Mass. Supreme Court Rules Against Agents in Auto Insurance Lawsuit

By | February 16, 2010

The Massachusetts Supreme Court has sided with the state’s insurance commissioner in a heated lawsuit brought by the state’s insurance agents and Arbella Mutual Insurance Co. over how new companies are assigned costs and policies in the assigned risk plan.

The suit, which was filed in June 2008, challenged the decision by then-Commissioner Nonnie Burnes to implement rules that would change the formula for how new insurers are assigned high risk drivers, and the role of independent agents in the ownership of renewal rights for those policies.

The case was a major legal challenge by agents and some insurers in the state over the elimination of the state’s old auto insurance system in which the state set all rates in favor of a managed competition system that gives individual companies greater freedom in charging customers.

The switch was undertaken as a move to help attract new insurers to the state, which at that point had 19 carriers writing auto insurance. Since managed competition arrived in April 2008, roughly a dozen new companies have entered the state.

At issue in the lawsuit brought by Arbella and the Massachusetts Association of Insurance Agents (MAIA) were two fundamental changes made by Burnes with regard to how high risk drivers – plus the premiums they pay and losses they cause – were divvied up among the state’s insurers in an assigned risk plan.

Arbella and MAIA lost on both challenges.

The first was a change that allows a company to voluntarily take on a high risk driver that was assigned to it through the plan. Agents in particular were irked by that move since it would essentially mean that they would lose renewal business.

After 2011, state rules mean that agents would no longer be paid commissions on those policies. Massachusetts has one of the highest number of independent insurance agents per capita of any state, and they control, or at least, did control, roughly 80 percent of the market.

In a blow to agents, the court ruled that, in those cases, the obligation to pay commissions is based not on contract, but on statute, and upheld the right of insurers to cease paying commissions on policies that are subsequently moved out of the assigned risk plan.

“The random assignment process of the (assigned risk plan) does not create a contract between a particular agent and an insurer; there is no agreement between them. Without a contract, there is nothing to which to apply the principles of the American agency system,” the court ruled.

The second provision, challenged by Arbella, is one that exempts new insurers from participating in the assigned risk market for two years. Arbella argued that it effectively exempted new insurers while increasing losses to established companies.

“Arbella’s argument that newly writing companies are unlawfully exempted from (the assigned risk plan) finds little traction because newly writing companies do, in fact, participate in MAIP from the time they begin writing insurance policies in Massachusetts” by “pay(ing) assessments levied against them for the operating expenses” of the plan, the court ruled.

“Although newly writing companies are not assigned policies issued to high-risk drivers and therefore do not collect insurance premiums or incur losses related to such policies, they do contribute to the administrative cost of (the plan) through these assessments. Thus, they are not completely exempted.”

Frank Mancini, president of the MAIA, said that he was disappointed with the ruling but that his group isn’t giving up. It is already pursuing two other legislative means to keep the ownership of expiring policies with agents.

One is a bill the group recently filed with the legislature’s financial services committee. The other is a proposal to change the rule with the governing committee of Commonwealth Automobile Reinsurers, which manages the assigned risk plan in the state.

“We have two other avenues of relief we are pursuing, and remain confident that we will be successful in one or both,” Mancini said. “The ownership of those rights is the basis for the value of your agency. If you don’t own the business the value of your agency is zero. We need to continue to fight this issue.”

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