Fallacy of Uniform Commission Laws

This editorial is one of a series on the subject of agents' and brokers' commissions which has aroused countrywide interest. Reserve copies of the issues in which previous editorials appeared have long ago been exhausted, and, in order to satisfy the many calls ttpon us, we are distributing the editorials in reprint form. Copies may be had on request.

A uniform commission law on the pattern of the New Jersey act can have two main effects: (I) it can raise the level of commissions for a class of agents far beyond the degree or value of the services rendered, or, (2) it can wipe out the large underwriting agencies--whatever their titles may be--in cosmopolitan centers like New York, Boston, Chicago, Philadelphia, etc., etc., and introduce an exclusive branch office system in all such centers.

The first of these effects is seen at present in New Jersey, where the smallest agency in a rural district --no matter how limited its services may be--receives the same rate of commission from a given insurance company as that paid by the same company to a full fledged underwriting office in Newark, Jersey City or Camden. And this regardless of the fact that the small rural agency acquires its business direct from insureds and incurs no brokerage expense, whereas the large underwriter in a city like Newark--who, for practical purposes, really is a general agent--secures a goodly portion of his premium volume through duly licensed New York and New Jersey brokers to whom he must pay the prescribed rates of brokerage.

While the actual experience of New Jersey belies the declared purposes of the uniform commission law, as will be shown later, we must remember that there were certain valid grievances which actuated agents in New Jersey to foster this obnoxious legislation. But before we delve further into the situation, it is well to have before 115 the pertinent provisions of the so called Ramsay Act.)

The United States Supreme Court referred to the Act as Chapter 128 of the 1928 New Jersey Statutes. Parenthetically, this is really part of the rating statute then in force. And although New Jersey enacted its new, sweeping rating law some two years ago (Chapter 28, Laws of 194-1, effective March 9, 1944) the 1928 Act was not disturbed in the process. Probably there were explainable reasons why the 1928 Act was permitted to remain Section 17:29-7 of the Revised Statutes. Some say that the purpose was to avoid injecting commission rates as factors in rate making. But. if so, the purpose is doomed to failure, because, as will be seen from the text of the Act which is quoted below, rates of commission are inextricably interwoven with "rates for insurance against the hazards of fire."

Here are the pertinent parts of Sections 1 and 2 of the 1928 Act which provide for uniform commissions and penalties for violation of the Act.

Section 1. (in part) In order that rates for insurance against the hazards of fire shall be reasonable it shall be unlawful for any such insurer licensed in this State to directly or indirectly pay or allow, or offer or agree to allow, any commission or other compensation or anything of value, in excess of a reasonable amount, to any person for acting as its agent in respect to any class of such insurance, nor to directly or indirectly pay or allow, or offer or agree to allow, any commission or other compensation or anything of value, to any person for acting as its local agent in respect to any class of such insurance, in excess of that offered, paid or allowed to any one of its local agents on such risks in this State. On the written complaint of any insurer or any agent licensed in this State, that there has been any violation of the provisions of this act. or when the commissioner deems it necessary without such complaint, the commissioner shall inquire whether or not there has been any violation of the provisions of this act in the commissions paid or payable on such risks in this State.

Section 2. (in part) Any insurer, agent, expert, person or corporation violating any of the provisions of this act shall be subject to a penalty of five hundred dollars for each and every violation to be sued for and recovered by the Commissioner of Banking and Insurance, or by any citizen of this Stale and paid to the State Treasurer. In case any insurer is convicted of a violation of this act, every local agent of the insurer in this State shall be entitled to the same commission or compensation, or other thing of value, for business done for the insurer during the calendar year in which the discrimination took place, on risks in this State, and any local agent may recover from the insurer in any court of competent jurisdiction, the amount of such excess commission or compensation, or other thing of value, if any, to which he may become entitled under the provisions of this act.

The declared reason for enacting the New Jersey uniform commission law was the high commission scales paid to agents in Newark, Jersey City and Camden. Particular grievance centered over Camden commission rates. It was contended that Camden agents could, and did, allow Philadelphia and New Jersey brokers rates of commission equalling those which agents received in the "ordinary" territories. The latter resented this. A certain State Senator, who was also an insurance agent in one of the State's southern counties, decided to overcome this situation and introduced a hill which actually prescribed uni- . form scales of commission for fire insurance risks. At the hearing on the measure there was substantial opposition from various elements, and, by tacit understanding, no action was taken on the bill.

Time passed. The Eastern Underwriters' Association was formed to replace the Eastern Union and the new Association approved commission scales which again showed material variation between rates paid in the "ordinary" territories and those paid in the three "excepted" counties. When the protests of the aggrieved agents proved fruitless, they again resorted to legislation. Naturally, the "ordinary" territory agents supported the uniform commission bill and, while agents in the "excepted" counties opposed it, the measure was enacted. Vetoed promptly by Governor Moore, the bill was just as promptly passed over his veto.

A very hectic time followed. Agents in the '"excepted" counties resigned from the New Jersey Association of Insurance Agents. Commission rates...

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