Appeals Court Orders Progressive’s Commission Plan Back to Trial

The Third Court of Appeals in Austin reversed itself Sept. 13 and ordered an Austin district court to retry a case involving a Corpus Christi insured who claimed unfair discrimination in his purchase of a policy at a price that was not the lowest offered by Progressive County Mutual Insurance Co.

The reversal was sought by Atty. Gen. John Cornyn on behalf of Insurance Commissioner José Montemayor, as well as the Office of Public Insurance Counsel. Progressive announced it will appeal to the Texas Supreme Court.

According to an analysis by the Independent Insurance Agents of Texas, at issue in the case of ANTONIO CORTEZ, Appellant, V. PROGRESSIVE COUNTY MUTUAL INSURANCE COMPANY, Appellee, is the question of whether Progressive’s multi-tiered commission plan results in agents charging different commissions to consumers who are in the same “class,” and if so, whether that discrimination is prohibited by law. The appeals court ruling had said the law applies only to race-based or other specifically prohibited discrimination, but the attorney general said that interpretation “disregards the fact that Texas insurance law has forbidden any discrimination between insureds of the same risk class for almost a century.”

The Texas Department of Insurance, which is prosecuting Progressive on the same issue in an administrative action, also says the court ruling will have a major impact on “long-standing canons of insurance law which forbid insurers from charging different rates on the basis of nonactuarial principles.” Action on the administrative hearing was postponed pending outcome of the lawsuit, which was filed in 1997 as a potential class action by the firm of Hilliard & Munoz.

The lawsuit arose from the purchase in 1996 by Antonio Cortez of a new insurance policy from Progressive through its independent agent, Angel Insurance Group in Corpus Christ. Angel earned a 10 percent commission on the policy—an amount that was passed through as a part of his premium. Cortez later learned that Progressive offers its independent agents a variable commission program in which agents choose how much commission they receive, so that policyholders pay a variety of premiums depending upon their agent’s commission.

In May 1997 Cortez filed suit “on behalf of himself and those similarly situated,” alleging that Progressive’s variable commission program violates article 21.2 1-8 of the Insurance Code “by charging consumers of the same risk a different rate based on the agent’s commission level.” In the petition Cortez alleged actual damages “in an amount equal to the difference between the actual commission and a 5 percent commission (the lowest commission Progressive agents charged). Because Angel could have offered the same policy at a 5 percent commission, the attorneys alleged the Progressive commission program violated anti-discrimination provisions in the Texas Insurance Code.

Montemayor issued a bulletin disagreeing with the initial appeals court decision and advising companies using multi-tier commission plans to be prepared to develop guidelines justifying the different pricing levels. So long as an agent uses one commission level for all Progressive policies, TDI’s current posture is that there is no violation of the law, TDI attorney Jim Haley told IIAT.

The bulletin sent “a signal that all companies and agents using tiered commissions without guidelines need to make changes,” Haley said. “Tiered commissions without guidelines tend to lead to arbitrary results and those arbitrary results could lead to discrimination. You can’t charge different premiums to two different people who present the same risk and cost consideration to the company.”

Topics Texas Agencies