Ohio National Life Insurance Company’s Termination of Trail Commissions
The issue of termination of trail commissions has been a popular topic in insurance industry news since Ohio National Life Insurance Company terminated trail commissions. More specifically, by letter dated September 21, 2018, Ohio National wrote to various agents and broker-dealers “to provide notice of termination of any and all selling agreements” [effective December 12, 2018]. Further, according to the termination notice letter, “all individual annuity trail compensation will cease at that time. All group variable annuity trail compensation and life insurance renewal commissions will continue to be paid per the terms of the selling agreement.”
In the life insurance and annuity contracts arena, there is typically a larger commission in the first year, followed by trail commissions for the life of the policy or contract. Given that many life insurance agents rely on these trail commissions, Ohio National’s decision to terminate certain broker-dealer agreements has led to a flurry of class action and individual lawsuits, with at least 10 currently pending in courts across the country, including federal district court actions filed in Ohio, Texas, New Jersey, and California, among other states. There are also several arbitrations pending, and the forum of private arbitration versus court may have been governed by consent to arbitration language in a particular selling agreement.
In the publicly filed complaint from UBS Financial Services Inc. (“UBS”), UBS alleges that Ohio National determined that the annuity contracts with guaranteed minimum income benefit (GMIB) riders were uneconomical in an environment of high regulation and low interest rates. According to the lawsuits, Ohio National breached its selling agreements which guaranteed the payment of trail commissions until the annuities were surrendered or annuitized. UBS claims that when Ohio National determined that its GMIB rider contracts were not economical, they tried to initiate an exchange offer to persuade holders of variable annuities with GMIB riders to exchange those products for other investments, which did not necessarily go according to plan as several UBS customers decided not to accept the exchange offer and, instead, chose to remain with their current variable annuity contracts.
In its defense, Ohio National claims that payments were only due while the contracts were in force, and cites to language in the selling agreements, providing that it “remains in force and will be paid on a particular contract until the contract is surrendered.” According to Ohio National, “such language unequivocally establishes that the termination of the Selling Agreement also terminated any obligation [on Ohio National] to continue paying trail commissions as to individual annuity products.” Ohio National’s argument relies on the use of the conjunction “and” which it notes is critical to its argument; trail commissions are only payable if both the selling agreement is in force and the pertinent annuity contract has not been surrendered or annuitized.” Since both of these joint conditions — that the selling agreement remains in force, and the particular annuity contract has not been surrendered or annuitized—Ohio National claims it has no obligation to the continued payment of trial commissions.
It will be interesting to see the results of the various litigations in due course and whether the courts agree with Ohio National’s interpretation of the language in the selling agreements or whether the agents are still entitled to payment of trail commissions. It may ultimately come down to an interpretation of contract language. For now, it is a good reminder that life agents should at least be familiar with the terms of their selling agreements because expecting to retire on trail commissions that could possibly be terminated unilaterally, could be a grave loss. Ideally, such contracts should contain a clause for vesting of commissions for a period of years which would guarantee the agent compensation for the period of years set forth in the agreement, assuming the agreement remains in full force and effect. In addition, a sub agent of a managing general agent, may not have the leverage to negotiate his or her contract terms, as payment to the sub-agent may be dependent on the carrier’s payment to and ongoing relationship with the managing general agent, but it is a good idea to review any applicable contracts to avoid surprises.
