Broker Fees Raise Questions in Mercury Lawsuit

A lawsuit filed by a private citizen questioned the legality of broker fees being collected by Mercury Insurance Company producers, according to the American Agents Alliance.

A preliminary ruling in the San Francisco Superior Court judged for the plaintiff, Robert Krumme, an attorney who filed the suit on behalf of the general public. The suit was brought under California Business and Professions Code Section 17204, allowing Krumme to represent the general public, although Krumme admittedly has never purchased a Mercury policy.

According to court documents, Mercury’s agency contract is identical to its broker contract, with the differentiation being the word broker. “That fact alone raises a little bit of question,” said John Norwood, counselor at law and owner of Sacramento-based Norwood & Associates. “But, whether or not you’re an agent or a broker depends on a lot of different things.

“What the court basically was saying is that because they have binding authority, because they are writing 90 percent of their business with Mercury, etc., it appears that Mercury’s producers are in fact agents, not brokers.

“On the other hand,” Norwood said, “how do you put independent agents and brokers in a position to compete against large direct writers who pay lower commissions, but the company pays for all the advertising and things like that. If you’re an independent agent… you probably can’t compete with the larger guys on a commission only basis. We’ve always kind of taken the position that if it takes more than the commission to be able to keep your lights on, pay your employees and stay in business, then you’re entitled to charge fees.”

At the heart of the dispute is Krumme’s challenge that Mercury producers acting as brokers should be considered agents. Krumme argued that the use of Mercury company forms; the broker’s binding authority; similarity between broker and agent contracts; and overall control of Mercury over its producers represents an agent relationship. This relationship would automatically deem any fees collected by brokers as inappropriate and illegal.

According to the Alliance, Mercury countered that the California Insurance Code does not succinctly differentiate its definitions of agent and broker, as nearly all references to producers are stated as “broker-agent.” Additionally, Mercury pointed out that the binding authority of its brokers is necessary to stay competitive in the current marketplace.

“This is a legitimate issue in terms of agent and broker compensation,” Norwood added. “The question is: if tomorrow, every company in California decided to pay their agents one percent commission and the agents obviously couldn’t keep their doors open on this one percent commission, does an agent have a right to charge a fee to a customer that’s sufficient to cover their overhead so long as the fee is disclosed and the customer readily agrees to it? Our answer is yes.”

The two sides have been given time to propose remedies to present to the judge at the final hearing rescheduled for March 4. If the judge’s ruling stands, Mercury is expected to appeal the decision.