult to know your rights and to prove a carrier violated them.

The commission mission

If an agent pays attention to any part of a commission clause, it is probably the part that describes the level of commission that a carrier is promising to pay the agency. Just as there is no standard commission clause, there no standard commission level. Commission levels will vary depending on the line of business and whether the policy is new or a renewal. Since there are different elements to commission levels, it is uncommon to see a commission level stated clearly in the commission clause. Instead, most commission clauses will refer to a “commission schedule” that is attached with the agreement. These commissions schedules are not part of the four-corners of the agency agreement, but they are included as attachments and incorporated into the agency agreement by reference. The first thing producers should do when they see that commission levels are included in a separate schedule is look for the schedule.

This may seem obvious, but I have reviewed several agency agreements that have referenced a commission schedule attachment, yet they did not contain it. So, make sure the commission schedule is included with the agreement. If it’s not, contact the carrier to get a copy of it—prior to signing the agreement. Once you sign the agreement, you will be tied to it, and you will be unable to change terms easily. Even if you can’t alter commission levels, you never want to enter an agreement without knowing all the terms, especially as one as important as commissions.

Notification of change

In my mind, the notification element of the commission clause is the most important element. Of course, I say that as a salaried PIA employee, so I lack proverbial skin in the game on the issue of commission levels. As with commission levels, there is a high degree of variance when it comes to the notification that is required before a change can take effect. Far too many agency agreements are missing this essential element. An agreement can be silent on how and when notice must be given.

Equally common is the vague provision that allows a carrier to alter commission levels “with notice” or its second cousin “with advance notice.” While it is great that the carrier must notify the agency that commissions will be reduced, these terms give carriers a lot of latitude to alter commission levels unilaterally and quickly.

With notice does not mean advance notice or even written notice. It just means with notice, which means an insurance carrier will satisfy this element by just providing notice of the commission reduction—even if the reduction occurs simultaneously with the notice. Or in the case of with advance notice one minute before the commission reduction is distributed. Obviously, this is less than ideal.

Better are the notification elements that include advance notice of a certain amount of days. I say better realizing there is no best way to reduce commission levels. No matter how much notice is given, reducing commission is a disruptive act. However, given the reality that commission reductions do, and will continue to happen—advance notice is better than nothing.

Here again is the similar theme of a lack of uniformity in terms of notification. PIA recommends that agencies be given at least 90 days advance notice of any reduction in commission. Of course, I am not sure I have ever seen a carrier provide that amount of notice. Those commission clauses that contain an advance-notice provision often will require notification 30 days prior to the change. While 30 days is not as long as 90 days (obviously statement alert!), something is better than nothing.

Regardless of the length of the notification requirement, virtually all commission clauses allow a carrier to make changes to commission levels unilaterally, without the consent of the agency.

However, there is a Garden State-sized exception to that general rule. Under New Jersey law, mutual consent is required to change the contractual rate of commission. When a carrier presents an agency with a proposed commission change, the agency does have the choice between agreeing to the reduction or not. If the agency and the company fail to agree on a commission change, the agency contract can be terminated.

Next steps?

What should insurance agents do with the information in this article, and how does it protect them?

The truth of the matter is that when an insurance carrier decides to reduce an agency’s commission levels there is little the agency can do in the moment. The best time to protect your agency is before the commission cut happens.

Review agency agreements before you sign them to ensure your agency has a clear idea of what the commissions levels are—and more importantly how and when those levels can change. This is vital to protecting your future interest.

Do you have questions about your agency agreement? Send them to PIA via the Industry Resource Center at resourcecenter@pia.org. As part of your PIA membership, our legal team can review your agency agreements and point out any areas of concern to you.

This article originally appeared in the January 2024 issue of PIA Magazine.