Impact on Other Agents of Conn. Verdict Against Nationwide Doubted

A recent $2.3 million jury verdict for wrongful termination in favor of a former Nationwide Insurance contract agent from Connecticut is unlikely to have any effect on independent agents or their companies, according to the nation’s largest independent insurance agent association.

The Independent Insurance Agents & Brokers of America said that contrary to suggestions that all agents would be affected by the case, the verdict is “not a big deal.”

Ray Garcia, of Garcia & Milas P.C., lawyer for the winning agent, Alex Charts, said that the case marked the first time an independent contract agent had been held to be a franchisee and therefore covered under franchise law.

“The typical industry contract with an independent contract agent contains a clause that says it can be terminated at any time ‘with or without cause.’ Nationwide argued that Mr. Charts’ agreement had such a clause,” said Garcia. “This jury decision is groundbreaking in that it is the first in the United States to apply franchise rules to the insurance business, in effect invalidating the ‘without cause’ provision.”

Following the verdict, Garcia claimed that the case could have far-reaching implications for all independent agents. “The jury’s decision means that independent agents, acting as stand alone businesses, fall under the purview of franchise law and therefore have far more protection against some actions taken by insurance companies,” he said. “It opens up the possibility of future class action suits against major insurance companies from independent agents terminated in the last few years without cause, or those who were not given reasons for their termination even when accused of illegal conduct.”

But independent agents who represent multiple insurance companies are not contract agents like Nationwide agents, who sell for Nationwide only, and they are not franchisees, according to the IIABA.

“To suggest that an independent insurance agency is a franchise is ridiculous,” commented Debra Perkins, IIABA executive vice president and general counsel, who characterized Garcia’s comments as “overly-broad” in their interpretation of the case.

Perkins said independent agents control their own businesses, unlike franchises. “The typical independent agency is not controlled by anyone other than the independent agent,” she said.

“This is not a big deal,” she said, adding that it is “more than a leap” to suggest that all independent agents will be affected.

Furthermore, Perkins noted, trial jury decisions do not set any precedent.

The case may not affect all independent agents representing multiple companies but Garcia thinks it could have broad impact on companies like Nationwide, Allstate and Prudential that use contract agents like Charts.

“According to federal law and many state laws, before requiring a franchisee to sign any contracts, a franchisor must provide detailed disclosure documents that describe company business plans and pending and resolved litigation,” Garcia maintained. “No franchise can be sold until such disclosures are provided. Some states also ensure that no franchisee can be terminated without good cause. Several of the major insurance companies such as Nationwide, Allstate and Prudential operate through networks of independent agents just like Mr. Charts.”

Garcia said the jury decision in U.S. District Court , if upheld on appeal, could mean companies like Nationwide will have to comply with Federal Trade Commission disclosure rules for franchises.

“During the pretrial phase,” Garcia maintained, “Nationwide made very significant stipulations which bear on the franchise law issue. Nationwide stipulated that the company controlled the pricing and availability of its insurance products subject to applicable law and regulation; was able to audit and/or examine the Charts business at all times; required Charts to comply with the advertising rules and regulations prescribed by Nationwide; and maintained supervisory responsibility over Charts’ performance and business operations.”

Charts was an agent for Nationwide Insurance for 23 years. He sued Nationwide after it terminated his contract in January 1996. The jury found that Nationwide terminated Charts without good cause. It also found that Nationwide violated the implied covenant of good faith and fair dealing and violated The Connecticut Franchise Act and the Connecticut Unfair Trade Practices Act.

According to Garcia, Nationwide contended that Charts had violated unidentified state law and unwritten company policy; that it did not have to show it had good cause to terminate the agreements; and that it was not required to inform Charts in writing of the reasons for his termination.

But the jury decided that Nationwide was required under the franchise law to provide “good cause” for the termination and that its apparent reasons for firing Charts failed to meet this test.

Nationwide said it plans to fight the award. “We are obviously disappointed with the jury’s decision. We believe the evidence does not support the jury’s verdict. We also believe that the jury disregarded important evidence, including the express terms of the contract between Nationwide and the agent,” the insurer said in a statement.

“We will continue to work through the judge to resolve this matter and are preparing to file post-trial motions. If the court does not grant our motion to overturn the verdict, we will be evaluating whether to file an appeal with the U.S. Court of Appeals for the Second Circuit.”

Nationwide also said that franchise laws are regulated on a state-by-state basis and, in its legal opinion, this ruling only applies to Connecticut.

“Agents are the lifeblood of our company. Without agents we cannot sell policies. We value our relationship with our agents and would not terminate an agent contract without what we believe to be good reason,” the company told Insurance Journal.

“In this instance, Nationwide presented evidence to show that Mr. Charts violated Connecticut state law by unfairly providing benefits to individuals when these same benefits were not available to all. As an ethical company, we felt we had no choice but to terminate his contract.”

Topics USA Agencies Connecticut