An eight person jury in the United States District Court in Connecticut awarded $2.3 million in compensatory damages to an independent insurance agent in a decision expected to have serious ramifications on the relationship between insurance companies and their independent agents all across the country.
The case, which had been pending for seven years, was decided last week after a seven day trial and marked the first time an Independent Contract Agent had been held to be a Franchisee and therefore covered under Franchise law. Judgment on the verdict entered on Dec.13, 2004.
Alex Charts, for 23 years reportedly one of the most successful and respected agents for Nationwide Insurance, 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, more significantly, violated The Connecticut Franchise Act and the Connecticut Unfair Trade Practices Act.
Nationwide reportedly never informed Charts in writing why it terminated their agreements with him, but 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.
Nationwide responded to the verdict by telling Insurance Journal that, “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.
“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.
“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.
“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.
“Franchise laws are regulated on a state-by-state basis and it is our legal opinion that this ruling only applies to Connecticut.”
Ray Garcia of Garcia & Milas P.C., the law firm representing Charts, took a different view of the verdict.
“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.
“The potential impact of this verdict reaches far beyond Mr. Charts and his case,” continued Garcia. “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. 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.”
According to Garcia, “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. 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. Nationwide claimed that it could terminate Mr. Charts regardless of cause and that it acted in good faith after conducting a “fulsome” investigation.
“During the pretrial phase,” Garcia said, “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 contended that he had been terminated by a vindictive manager who aborted a bungled investigation into rumors based on hearsay. Charts also contended that he had done nothing wrong and had been made a sacrificial lamb by a company that paid a $50,000 fine to the Connecticut Insurance Commissioner in 1998 arising from its sales practices from 1993 to 1997.”
Garcia said that post trial motions for legal fees and prejudgment interest are expected to be filed this week. According to Garcia, if granted, those motions could increase the verdict by more than $3,000,000.
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