Regulations Governing Auto Dealer Affiliated/Owned Insurance Agencies

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1 : Regulations Governing Automobile Dealership Affiliated/Owned Insurance Agencies March 30, 2015 Issue Several Ohio automobile dealerships have opened or acquired insurance agencies within their dealerships. 1 During the sales or leasing process, customers are being approached by the automobile salesperson and affiliated/owned insurance agent about purchasing insurance from the affiliated/owned agency. Insurance agents are concerned that their clients are being pressured into purchasing automobile insurance from the dealership affiliated/owned agency by unlicensed insurance agents (automobile salesperson) and based on misinformation, misrepresentation, coercive activities and high pressure sales tactics. In addition, there is a question as to whether the automobile dealership owned insurance agency is violating the 51% principal purpose test and should not be eligible for an insurance license. Finally, customers may also be uninformed about what their insurance coverage obligations are when purchasing an automobile. Many customers do not contact their insurance agent in advance of purchasing their automobile and therefore do not understand the application of their current coverage to their new car and legal responsibilities for coverage. This legal brief is intended to provide general guidance on these issues, including the three regulations governing automobile dealership owned insurance agencies, analysis of whether these activities are legal and options to contest questionable insurance practices. Rule 1. Regulations governing the activities of automobile salespersons selling, soliciting and negotiating insurance Ohio Revised Code (ORC) Section requires insurance agents to be licensed with the Ohio Department of Insurance (ODI) in order to sell, solicit or negotiate insurance. The definitions of sell, solicit and negotiate are: (O) "Negotiate" means to confer directly with, or offer advice directly to, a purchaser or prospective purchaser of a particular contract of insurance with respect to the substantive 1 Coughlin Motors is operating an Allstate agency within their dealership in Pataskala. We have also been told that other Central Ohio automobile dealerships have added insurance agencies.

2 benefits, terms, or conditions of the contract, provided the person that is conferring or offering advice either sells insurance or obtains insurance from insurers for purchasers. (Q) "Sell" means to exchange a contract of insurance by any means, for money or its equivalent, on behalf of an insurer. (S) "Solicit" means to attempt to sell insurance, or to ask or urge a person to apply for a particular kind of insurance from a particular insurer. ORC (D) establishes criminal penalties for whoever violates section is guilty of a misdemeanor of the first degree. The licensing statutes are intended to provide consumer protections and public confidence that they are receiving professional insurance advice from a licensed and educated insurance agent. ORC prohibits paying unlawful consideration to an unlicensed person selling, soliciting or negotiating insurance. However, Section (D) permits an insurer or agent to pay a referral fee if it is a fixed dollar amount for each referral and does not depend on whether the person referred purchases an insurance product. 2. Controlled Business Statute Principal Purpose for Licensure Controlled Business Statutes were adopted in the early twentieth century to prevent tie-in sales and unpoliceable coercive activity through the prohibition of licensure. The Ohio Revised Code prohibits an agency from holding an insurance license whose principal purpose is to place insurance on property it sells for which it is an agent, custodian, trustee or payee. Specifically, ORC Section (B) states, The superintendent may suspend, revoke, or refuse to issue or renew any license of an insurance agent, assess a civil penalty, or impose any other sanction or sanctions authorized under this chapter, for one or more of the following reasons: (34) Using a license for the principal purpose of procuring, receiving, or forwarding applications for insurance of any kind, other than life, or soliciting, placing, or effecting such insurance directly or indirectly upon or in connection with the property of the licensee or that of relatives, employers, employees, or that for which they or the licensee is an agent, custodian, vendor, bailee, trustee, or payee. This statute has been interpreted through case law and utilized the 51% principal purpose test to determine whether a business that owns an insurance agency is using its insurance license in a manner to merely solicit existing customers to purchase insurance for property it owns. In the case of an automobile dealership, it would not be permitted to use an insurance license to sell over 51% of its insurance products to customers that are purchasing or leasing automobiles that it owns.

3 3. Regulations governing the physical location of an insurance agency ORC (B) requires Ohio insurance agencies doing business as a corporation, LLC, association, partnership, LLP or other legal entity to obtain a business entity license in order to sell, solicit or negotiate insurance in Ohio. OAC (H) establishes the criteria an insurance agency must meet in order to be eligible for a business entity license, which includes: having a licensed insurance agent in the business entity, completing the application, paying the fee and registering with the Secretary of State. The physical location of the insurance agency is not a factor in the criteria to be eligible for the business entity license. We are not aware of any specific legal prohibition in Ohio law that would preclude an automobile dealership from having an insurance agency inside of the dealership. Analysis The issue of automobile dealerships engaging in the insurance business has been a longstanding issue for decades. In some ways it is similar to the issues independent agencies experience with bank affiliated agencies. While litigation surrounding these types of agencies has been quiet over the past 17 years, the issue has reemerged for independent agents with the opening of several automobile dealership affiliated/owned insurance agencies in Central Ohio. The first issue governing these relationships is the activities of the automobile salesperson in the insurance transaction. The automobile salesperson is limited in their ability to promote or recommend an insurance product to a customer without potentially running afoul of Ohio s insurance licensure laws. The type of interactions, compensation structure for referrals and sales tactics utilized by automobile salespersons could lead to the greatest likelihood of violations of the insurance act. However, this type of activity is very fact specific and may be difficult to prove. Examples of automobile salespersons activities that may be in violation of ORC include: An automobile salesperson invites an insurance agent into the room while a customer is closing a car sale. The automobile salesperson introduces the insurance agent and encourages/steers the customer to purchase automobile insurance with the agent. o This could potentially run afoul of the law because by encouraging or steering the consumer to purchase certain insurance coverage, the automobile salesperson may be asking or urging the customer to apply for insurance with this insurance agent without a license. An automobile salesperson advises a customer that if they buy their insurance from their agent and insurer they will save money. o This is likely illegal because the salesperson is asking or urging a person to apply for a particular kind of insurance from a particular insurer.

4 A customer is closing on a car purchase and is financing the transaction through the automobile dealership lenders. The automobile salesperson tells the customer that the financing of the transaction is dependent upon the purchaser buying automobile insurance from their agency. o This is expressly illegal as the issuance of credit may not be used to induce or predicated upon the purchase of insurance. Insurance agencies affiliated with another business or owned by the same owners of another business, be it banks, automobile dealerships, securities firms or other businesses have been an ongoing issue for many years. The state legislature, US Congress, Ohio Supreme Court and US Supreme Court have all passed laws and issued opinions on the legalities and permissible business structures governing these types of activities. Most relevant to the current situation was the the1997 lawsuit involving the Independent Insurance Agents of Ohio (Big I Ohio) vs. Duryee (ODI Superintendent at the time). The Big I Ohio filed for a permanent injunction against ODI to stop the issuance of an insurance license to an agency owned by Fred and Rhett Ricart, owners of the Ricart Automotive Group. The trial court issued a temporary injunction while the case was pending and issued a ruling that ODI had the authority to grant Tracir, Ricart s insurance agency, an insurance license. The 10 th District Court of Appeals found that Big I Ohio failed to demonstrate that the automobile dealership affiliated/owned insurance agency will or is using its license in violation of the principal-purpose test by placing more than fifty one (51%) percent of its insurance upon the automobiles and products sold by the automobile affiliated/owned dealerships. In 1998, the Ohio Supreme Court refused to overturn a 10 th District Court of Appeals ruling, therefore ending the litigation. This ruling established that ODI must grant automobile dealership affiliated/owned agencies an insurance license if they complied with the 51% principal purpose test and they are not the alter ego of the dealership. Several of the key findings in the Tracir decision are: In the case of a new applicant, where there is no yearly data, the superintendent relies upon the affidavits of the principal officers of the applicant that the license will not be used to sell insurance in excess of the 51% in any one year to persons with which it has a prohibited relationship under ORC (B)(34). The court cited the Fabe case in finding that the principal purpose test does not apply to affiliated entities since the language of the statue is clear and unambiguous in its exclusion of affiliate from enumerated relationships. Despite the fact that the same persons owned the automobile dealership and insurance agency, the court found that the alter ego rule did not apply to the Ricart dealership and Tracir agency. It held that because Ricart Automotive did not control Tracir and it employed other individuals that controlled the daily business operations it was not Ricart s alter ego. The Big I s conclusion following the Tracir decision was that ODI s opposition to the lawsuit has gutted Ohio s controlled business statute and eliminated its own discretion in granting corporate licenses.

5 While licensure challenges under the principal purpose test have been limited in its application and success, assessing whether the dealership owned agency is the alter ego of the dealership will be an important first step in determining the validity of the insurance license. This would likely require an investigation by ODI into the ownership of the agency, operating structure and business plan for the insurance sales. Another issue in these relationships is the sharing of information between the dealership and agency. The best guidance we have on this issue is from the 2001 Congressional enactment of the Gramm-Leach-Bliley Act (GLBA). It was intended to clarify the ability of banks, insurance companies and brokerage firms to operate as affiliates under common ownership. The Act permits the sharing of non-public consumer information among affiliated companies such as banks and their affiliated insurance entities. Automobile dealership affiliated/owned insurance agencies would be treated in much of the same way banks are regulated on sharing consumer information. Conclusion It is possible automobile dealerships are violating Ohio s insurance licensure laws. Determining whether automobile dealerships are violating the law will be a case by case basis. It will require the collection of information from clients that are sold or solicited insurance during the automobile purchasing or leasing process to evaluate whether a potential violation has occurred. Consumers and independent agents may contest these activities and licenses based on two points: The automobile salesperson is selling, soliciting or negotiating insurance or without a license by promoting one agent and company during the car buying or leasing process. The issue of improper compensation for referrals could also arise under this area. The automobile dealership owned agency is violating the principal purpose 51% test and therefore should have its license revoked. This would require an investigation into the licensure application, legal structure of the agency and affidavits submitted to prove compliance with the principal purpose test (if applicable). We are unaware of any recent challenges that have been successful that are based on the 51% principal purpose test in denying or revoking an insurance license. PIAA has developed consumer education materials for agents to share with their clients that are considering purchasing or leasing a new automobile. This will help consumers become better informed about their insurance obligations during the automobile purchasing process and serve as a good resource for agents. (more)

6 What to do if you become aware of a questionable practice by an unlicensed salesperson or dealership affiliated/owned agency Ohio law gives consumers the right to file a complaint with ODI against an insurance company or agent alleging a state insurance law violation. In addition, agents have several options to pursue when confronting potential violations of the insurance code that may negatively affect Ohioans. Those options include: File a complaint with the ODI Encourage your client to file a complaint with ODI If you are considering filing a complaint, please be aware that it will require you to collect specific information that may constitute a violation of Ohio s insurance laws. This means you may have to get your clients to document their interactions with unlicensed salespersons so the complaint can substantiate the facts of an objectionable practice. According to ODI, it will not resolve a dispute when the only evidence is your word against the word of the company or agent. In addition, PIAA may be able to seek out greater clarification from ODI or the Attorney General. In a similar action, the Massachusetts Division of Insurance issued Bulletin to provide guidance on the involvement of motor vehicle salespeople in the solicitation, negotiation or sale of motor vehicle insurance. We could seek out a similar bulletin from the ODI if we believe it would be of benefit to have greater guidance on this activity. PIAA and independent insurance agents must educate consumers about their insurance needs prior to purchasing an automobile from a dealership. Well informed consumers will be able to avoid the high pressure sales tactics during the closing process to attempt to persuade purchasers to switch their insurance when they may not want to do so. NOTICE: Professional Independent Agents Association of Ohio, Inc. (PIAA) provides this information with the express understanding that 1) no attorney-client relationship exists, 2) neither PIAA nor its attorneys are engaged in providing legal advice and 3) that the information is of a general character. You should not rely on this information when dealing with personal legal matters; rather, seek legal advice from retained legal counsel.