Clark V. Natali Insurance Agency, LLC, et al. v. PA Insurance Dept (Majority Opinion)

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IN THE COMMONWEALTH COURT OF PENNSYLVANIA Clark V. Natali Insurance Agency, LLC, and Clark V. Natali, Individually, Petitioners : : : : : v. : : Pennsylvania Insurance Department, : Respondent : BEFORE: No. 1775 C.D. 2007 Submitted: March 10, 2008 HONORABLE BONNIE BRIGANCE LEADBETTER, President Judge HONORABLE MARY HANNAH LEAVITT, Judge HONORABLE JIM FLAHERTY, Senior Judge OPINION NOT REPORTED MEMORANDUM OPINION BY JUDGE LEAVITT FILED: April 10, 2008 Clark V. Natali and the Clark V. Natali Insurance Agency, LLC appeal an adjudication of the Insurance Commissioner dismissing Natali s request for administrative review of Allstate Insurance Company s termination of its agency agreement with Agency. In this case we consider whether the Commissioner erred in concluding that he lacked jurisdiction under Act 143 of 19781 to review Allstate s decision. Clark V. Natali was employed by Allstate as an insurance agent for approximately 35 years. In 1999, Allstate announced that it was terminating its 1 Act of September 22, 1978, P.L. 763, as amended, 40 P.S. §§241-246. Act 143 governs the termination of certain insurance agency contracts. When an agent s contract subject to Act 143 is terminated, the agent has the right to have the Commissioner or his designee review the propriety of the insurer s action. employer-employee relationship with all of its captive agents so that it could market insurance products through independent contractors. Natali elected to become an independent contractor and, as part of that new business relationship, he formed the Clark V. Natali Insurance Agency, LLC (Agency). On October 9, 2000, Natali entered into an Allstate R3001C Exclusive Agency Agreement (Agency Agreement) with Allstate, effective November 1, 2000. The Agency Agreement expressly incorporated several other documents, including an Exclusive Agency Independent Contractor Manual (EA Manual) which could be amended from time to time by Allstate. Reproduced Record at 90a (R.R. __).2 The Agency Agreement and the EA Manual contained important provisions establishing the respective ownership interests of Allstate and Agency. The very first provision of the Agency Agreement stated that [t]he Company [Allstate] will own all business produced under the terms of this Agreement. Id.3 2 Section I.C of the Agency Agreement stated as follows: The Supplement for the R3001 Agreement ( Supplement ) and the Exclusive Agency Independent Contractor Manual ( EA Manual ), and the Allstate Agency Standards ( Agency Standards ) as they may be amended from time to time, are expressly incorporated in their entirety as part of this Agreement. The Company reserves the right to amend the Supplement, EA Manual, and Agency Standards at any time without prior notice to Agency ¦. R.R. 90a. 3 Allstate expressly reserved considerable control over its business: The Company will determine in its sole discretion all matters relating to its business and the operation of the Company including, but not limited to, the following: 1. The determination of contract forms and provisions, premiums, fees, and charges for insurance and other Company Business; 2. The acceptance or rejection of any application; (Footnote continued on the next page . . .) 2 Section IV of the Agreement further provided that Allstate owned all confidential information relating to the business generated pursuant to the Agreement, including the renewal and expiration dates of policies, and that such confidential information was the exclusive property of Allstate. R.R. 93a.4 Finally, Section XVI.B of the Agency Agreement defined the nature of Agency s interest as follows: Agency has an economic interest, as defined in this Agreement and the incorporated Supplement and EA Manual, in its Allstate customer accounts developed under this Agreement. Subject to the terms and conditions set forth in this Agreement and the (continued . . .) 3. 4. 5. 6. The termination or modification of any contract or the refusal to renew any contract; The limitation, restriction, or discontinuance of the writing or selling of any policies, coverages, lines, or kinds of insurance or other Company business; The obtaining of any licenses of the Company or the Company s withdrawal from any state, jurisdiction, or territory; and The type and quality of customer service received by Company policyholders. R.R. 91a. According to the Agency Agreement, Confidential information includes, but is not limited to: business plans of the Company; information regarding the names, addresses, and ages of policyholders of the Company; types of policies; amounts of insurance; premium amounts; the description and location of insured property; the expiration or renewal dates of policies; policyholder listings and any policyholder information subject to any privacy law; claim information; certain information and material identified by the Company as confidential or information considered a trade secret as provided herein or by law; and any information concerning any matters affecting or relating to the pursuits of the Company that is not otherwise lawfully available to the public. All such confidential information is wholly owned by the Company. Such confidential information may be used by Agency only for the purposes of carrying out the provisions of this Agreement. R.R. 93a. 4 3 incorporated Supplement and EA Manual, Agency may transfer its entire economic interest in the business written under this Agreement upon termination of this Agreement by selling the economic interest in the business to an approved buyer. R.R. 96a. The EA Manual, which was made part of the Agency Agreement by Section XVI.B, explains and expands upon the provisions of the Agency Agreement. The 1999 version of the EA Manual in effect when Natali executed the Agency Agreement reiterated that agents would have an economic interest in [their] Allstate customer accounts, which they could transfer upon termination of their agency relationship with Allstate by selling their economic interest to an approved buyer. R.R. 332a. Alternatively, agents could elect a termination payment. The 1999 EA Manual noted that [a]ny reference in this Manual to the sale of an agency or the sale, transfer, or purchase of an agent s book of business means the sale, transfer, or purchase of the economic or other interest in the book of business only. Allstate retains ownership of the book of business. Id. at n.4 (emphasis added). The 2005 version of the EA Manual, which became effective September 1, 2005, contained a new provision that further clarified the economic interest of an agent: Economic Interest in the Book of Business You have an economic interest in the Allstate customer accounts developed under the [Agency Agreement]. That economic interest is a specifically defined, limited interest. Subject to the terms and conditions set forth in your [Agency Agreement], this Manual, and the Supplement, your economic interest in the book of business is comprised of only two elements: ¢ First, the economic interest includes the option, where applicable, of receiving a 4 Termination Payment according to the terms of your [Agency Agreement] and/or the Supplement. ¢ Second, the economic interest includes the ability, subject to approval of the Company and other provisions of your [Agency Agreement], this Manual, and the Supplement, to transfer your interest as provided in the [Agency Agreement]. No other rights are included within the terms your economic interest or economic interest in the book of business . You do not have any ownership interest in any of the business written under the [Agency Agreement] or any previous agency agreement between you and the Company. You do not have any right to renewals or renewal commissions of any kind after termination of your [Agency Agreement]. The Company retains ownership of each item of business and of the entire book of business, including renewals. You do not have any ownership interest in expirations, renewals, or in any information about the customers to whom you have sold Company business. All such information remains the property of the Company. R.R. 386a. The Agency Agreement also addressed termination of the contract. It stated that the Agreement would terminate automatically [o]n the effective date of any transfer of Agency s entire interest in this Agreement, whether approved or not ¦. R.R. 97a. The Agreement was also terminable [b]y either party, with or without cause, upon providing ninety (90) days prior written notice to the other ¦. Id. In the event written notice of termination was given by either party, Agency had to cease acting or representing itself in any way as an agent or representative of Allstate immediately upon request of the Company. Id. Likewise, once the Agency Agreement was actually terminated, Agency agreed not to represent itself as an agent or representative of Allstate; to return or dispose of all property belonging to 5 Allstate; cease using Allstate s telephone numbers; and cease using Allstate service marks and trade names. R.R. 97a-98a. In a letter dated January 6, 2006, Patricia A. Selvig, Allstate s Territorial Distribution Leader, advised Natali that Allstate was terminating the Agency Agreement effective May 1, 2006, because of Agency s failure to achieve business objectives established by Allstate. Selvig reminded Natali that, upon termination of the Agency Agreement, Agency became obligated to act immediately to: return all property belonging to Allstate; cease using any telephone numbers it had used to conduct Allstate business; and cease using Allstate service marks and trade names. Selvig advised Natali that Agency could accept a termination payment from Allstate or sell its economic interest in the book of business to an approved buyer. On February 3, 2006, Natali formally advised Allstate in writing of his intent to sell his economic interest in the Agency s entire book of business to Joseph P. Halloran, Jr., whom he understood to be an approved buyer. Natali expected to complete the sale on or before May 1, 2006. Approximately ten days later, Natali and Halloran submitted an Agency Purchase Approval Request to Allstate. Allstate approved the request, and the sale became effective April 1, 2006. On November 7, 2006, Natali requested the Commissioner to review Allstate s termination of his contract, which Natali alleged did not comply with Act 143. The Commissioner assigned the matter to a Presiding Officer to act on his behalf. Thereafter, Allstate moved to dismiss Natali s request for administrative review and filed an affidavit and documents in support of its motion. Upon review of the undisputed facts, the Commissioner, by his Presiding Officer, found two bases for dismissing Natali s action. First, the Commissioner held that Act 143 was not applicable because the Agency Agreement was terminated not 6 by Allstate but by Natali when he sold his economic interest to Halloran. Second, the Commissioner determined that Act 143 was not applicable because Allstate owned Agency s book of business and no policies were cancelled or not renewed as a result of the termination of the Agency Agreement. For these reasons, the Commissioner held that he lacked jurisdiction to hear Natali s request for administrative review and dismissed it. Natali now petitions for this Court s review. Before this Court,5 Natali challenges each of the bases for the Commissioner s decision. First, Natali disagrees with the Commissioner s determination that he voluntarily terminated Agency s relationship with Allstate by selling his economic interest to Halloran. Second, Natali contends that Allstate did not establish that its actions were exempt from Act 143 as involving company-owned business. We address these issues in reverse order. Natali first challenges the Commissioner s conclusion that Act 143 is not applicable in this case pursuant to Section 1.1(b)(1) of the Act.6 This nonapplicability provision states as follows: The provisions of this act do not apply to ¦ business owned by the insurer and not by the agent, provided such insurer offers to continue such policies through another of its agents. Section 1.1(b)(1) of Act 143, 40 P.S. §241.1(b)(1). Natali argues that Allstate satisfied neither the business ownership requirement nor the continuation requirement in Section 1.1(b)(1). We disagree. 5 In reviewing a decision of the Commissioner this Court must determine whether constitutional rights were violated, an error of law was committed, or the findings of fact are unsupported by substantial evidence. Massari v. Foster, 569 A.2d 399, 400 (Pa. Cmwlth. 1990). 6 Section 1.1 was added by Section 2 of the Act of December 18, 1987, P.L. 418. 7 Beginning with the business ownership requirement, the Commissioner found, based on the plain and unambiguous language of the Agency Agreement and each version of the EA Manual, that Allstate owned the book of business maintained by the Agency. Natali counters that the term business in Section 1.1(b)(1) is not synonymous with book of business and that, in any event, Allstate s ownership interest was limited after it converted all of its captive agents to independent contractors. Essentially Natali argues that Allstate s ownership interest was limited to the insurance premiums the Agency collected from policyholders and certain confidential information acquired through the insurer-agency relationship. We address, first, the meaning of business in Section 1.1(b)(1) of Act 143. This is not a difficult issue since the term is self defining: The provisions of this act do not apply to ¦ business owned by the insurer and not by the agent, provided such insurer offers to continue such policies through another of its agents. 40 P.S. §241.1(b)(1) (emphasis added). Thus, business in this context is synonymous with policies of insurance written by the agent. This Court recognized that principle in Massari v. Foster, 569 A.2d 399, 401 n.2 (Pa. Cmwlth. 1990), when we noted that business as stated in [Section 1.1(b)(1) of Act 143], when read in the context of the remainder of the sentence, refers to policies. Thus, the Commissioner did not err in interpreting the term business to mean written policies and renewals. Having determined the meaning of business for purposes of Act 143, we agree with the Commissioner that Allstate owned the business in this case. The first substantive provision of the Agency Agreement plainly and unambiguously stated that [t]he Company [Allstate] will own all business produced under the terms of this Agreement. R.R. 90a (emphasis added). Section IV of the Agreement 8 further provided that Allstate owned all confidential information relating to the business, including the renewal and expiration dates of policies, and that such confidential information was the exclusive property of Allstate. Both versions of the EA Manual confirmed that agents enjoyed only a limited economic interest in the business which they could realize upon termination of the agency relationship by selling that interest to another agent or electing a termination payment.7 Accordingly, the Commissioner properly found that the business ownership requirement in Section 1.1(b)(1) of Act 143 was satisfied. As noted previously, the nonapplicability provision in Section 1.1(b)(1) also contains a requirement that the insurer offer to continue existing policies through another of its agents after termination of an agency contract. In addressing this continuation requirement, the Commissioner looked at the undisputed facts as set forth in Selvig s declaration. Specifically, Selvig declared that subsequent to the April 1, 2006, sale to Halloran, Allstate has paid Halloran the commissions on the 7 The 2005 version of the EA Manual is unequivocal in this regard. It stated that agents do not have any ownership interest in any of the business written under the [Agency Agreement] or ¦ any right to renewals or renewal commissions of any kind after termination of [the Agreement]. The Company retains ownership of each item of business and of the entire book of business, including renewals. You do not have any ownership interest in expirations, renewals, or in any information about the customers to whom you have sold Company business. All such information remains the property of the Company. R.R. 386a. Natali contends that the Commissioner impermissibly relied upon the 2005 version of the EA Manual because the Agency never received a copy, and because an issue of fact existed as to whether Allstate promptly filed a copy with the Commissioner in accordance with 31 Pa. Code §127.6 ( An amendment to an existing contract shall be filed promptly with the Insurance Commissioner. ). Natali s arguments are without merit since the Agency Agreement expressly incorporated the EA Manual and reserved in Allstate the right to amend the Manual at any time without prior notice to Agency. In any event, the 1999 version of the EA Manual, which Natali concedes is binding, explained the boundaries of an agent s economic interest in customer accounts and stated that Allstate retains ownership of the book of business. R.R. 332a. 9 policies transferred to him. Selvig also stated that [n]o Allstate policies of insurance have expired, have not been renewed, or have otherwise lapsed because of or as a result of the termination of the relationship between Allstate and the Agency. R.R. 87a. Natali does not challenge the veracity of Selvig s factual averments but instead argues that those averments do not meet Allstate s affirmative burden of proving that it offered to continue all of the former Natali policies. Natali s hypertechnical interpretation of Section 1.1(b)(1) s continuation requirement is contrary to this Court s analysis in Massari. In Massari, as in the case sub judice, the Commissioner dismissed for lack of jurisdiction an agent s request for administrative review of the termination of his agency contract. In affirming the Commissioner s decision, we noted that certain key facts were not in dispute, including whether [insurer s] policies were reassigned to the [insurer s] agents upon Massari s termination. Id. at 401. Because this fact was undisputed, and because an insurer owned the business in question, this Court held that Act 143 was clearly inapplicable. We agree with the Commissioner that it follows from Massari that an insurer does not have to prove that it offered to reassign its policies to another agent if those policies were in fact reassigned. Agency s policies in this case were, in fact, transferred to Halloran and Natali does not dispute that key fact. In sum, we agree with the Commissioner that Act 143 cannot be invoked by Natali because Allstate owned the book of business and continued the policies at issue through another of its agents after the Agency Agreement was terminated. The Commissioner held, in the alternative, that Act 143 was not applicable in this case because the Commissioner can only review a termination of an agency relationship by the insurer. Because Natali s sale of the Agency s economic 10 interest to Halloran pre-dated the effective date of Allstate s termination, the Commissioner concluded that Natali terminated the Agency Agreement. Natali disagrees, arguing that Allstate s letter of January 6, 2006, effectively terminated the agency relationship as of that date. In support, Natali points to language in Allstate s January 6 termination letter demanding that he return all property belonging to Allstate, cease using Allstate-registered telephone numbers to conduct business, and cease using Allstate service marks and trade names. In light of these demands, Natali claims that he had no choice but to sell Agency s economic interest to Halloran. We begin with the Commissioner s interpretation and application of Act 143, which is entitled to great deference. See Winslow-Quattlebaum v. Maryland Insurance Group, 561 Pa. 629, 635, 752 A.2d 878, 881 (2000) ( It is well settled that when the courts of this Commonwealth are faced with interpreting statutory language, they afford great deference to the interpretation rendered by the administrative agency overseeing the implementation of such legislation. ). Here, the Insurance Department has consistently interpreted Act 143 as not applicable when the sale of the agency results in the termination of the contract by the agency itself, and not by the insurer. See, e.g., Murphy Insurance Agency/Travelers (August 1, 1991); R.R. 405a ( The Insurance Department has determined that the sale of an agency constitutes termination of the contract by the agent and not by the insurance company, and that Act 143 does not apply to sale terminations. ). We see no reason to question the Department s interpretation of Act 143. As the Commissioner observes, the key provisions of the Act all speak to actions by the insurer that are subject to review. See, e.g., Section 2(a), (d), (e) of Act 143, 40 P.S. §242(a), (d), (e).8 Moreover, Act 143 does not apply to an agent ¦ whose 8 Section 2 of Act 143 states, in pertinent part: (Footnote continued on the next page . . .) 11 contract has been terminated for ¦ abandonment. Section 1.1(b)(3) of Act 143, 40 P.S. §241.1(b)(3). Thus, we agree with the Commissioner s interpretation that Act 143 is directed at terminations of agency contracts by the insurer, not by the agency. The timeline of the events in this case shows that it was Natali and not Allstate who terminated the Agency Agreement. Allstate s letter to Natali dated January 6, 2006, merely advised Agency that the Agreement would be terminated effective May 1, 2006. Natali s sale of Agency s interest in the book of business to Halloran became final on April 1, 2006. Pursuant to Section XVII of the Agency Agreement,9 the Agreement was terminated automatically on that date, one month before the effective date of Allstate s termination. Because Act 143 does not apply to (continued . . .) (a) Notice.--No insurer shall terminate its contract with an agent without first providing such agent and the Insurance Commissioner with written notification at least 90 days prior to the date of termination. Such notice shall advise the agent of his right of appeal under subsection (d). *** (d) Administrative review.--Any agent may, if within 30 days of receipt of notice of termination, request in writing to the Insurance Commissioner that the Insurance Commissioner review the action of the insurer for the purpose of determining that said termination was in compliance with the provisions of this act. (e) Restriction on termination.--Prior to termination due to adverse experience, mix of business or lack of premium volume, it shall be the obligation of the insurer to make a reasonable attempt to rehabilitate such agent as set forth in subsection (f). No insurer shall terminate its contract with an agent due solely to the adverse experience for a period of less than two successive years prior to the notice of rehabilitation as set forth in subsection (f). 40 P.S. §242(a), (d), (e) (emphasis added). 9 Section XVII stated: This Agreement will be terminated automatically ¦ [o]n the effective date of any transfer of your entire interest in this Agreement, whether approved or not ¦. R.R. 109a. 12 a termination caused by a sale, the Commissioner correctly concluded that the termination was not subject to Act 143 and that he did not have jurisdiction.10 For all of the foregoing reasons, we affirm the order of the Commissioner. ______________________________ MARY HANNAH LEAVITT, Judge 10 Natali s claim that the sale to Halloran was involuntary is really an attempt to create factual issues where none exist. Natali claims that Allstate s notice of termination effectively put the Agency out of business because it was immediately required to return Allstate s property, cease using Allstate s telephone numbers and cease using Allstate s service marks and trade names. Natali s assertions are belied by the actual language of the termination letter, which states that [u]pon termination of the agreement, Agency was obligated to take the foregoing actions. R.R. 115a. The language of the termination letter in turn tracks the actual language contained in the Agreement, which set forth similar obligations upon termination of this Agreement. R.R. 97a. In short, Agency was not obliged to take any of the cited actions before May 1, 2006. 13 IN THE COMMONWEALTH COURT OF PENNSYLVANIA Clark V. Natali Insurance Agency, LLC, and Clark V. Natali, Individually, Petitioners : : : : : v. : : Pennsylvania Insurance Department, : Respondent : No. 1775 C.D. 2007 ORDER AND NOW, this 10th day of April, 2008, the order of the Acting Insurance Commissioner in the above-captioned matter, dated September 7, 2007, is hereby AFFIRMED. ______________________________ MARY HANNAH LEAVITT, Judge

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