The Court of Appeal has ruled that the broker-agent structure implemented by Mercury Insurance Group, a major provider of personal automobile insurance in California, constitutes an “unfair business practice” under California’s Unfair Competition Law (Business & Professions Code section 17200), and has affirmed a trial court’s order prohibiting Mercury from utilizing ongoing relationships with brokers who have not been formally appointed as agents, and prohibiting those brokers from collecting brokerage commissions in selling Mercury policies to consumers. Central to the decision is the semi-historical distinction between “insurance agents” and “insurance brokers” under California law.
In simplest terms, an insurance “agent” works for and represents an insurer, and has the authority to act on behalf of and to bind the insurance company. To be an “agent,” it is necessary to (1) be licensed by the Department of Insurance, and (2) have a formal “appointment” filed with the Department by the insurer for which the agent is a representative. An insurance “broker” does not act on behalf of the insurance company; instead, a broker acts on behalf of the prospective insurance buyer and is hired to seek out and obtain the coverage the buyer needs or wants. A “broker” is licensed by the Department, but does not have an appointment from any particular insurer. While an agent will generally be paid for his/her services by the insurer he/she represents, a broker is compensated by the insurance buyer, through fees or commissions. In some limited cases -- the physical delivery of policies to the insured, and the acceptance of premium payments for transmission to the insurer -- California’s Insurance Code provides that a broker may also act as an agent.
Mercury has a large number of insurance sellers who have more or less permanent and ongoing ties to the company. Prior to 1989, all of them were formally appointed as agents. In 1989, however, Mercury terminated the appointments of 700 out of 800 agents, declaring them instead to be “brokers.”
In general, the change in title did not alter the ability or authority to bind Mercury, but it did allow the former agents to charge brokerage fees. Policies sold by brokers or appointed agents used the same application forms, rating guidelines, and underwriting guidelines, all of which were provided by Mercury. Both brokers and appointed agents advertise that they “represent” Mercury. Mercury subjects agents and brokers to the same amount of training and supervision. Mercury does not object to brokers charging brokerage fees (in addition to policy premiums), but it will discipline appointed agents who attempt to charge such fees. In its comparative rate advertising, Mercury does not advise that brokerage fees may be added to the advertised cost of insurance. This practice may provide a competitive advantage to Mercury, which “is aware of, and concerned about, misleading the public with its comparative rate print advertisements,” but it “has not established any system to discover or monitor . . . and has no way of knowing” whether brokerage fees are being assessed. Mercury submits its insurance rates and premiums—but not the brokerage fees—to the California Department of Insurance for approval.
The Court of Appeal, after a lengthy analysis of the relevant statutory and regulatory scheme, affirms the trial court’s decision to issue an injunction prohibiting Mercury from using brokers not appointed as the company’s agents and prohibiting those broker-agents from charging brokerage fees, even though there was no evidence to show that any portion of the brokers’ fees is passed along to Mercury. While the Court acknowledges that certain regulations of the Department of Insurance arguably justify Mercury’s practices, it emphasizes that only a statute, not an administrative regulation, will create a “safe harbor” from liability under the Unfair Competition Law. The Court also affirmed the trial court’s award of attorneys’ fees to the plaintiff of nearly $1.2 million.
In addition to the “safe harbor” issue, this is another case illustrating one of the criticisms most frequently leveled at California’s “Unfair Competition Law,” Business & Professions Code section 17200. As the court describes it:
Mercury makes a point of opening its brief with comments that plaintiff never purchased a policy from Mercury and is therefore utterly “disinterested” in the controversy he began. It is well established, however, that a personal stake is not required for standing to prosecute an unfair competition law suit on behalf of others….
This and other aspects of the case may draw comment from the weblog that specializes in section 17200 issues, The UCL Practitioner. [UPDATE: As predicted, interested readers will find that discussion here.]
The decision in Krumme v. Mercury Insurance Company (Oct. 29, 2004), Case No. A103046, can be accessed at these links in PDF and Word formats. [Note: The links will expire in approximately 120 days; the opinion should still be accessible thereafter by substituting "archive" for "documents" in the URL.]
[Personal note: Coincidentally, I was present when this case was argued before the Court of Appeal in San Francisco. (I represented the appellant in an unrelated matter that was also on the court’s calendar that morning. The court has not yet ruled in my case, which may or may not result in a published opinion.) Mercury’s counsel did a sterling job, in my view, of presenting his client’s case, and the issue determined here is clearly of significant importance to that company. I would not be at all surprised if Mercury petitions the California Supreme Court to take up the issue. I will report further if the case moves on from this point.]
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