Attention Agents: Fees Charged May Be Unlawful

Brokers and agents take note – an appellate court in California handed down a decision earlier this month that strikes at the legality of “broker fees” charged by agents.

In Mercury Insurance Co. v. Jones, the 4th District Court of Appeals reversed a trial court decision and gave the thumbs up to a fine in excess of $27M that the California Department of Insurance had levied against the insurer back in January 2015 (the largest fine against a property and casualty company in the CDI’s history). The Department did so pursuant to an administrative action it initiated after determining that Auto Insurance Specialists (AIS) and other Mercury “brokers” – which charged consumers between $50 and $150 in fees in addition to premiums on Mercury auto policies – were actually acting as de facto agents, rendering the fees illegal and subject to prior approval by the CDI.

An administrative law judge, who arrived at the amount by multiplying nearly 184,000 unlawful transactions by $150, initially recommended the penalty. A trial court later overturned it, but the three-justice appellate panel in Jones concluded that doing so was in error and contrary to the intent of Proposition 103, which requires carriers to obtain prior regulatory approval for insurance rates.

It has long been a policy of the Department that fees improperly charged by agents are to be treated as premium subject to a prior approval rate filing. The court in Jones gave its stamp of approval to this policy as well as the CDI’s Bulletin 80-6 (and subsequent clarification), stating that while brokers are free to charge fees to insureds, agents can do so only if they provide services to consumers that are apart from and outside the scope of their agency relationships with carriers.

Insurance Commissioner Ricardo Lara reacted to the appellate court ruling by saying, “[the] decision is unequivocal: insurers cannot avoid the Department’s scrutiny by charging ‘fees’ on top of the rates already approved by the Commissioner. Our efforts to maintain fair rates depend on insurers playing fair by disclosing the full cost of their insurance, which Mercury did not do.”

The takeaway for producers acting as agents: now more than ever, fees charged over and above premiums will be under the microscope.

This blog post is not offered as, and should not be relied on as, legal advice. You should consult an attorney for advice in specific situations.