COLUMBIA LAW REVIEW - AWS

COLUMBIA LAW REVIEWVol. 61 FEBRUARY 1961 No. 2

THE REGULATION OF INSURANCE MARKETING

SPENCER L. KIMBALL* AND BARTLETT A. JACKSONf

TABLE OF CONTENTSPAGE

I. U nfair T rade P ractices of Ag e n t s ..................................................................... 143A. Practices Injurious to Policyholders .......................................................... 144

1. Discrimination .............................................................................................. 144a. Unlawful inducements to insure ........................................................ 146b. Overcharges ............................................................................................ ISO

2. Deceptive and coercive practices .............................................................. 152a. Misrepresentation .................................................................................. 152b. Improper advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154c. Twisting .................................................................................................. 154d. Coercion .................................................................................................. 155

3. Service and claim settlement ..................................................................... 157B. Practices Harming Competing Companies or Agents ............................... 159

1. Defamation .................................................................................................... 1592. Other unfair competition ........................................................................... 161

C. Practices Directed Primarily Against the Company ................................... 1611. Misrepresentation to the company ............................................................ 1612. Conversion of funds .................................................................................... 1623. Multiple representation of companies .................................................... 163

D. Miscellaneous Practices .................................................................................... 164II. I nsurance Department P ractices in the Regulation of Marketing . . 165

A. Organisation and Administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165-1. Responsibility of insurance departments .............................................. 1652. Structure of the department ..................................................................... 1663. The licensing process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166

B. Investigation of Unfair Trade P ractices.......................................................... 168-1. Investigation conducted by the department ............................................. 1682. Investigation delegated to companies ....................................................... 170'

C. Prosecution of Unfair Trade P ractices.......................................................... 1711. Informal sanctions ...................................................................................... 171

a. "Persuasion" of agents ...................................................................... 171b. Sanctions applied through the companies ...................................... 172'c. The role of agents’ associations ...................................................... 178d. Conciliatory procedures ....................................................................... 179’

2. Formal sanctions ........................................................................................ 179'a. Criminal prosecution in the courts .................................................... 179b. Formal procedure within the insurance departments....................... 180'

i. Sanctions ........................................................................................ 180'ii. The formal hearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 181

iii. Regulation of advertising .............................................................. 183III. Solution of Some P articular Problems ......................................................... 185

A. Rebating ............................................................................................................... 186-B. Twisting ............................................................................................................... 193C. Misrepresentation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 196-

IV. Conclusions ................................................................................................................. 198-

* Professor of Law, University of Michigan, •f J.D., University of Michigan Law School.

142 COLUM BIA L A W R E V IE W [Vol. 61:141

Most writing in the field of insurance law has dealt with doctrines enunciated by the courts, which for the most part interpret and enforce the insurance policy itself. Even when investigation has transcended this limit it has rarely gone beyond a survey of the contents of the statute book.1 Thus far, there has not been any serious effort to study in detail the practical content and processes of insurance regulation. I t is the purpose of the research project,2 3 * * * * of which this study is a part, to fill some of this gap by examining the actual processes of insurance regulation, and by relating what these processes do to the needs of the insurance business and to the problems of channelling and controlling that business in the interest of larger social goals.

The subject matter of the present study is the control of marketing practices of insurance agents. This is but a small segment of the whole field of insurance law and regulation, and it is not a very controversial one. But it is very important to the policyholder who may be injured by unfair marketing practices and to the thousands of men representing the gigantic insurance business who suffer individually and collectively from the unfair practices of some unscrupulous agents.

This study is divided into three principal parts. We shall first describe the insurance marketing practices which are generally regarded as unfair, together with the statutes that forbid or limit such conduct. We shall then discuss the methods used by insurance departments to administer and enforce the laws governing marketing practice. Finally, we shall explore a few of the major problems in some detail in an effort to discover their full implications and to suggest possible solutions.

In order to locate and identify various fypes of unfair practices and to determine the procedures and techniques utilized to investigate, punish, and prevent agent misconduct, we made a field study of a number of insurance departments. Inquiries were carried out in Connecticut, Illinois, Kansas, Michigan, Montana, New Jersey, New York, Texas, Utah, and Wisconsin.8 Our purpose was to obtain a picture of the regulatory process throughout

1. See P atterson, T he I nsurance Commissioner in the U nited States (1927) for the work that goes furthest to transcend traditional limits.

2. A functional study of insurance law, and especially of insurance regulation, is now in process at the University of Michigan Law School.

3. The most complete study was made in the New York department. All departments gave us complete and ungrudging cooperation and made their records and expertise fully available to us. W e wish to express our appreciation to them for their help and for their understanding that the value of this inquiry depended on its being •unrestricted. The Utah and Montana studies were complete surveys of the department activities. The Utah report is Kimball & Hansen, The Utah Insurance Commissioner: A Study of Administrative Regulation in Action, 5 Utah L. Rev. 429 (1957), 6 Utah L . Rev. 1 (1958). The part relevant here is 6 U tah L. Rev. 1, 6-14 (1958). TheMontana report is Kimball & Conklin, T he Montana I nsurance Commissioner(1960) (published by University of Michigan Law School). The parts relevant here

a re id. at 34-46 and 67-71.

1961] IN SU R A N C E M A R K E TIN G 143

the United States by studying a cross section of the country, giving attention to geographical distribution, to size of the state and the department, and to leadership in insurance regulation. Necessarily, expense and convenience were also factors in our choice.4 5 6 Our three principal sources of information were (1) discussion with department personnel, (2) examination of departmental files and forms, and (3) observation of the regulatory process in action. We also asked representatives of the insurance industry for their views and examined the statutes, the reported cases, and the opinions of attorneys general dealing with the subject. Every practice that we describe is based upon specific instances discovered in our inquiries.

The field of insurance is complex and changing and we make no pretense at definitive solutions. We shall be content if we can throw new light on old problems and put them in better perspective so that more adequate solutions may be developed.

I. U nfair T rade P ractices of Agents

The statutes proscribing unfair marketing practices are fairly uniform in substance, in large part as a result of the widespread acceptance of the Uniform or Model Unfair Trade Practices Act.® After the Supreme Court held in the Southeastern Underwriters’ case® that insurance is commerce, and thus subject to federal control under such laws as the Sherman Act7 and the Federal Trade Commission Act,8 Congress passed Public Law 15, which preserved the right of the states to regulate insurance, with the proviso that “after June 30, 1948 . . . the Sherman Act . . . the Clayton Act . . . [and] the Federal Trade Commission Act . . . shall be applicable to the business of insurance to the extent that such business is not regulated by State law.”9 This proviso precipitated cooperative state action to preserve state control of the insurance business. The National Association of Insurance Commissioners, in collaboration with committees representative of the industry, undertook studies that resulted in the recommendation of the “All-Industry” bills to provide adequate state regulation of insurance. A model State Unfair

4. I t would, for example, have been useful to add . California to the list, but the time proposed for our visit was inconvenient for the California department

5. Between 1947 and 19S0 twenty-six states enacted laws based upon the Model A c t 1 R ichards, I nsurance 198 n.9 (5th ed. 1952). In FTC v. National Cas. Co., 357 U.S. 560, 564 n.6 (1958), the Supreme Court stated that thirty-six states had then enacted the Model Act and eight others had similar statutes. All the states have now enacted the Model Act in substance. [1960] 1 N-A.I.C. P roceedings 150. Miscellaneous additional provisions also exist in various states.

6. United States v. South-Eastern Underwriters Ass’n, 322 U.S. 533 (1944).7. 26 S ta t 209 (1890), as amended, IS U.S.C. § 1-7 (1958).8. 38 Stat. 717 (1914), as amended, 15 U.S.C. §§ 41-58 (1958).9. 59 S ta t 33 (1945), 15 U.S.C. § 102 (1958). See generally Kimball & Boyce,

The Adequacy of State Insurance Rate Regulation: The McCarran-Ferguson A ct in Historical Perspective, 56 M ich . L. Rev. 545 (1958).


Trade Practices Act was one of the bills proposed.10 This act prohibits certain unfair trade practices and provides for the designation of other unfair practices, not specified by the act itself, by the commissioner of insurance. The act was endorsed by the Insurance Committee of the Council of State Governments in its 1946 report,11 and most of the states have adopted it, or one like it.12 The necessity that state regulation satisfy the statutory proviso to preclude federal control was underlined in the 1950’s by the Federal Trade Commission’s assertion of jurisdiction in cases of alleged fraudulent advertising by insurance companies. Though the Commission was unsuccessful in an early case,13 in 1960 it seemed likely that some residue of power over interstate insurance activity did remain in the Commission.14

We have grouped the unfair trade practices of agents into those that are injurious to the insuring public, those that are injurious to other agents, and those that are injurious to the insurance companies. Though a practice may be injurious to more than one of these, this tripartite division of injured persons will both serve as a convenient basis for classifying unfair conduct and focus attention on remedies.15

A. Practices Injurious to Policyholders

1. Discrimination. By discrimination we mean any practice, whether by company or by agent, that gives some policyholders an unjustified advantage over others. W e discuss only in passing the problems of discrimination by companies, the most important of which are problems of classification in the rate structure.16 However, the Model Act prohibits any kind of discrimination by life insurance companies,17 and similar prohibitions against

10. See 1 Richards, I nsurance 198-215 (5th ed. 1952).11. Council of State Governments, Revision of State Systems for I nsurance

R egulation 23 (1946).12. See note 5 supra.13. FTC v. National Cas. Co., 357 U.S. 560 (1958).14. FTC v. Travelers Health Ass’n, 362 U.S. 293 (1960). The case was remanded

to the Court of Appeals, where further proceedings are pending at the date of this writing.

15. I t would also be possible to describe unfair practices in terms of existing statutes. W e have not done so for two reasons. First, some practices of agents, which are considered unethical by companies, other agents, or the public, are not specifically prohibited and yet may in fact be regulated by some insurance commissioners. In order to make our description as complete as possible, we have excluded no practice merely because it -was not specified in a statute; we have rather sought the judgments of policyholders, agents, company executives, and people in state insurance departments, and included all practices that any of them regarded as unfair. Second, we are concerned mainly with enforcement, and it seems more useful to classify unfair practices according to the person injured, who is most likely to take remedial action. See P atterson, op. cit. supra note 1, a t 307-31 (1927), for a different classification than ours and a description more detailed in some particulars.

16. See W illiams, P rice D iscrimination in P roperty and Liability I nsurance (1959). Closely related is the practice of fictitious grouping of individual policyholders

-to permit lower rates. On this problem see [1958] 2 N.A.I.C. P roceedings 413-23.17. 1 R ichards, I nsurance 199 n.13, § 3 (g ) (5th ed. 1952).


discrimination in some other lines of insurance have been adopted in many states.18

The development of premium financing plans also poses an important problem of company discrimination that has some implications for agents. I t has long been recognized that interest-free credit on insurance premiums is akin to rebating,19 and the New York Insurance Department, at least, has expressed concern over the discriminatory possibilities in the growth of premium financing plans.20 When a bill was introduced in the 1960 New York legislature to regnlate premium financing, however, its main thrust was to ensure fairness to the financed policyholders, rather than to prevent discrimination against cash-paying policyholders.21 The problems of an organized premium financing business are not the same as those involved in an agent’s casual financing of a single policyholder’s premium.

In recent years the most interesting problem of company discrimination has been in the “minimum deposit plan” for life insurance, which provides significant tax advantages to buyers in higher income tax brackets.22 The plan consists of one of the usual forms of life insurance, with provision for an unusually high premium loan value in the early years of the policy. It is not uncommon to have the premium loan value as high as 70 per cent of the gross premium. Thus, the initial cash outlay is very low when compared with other plans if the policyholder takes full advantage of the loan value. The plan is popular with many agents because it provides a relatively high commission23 for the sale of a plan requiring only a small cash outlay, and with policyholders because of its tax advantages. The plan has allegedly led to misrepresentation, incomplete comparison, misleading advertising, and replacement of existing coverage (twisting), and has resulted in numerous complaints to some insurance departments. However, the New York Insurance Superintendent thought that its most unfair aspect was not the agent malpractice to which the plan may give rise, but was inherent in the plan itself: “When two policyholders, who at the same age and condition have bought essentially similar policies in the same amount from the same company, one a minimum deposit policy and the other a conventional type

18. For example, see N.J. Rev. Stat. § 17:29B-4(7) (b) (Supp. 1960).19. One such statute is W is. Stat. An n . § 201.53(6) (1957). This notion was

earlier applied rather strictly. See III . Ops. Att’y Gen. 880-82 (1916). Contrast the later, more liberal attitude in Sullivan v. Connecticut Mut. Life Ins. Co., 337 Mo. 1084, 88 S.W.2d 167 (1935) (not rebating to collect premium in twelve monthly installments, without interest). And see P atterson, op. cit. supra note 1, at 319-21, for discussion of the earlier situation.

20. Journal of Commerce, O ct 15, 1959, p. 10, col. 1.21. S. 1090, A. 1551, 183d Sess. (N.Y. I960); see Journal of Commerce, March 16,

1960, p. 10, col. 7.22. See, e.g., Journal of Commerce, Mar. 24, 1960, p. 4, col. 4 ; 182 W eekly U nder

writer 627 (1960).23. These commissions may be as high as 90% of the initial cash outlay.


policy, surrender them at the end of the first policy year, a return of as much as 70 per cent of the first year premium to one and a return of nothing to the other is inequitable.” For this reason, and because of the unfair practices the plan encourages, the New York Superintendent has promulgated a regulation that would in effect prohibit the use of minimum deposit insurance.24

a. Unlawful inducements to insure. Agents most often discriminate through a “rebate,” by which we mean any inducement to insure not included in the policy and hence not made available to all policyholders. Insurance laws in all states prohibit rebating in life insurance; many have a general provision covering all lines of insurance. The Model Act provision referring to life insurance is typical:

Except as otherwise expressly provided by law, no life insurance company or its agent shall make any contract of insurance or agreement as to such contract, other than as plainly expressed in the policy issued thereon; nor shall any such company or agent pay or allow, or offer to pay or allow, as inducement to insurance, any rebate of premiums payable on the policy, or any special favor or advantage in the dividends or other benefits thereon, or any valuable consideration or inducement not specified in the policy contract of insurance; or give, or sell, or purchase or offer to give, sell, or purchase, as inducement to insurance or in connection therewith, any stocks, bonds, or other securities of any insurance company or other corporation, association, or partnership, or any dividends or profits accrued thereon, or anything of value whatsoever not specified in the policy.25 26

The Model Act also prohibits specifically particular types of rebating.20

24. Regulation No. 39, New York Insurance Department, reprinted in 181 Weekly U nderwriter 250 (1959).

25. Section 3 (h ) (1 ) ; see 1 Richards, Insurance 199 n.13 (5th ed. 1952). In § 3 (h )(2 ) , the Model Act specifically excludes from the general prohibition bonuses paid to nonparticipating policyholders, discounts to industrial policyholders who pay directly to the company, or readjustment of group life rates based on experience with the particular group. Other particular exceptions exist in individual states. Thus, for example, Ala. Code tit. 28, § 90(4) (8) (b) (D ) (1958) and Okla. Stat. A nn . tit. 36, § 1204(8) (b) (4) (1958) allow an insurance company employee to receive the commissions on his own policy. Ala. Code tit. 28, § 9 0 (4 )(8 )(b )(E ) (1958) and Okla. Stat. A nn . tit. 36, § 1204(8) (b) (5) (1958) permit reductions of premiums because of expense savings resulting from a salary savings plan. La. R ev. Stat. § 22:1214(8) (d) (1959) permits agents to accept a premium note. N.Y. I ns. Law § 188(3) permits sharing of commissions by licensed brokers. T ex. I ns. Code art. 5.41 (1952) permits nondiscrimina- tory profit sharing. Utah Code A nn . § 31-27-14(2) (1953) permits trade custom discounts in certain fields, such as marine insurance.

26. Section 3(f) ; see 1 R ichards, I nsurance 199 n.13 (5th ed. 1952).No insurance company doing business in this state shall issue, nor permit its

agents, officers, or employees to issue or deliver, agency company stock or other capital stock, or benefit certificates or shares in any common law corporation, or securities or any special or advisory board or other contracts of any kind promising returns and profits as an inducement to insurance; and no corporation or stock company acting as agent of an insurance company nor any of its agents, officers, or employees shall be permitted to sell, agree or offer to sell, or give or offer to give, directly or indirectly, in any manner whatsoever, any share of stock securities, bonds, or agreements of any form or nature promising returns and profits as an inducement to insurance or in connection therewith.


The simplest rebate is a cash return of a part of the premium or the acceptance as full payment of an amount less than the premium set by the company,27 ordinarily made possible by a reduction in the agent’s commission. Sometimes an agent may even rebate the entire first year premium in the hope that renewal commissions will compensate for this initial loss. Outside of life insurance, rebates are most often a constant percentage of each year’s commission, the continuing rebate being necessary to secure the business against attacks of rebating competitors. In life insurance, however, renewal commissions are small so that continuing rebates are not practical, and the rebate seems generally limited to all or a part of the first year commission.28

Some agents have invented many subtle practices for rebating indirectly in an effort to circumvent the statutory proscription. For example, one insurance agent rented office space at an excessive rental from a taxicab company that gave him all of its insurance business. The insurance department considered the excessive portion of the rent to be a rebate and required the agent and the taxicab company to revise the rental arrangements. Another device is to join the insurance transaction with a sale of stocks or bonds at a price lowered by the amount of the proposed rebate. If the securities are not regularly sold in established markets, such rebating is difficult to detect and even more difficult to prove29 The advisory board contract provides another method for avoiding the prohibition against rebating. The insured pays the regular premium for his insurance coverage but is then retained by the agent or company in an “advisory” capacity for which he receives compensation. The “advisor” performs no real function and is thus actually receiving a rebate.30 Still another way to rebate is for

27. Though every practice we describe is based on specific instances discovered in our inquiries, in our documentation we make no effort to identify these examples nor even to locate them in particular states.

28. Rebates are not always made in cash. One agent provided a large customer with a trip to Florida in the winter and to Alberta in the summer. On a smaller scale, an agent may give the policyholder a case of whiskey or other goods. An agent may give his insurance clients discounts on purchases from another business that he owns. Alaska forbids the combination of an insurance plan with another purchase. Alaska Comp. L aws Ann . § 42-5-4 (Supp. 1958). See also Cal. I ns. Code § 777.1-.3. Calvin Phillips & Co. v. Fishback, 84 Wash. 124, 146 Pac. 181 (1915), held that it was not a rebate for the agent, in the same transaction, to make or procure a loan for the insured and issue insurance as collateral for the loan. The Pennsylvania Attorney General ruled that it was a rebate for a company to permit its own stockholders to buy insurance a t a reduction equal to the agent’s commission. 26 Pa. Dist. R. 333 (1917). See also Annot., 137 A.L.R. 1029 (1942), on dividends to policyholders as rebates. N.Y. Ops. Att’y Gen. 198 (1947) expressed the opinion that it was rebating for a broker placing business with a mutual company to anticipate the dividend to be received by the policyholder, even though the latter must pay the broker the difference if the dividend is less..

29. The difficulty of proof lies mainly in showing "inducement,” for it is of the essence in these subtler forms of rebating that the “inducement,” or the interrelationship of the two transactions, be concealed. See P atterson, op. cit. supra note 1, at 312-15, for a discussion of the earlier cases dealing with this question.

30. See Kimball, I nsurance and P ublic P olicy 124-25 (1960) for the handling of such cases in Wisconsin; and P atterson, op. cit. supra note 1, at 315-19, for a discussion of the earlier cases on the advisory board contract. People v. American Life


the insurance broker to incorporate his business and sell shares to his clients in proportion to the premium volume of business placed with the corporate agent. This cumbersome method would allow the agent to rebate by declaring dividends. More directly, the policyholder may form a special corporation as agent or broker for his insurance.31

Payment of a commission to one who is not a licensed agent is generally considered an unlawful rebate.32 In this enlarged sense of the term, “free binder insurance” provides another variation of rebating. If a building contractor is building a number of houses, the insurance agent binds the fire coverage on each house for the period permitted by the rules of the selected company. The “binding memo” is typed up but is only sent to the company if a loss occurs. If the initial period is not long enough to permit completion of the house the agent simply binds the coverage with a second company. In return for such free insurance the contractor sees that the purchasers of the houses place their insurance with the cooperating agent. In this form of “rebating” the agent is responsible for the discrimination in favor of the contractor, but the company pays for it.33 Replying to an interrogatory from the New York Insurance Department investigating this practice, many companies acknowledged that they were exposed to the risk of free insurance, and one stated that the practice was widespread. The companies seemed to believe, however, that there was no alternative but to rely on the honesty of the agent. Many agents insist, and some of the companies concede, that the companies tacitly consent, accepting the burden in order to procure the business of the subsequent purchasers. The problem was referred to the New York Board of Fire Underwriters, which sent a bulletin to its members discouraging the practice. Though it appears that no further action was taken, an official of the New York Department recently maintained that the

Ins. Co., 267 111. 504, 108 N.E. 679 (1915), held it to be rebating when a policyholder paid only one-third of the first year premium and agreed to help the agent “in working up his business to pay off the difference,” despite the fact that he did give a certain amount of such help, which the agent said was satisfactory. N.Y. Ops. Att’y Gen. 230- 31 (1946) expressed the view that it was rebating for a life insurance agent who had advised a corporation on a pension plan for a fee to waive his fee when he was retained to write the proposed insurance.

31. The last arrangement was invalidated in Arcim Corp. v. Pink, 253 App. Div. 428, 2 N.Y.S.2d 709 (3d Dep’t 1938), otf'd, 280 N.Y. 721, 21 N.E.2d 213 (1939). In Lyman v. Ramey, 195 Ky. 223, 242 S.W. 2 (1922), a secretary employed by a trade association sought a license as an insurance agent in order to write insurance for the members. The commissions were to be turned over to the association and used to pay his salary. The court held the arrangement to be rebating. Another association altered its arrangements as a result of Lyman v. Ramey, and permitted the secretary to keep the commissions, though his salary was reduced substantially at the same time. The court thought this arrangement was lawful. Saufiey v. Smith, 209 Ky. 134, 272 S.W. 379 (1925). See also Saufiey v. Botts, 209 Ky. 137, 272 S.W. 408 (1925) ; Rogers v. Ramey, 198 Ky. 138, 248 S.W. 254 (1923); N.Y. Ops. Att’y Gen. 535 (1912).

32. See, e.g., Cal . I ns. Code § 755; Black Motor Co. v. Baughman & Datron Agency, 290 Ky. 163, 160 S.W.2d 388 (1942).

33. The agent may even go further and split commissions with the contractor.


practice has been reduced. In a few states, binder rules recommended by the Inter-Regional Insurance Conference have been adopted in an effort to eliminate free insurance.34 I t is interesting that such rules have met with some resistance by agents.35

A curious inversion of the usual rebating situation is sometimes found when an insurance policy is offered as an inducement to the purchase of commodities, as in an advertisement that offers free insurance for a year with each purchase of a used car. This can be assimilated to rebating, as it was in New York recently, though in a sense it is the converse of rebating. Some states make special statutory provisions for this case. In Pennsylvania, for example, anyone who offers an insurance policy free of cost as an inducement to purchase any real or personal property is guilty of a misdemeanor.36

Used in a broad sense, the term rebate also includes the writing of controlled business, which goes to the agent because he is in a position to control or dictate the selection of the insurance agent. The most frequent case is insurance on the agent’s own property, or on the property of corporations in which he has a controlling interest. Controlled business statutes prevent an insured from seeking an agent’s license for the purpose of saving commissions by limiting the amount of an agent’s controlled business to a designated percentage of his total writings.37 The public policy implemented seems akin to that in the rebating statutes—to support the agency system by preventing the bypassing of the agent even when free market considerations would so dictate.

The various inducements to insure, all described as “rebating,” are difficult to control. It is not enough merely to forbid them and to instruct

34. This is an organization formed to coordinate the activities of stock-company rating bureaus. Mowbray & Blanchard, I nsurance 435 (4th ed. 1955).

35. See 183 W eekly U nderwriter 768 (1960). See also Journal of Commerce, Apr. 6, 1960, p. 10, coL 1 (Gallagher speech opposing free binder insurance).

36. P a . Stat. A nn . t i t 18, § 4699.11 (Supp. 1959).37. For example, Wis. Stat. A nn. § 201.53(3) (1957), provides:

No agent shall receive any compensation for effecting insurance upon his own property, life or other risk, unless during the twelve months preceding, as agent for the company assuming such risk, he shall have effected other insurance therein, the premium on which shall exceed the premium on the insurance on his own risk.Cal. I ns. Code § 759 forbids an insurer to appoint an agent to enable the agent

to purchase insurance at a reduced cost, and § 760 declares that commissions on excessive controlled business are to be treated as rebates.

Board of Ins. Comm’rs v. Duncan, 174 S.W.2d 326 (Tex. Civ. App. 1943), holds that business acquired from close relatives on a voluntary basis is not “controlled” business. But Jarus v. Robinson, 133 N.E.2d 441 (Ohio C.P. 1954), holds that insurance sold by a real estate broker on houses he sells is controlled business, even though he is technically an agent for the seller rather than the buyer.

Efforts are sometimes made to escape the thrust of the controlled business statute. F or example, a large real estate holding company controlling a number of real estate brokerage and lending firms placed their insurance business with an agency also controlled by i t The insurance commissioner treated the arrangement as rebating.


the insurance commissioner or the district attorney to enforce the law. The problem is much more complex. We discuss it more fully below.38

b. Overcharges. Another discriminatoiy practice of agents injurious to policyholders is the premium overcharge. I t is not a serious problem of insurance regulation because the insurance business is competitive, but in certain circumstances it does occur. An agent or broker may, for example, demand additional compensation for placing a risk that companies are hesitant to cover.39 He may then make misrepresentations in the application to induce the company to write the policy. Often there will not even be ostensible justification for an overcharge. The agent explains the discrepancy between the price in the policy and the amount actually charged as a service fee. This practice, which is probably not common because the risk of detection seems too great to be casually incurred, occurs in some metropolitan slum areas where ignorance makes people easy prey for the unscrupulous agent. The practice is specifically covered by many statutes that prohibit rebating.40

In at least one situation the competitive factor is not operative, and overcharges became a serious problem. A number of lending agencies, also licensed to sell insurance, compelled borrowers on automobile financing loans to procure automobile insurance from them. The financing rate books contained complicated tables that included insurance rates at high rated automobile insurance classifications, which were properly applicable only to a minority of risks. Because of the iguorance and necessitous circumstances of such borrowers, this oppressive practice proved simple. Corrections were made only if it was shown affirmatively that the lower rated classification was proper. In the 1950’s, when the proportions of this problem became evident to the insurance department officials, the National Association of Insurance Commissioners sponsored a nationwide drive to procure refunds for car owners.41 I t is claimed that by 1960 over five and one-half million dollars had been refunded to automobile buyers as a result of this refund program.42 The problem was also aired in hearings of a subcommittee of the United States Senate Committee on Interstate and Foreign Commerce.43

38. See text accompanying notes 150-67 infra.39. See speech by Commissioner Mahoney, of Maine stating that some agents charge

illegal fees for processing assigned risk applications. Journal of Commerce, Nov. 23, 1960, p. 12, col. 4. The Nevada Commissioner ruled that agents may not' charge special fees to applicants for coverage under the Automobile Assigned Risk plan. 1960 I ns. L.J. 507.

40. The Model Act provides that “no life insurance company or its agent shall make any contract of insurance or agreement as to such contract, other than as plainly expressed in the policy issued thereon . . . .” 1 R ichards, I nsurance 199 n.13, § 3 (h )(1 ) (5th ed. 1952).

41. Journal of Commerce, Aug. 31, 1959, p. 7, col. 2.42. The New York department claimed refunds of $2.3 million from 1955 to 1959.

Journal of Commerce, Aug. 31, 1959, p. 7, col. 2.43. Hearings on S. Res. 224 Before the Subcommittee of the Senate Committee on


In 1960 the Association of Better Business Bureaus recommended to Congress that legislation be enacted requiring full disclosure of the insurance charges in such transactions, with a detailed explanation of the coverage provided by the insurance.44

In recent years a similar problem has arisen when lenders engaged in installment and other credit transactions have obtained insurance against loss resulting from disability or death that leaves the debtor or his estate unable to meet his obligations.45 46 A study by the New York Insurance Department disclosed that, in conjunction with the sale of such credit insurance, there were unfair practices such as “the sale of unnecessary insurance to the consumer, failure to refund premiums when the debtor paid up in advance, excessive charges for insurance, failure to disclose to the debtor the amount he was paying for insurance, and avoidance of claims by failure to furnish debtors with evidence of insurance.” As a result of the study the Department promulgated two rules to curb the practices.40

One of these rules establishes a schedule of maximum premium rates for life and disability insurance, which may be exceeded only if the insurer can demonstrate adverse experience; guarantees that the debtor will be able to choose an insurer freely; requires that all policies be filed with and approved by the Department; makes it mandatory that the insurer issue evidence of insurance to the debtor; prohibits denial of claims because of preexisting physical condition; requires that the insurance be limited in amount to the loan outstanding and that the term of the policy not extend beyond the indebtedness.

The other rule forbids cancellation of the insurance policy on financed personal property at the creditor’s request unless the debtor is given ten days notice and requires that, in the event of total loss, the insurer is to provide the debtor with an accounting, including the payment made to the creditor.47

Sometimes overcharging occurs because an agent, on cancellation of a policy, cheats the policyholder out of a portion of his return premium. An agent may be able to convince the policyholder that he is entitled to a lower return premium than he actually should receive, perhaps by convincing him that the cancellation was on a short rate basis though the company credits it on a pro rata basis.48 More frequently the problem

Interstale and Foreign Commerce, 85th Cong., 2d Sess., pL 2 (Aug. 7, 1958). Senator Monroney, subcommittee chairman, stated that there was no evidence of widespread misclassification where the insurance was written through regular agents. Id. at 444.

44. Journal of Commerce, Mar. 24, 1960, p. 9, col. 2.45. Such insurance is known as “credit life” or “credit accident and sickness in

surance.”46. 179 W eekly U nderwriter 448 (1958).47. N.Y. Insurance Department Rules 27-A, 27-B.48. For a fascinating case in which the state was the policyholder in a situation


arises because the agent is unwilling to return any portion of his commission. If the insured is sufficiently disturbed at paying a premium out of line with pro rata charges, he may complain to the State Insurance Department. The New York Department has taken the position that the company must repay the broker’s commission to the insured, protecting itself by contract with the broker.

2. Deceptive and coercive practices. We shall here discuss practices of some agents, which are unfair to the insuring public, where the element of discrimination between policyholders is either lacking or incidental. The methods by which an agent increases his chances of inducing a prospect to purchase insurance from him are of two general types, deception, which can be further subdivided into misrepresentation to individuals and false advertising, and coercion.

a. Misrepresentation. The most common agent malpractice is misrepresentation. A certain amount of dealers’ talk or puffing is no more objectionable in selling insurance than in other transactions. In deciding at what point it becomes unlawful misrepresentation, three relevant considerations are (1) the degree to which the representation deviates from strict accuracy, (2) the importance of the fact represented, and (3) whether the misrepresentation was intentional. The first two considerations relate to the probability that the misrepresentation will in fact mislead, the third to the culpability of the salesman.

The most obvious form of misrepresentation is an affirmative and untrue statement by the agent about the terms of the policy he is selling. He may also misrepresent the terms of a competitor’s policy. Careful reading of the policy could, on occasion, expose the lie, but policyholders seldom read policies. Moreover, misrepresentations tend to be fairly subtle and often deal with minor points. Few policyholders are equipped to study tlie policy and the judicial interpretations that would provide a basis for judging the agent’s assertions. The Model Act prohibits misrepresentation of one’s own policy:

No person engaged in the business of insurance in this state shall make, issue, or circulate, or cause to be made, issued or circulated, any estimate, illustration, circular, or statement of any sort misrepresenting the terms of any policy issued or to be issued or the benefits or advantages promised thereby, or the dividends or share of the surplus to be received thereon, or shall use any name or title of any policy or class of policies misrepresenting the true nature thereof.49

like this, see K imball & Conklin, op. cit. supra note 3, at 68-70. The Nevada Commissioner issued Ruling No. 60-15 in October, 1960 to try to curtail a related abuse. See 183 W eekly U nderwriter 758 (1960).

49. 1 R ichards, I nsurance 199 n.13, § 3(a) (5th ed. 1952).


A second type of misrepresentation is a misstatement of facts other than the terms of the policy. Recently agents selling hospital plans to older widows represented that the plan had state endorsement and that the state paid 30 per cent of the premium. The agent then misrepresented to the company the age of the applicants, in order to reduce the premium. The practice was fairly extensive.

Misrepresentation of both one’s own policy and that of a competitor can be committed through silence. Typically this involves incomplete and misleading comparisons between an agent’s own and his competitor’s policies. In some states this is specifically prohibited, often by a legislative determination of the specific matters that must be compared if the agent undertakes any comparison at all.50

Even complete silence is sometimes objectionable. The insurance contract has long been known as a contract uberrimae fidei—a contract of the utmost good faith—with a resulting obligation of full disclosure of all relevant considerations on both sides. This is enforced against the policyholder by harsh doctrines of warranty, representation, and concealment. If the agent fails to clarify some aspect of his own policy, such as failing to explain that there is a ten-month waiting period before the policy covers childbirth, he is in violation of a moral obligation to speak. But because the policyholder has generally paid for the protection he receives, failure to point out specifically and voluntarily all of the ways in which the policy excludes coverage is only a minor deviation from rectitude, unless in context the silence is actively misleading. It is very difficult to select those cases in which failure to speak is blameworthy and to devise suitable controls.

An agent may offend by silence when the policyholder assumes that the agent, especially a large general agent, is the insurer. The policyholder’s erroneous assumption usually results from the way in which the agent has advertised his business, or from the name of the business itself, and a number of states have statutes aimed at eliminating such half-truths.51

Misrepresentation may be either intentional or innocent. However, it probably occurs innocently many times for each time it occurs intentionally. While the harm done to the policyholder does not depend on whether the misrepresentation is intentional, it is desirable that the agent not be penalized

50. E.g., Me. Rev. Stat. ch. 60-A, § 39 (Supp. 1959); N.H. Rev. Stat. Ann . § 418:34 (1955) ; N.Y. I ns. Law § 127(2).

51. Mich . Comp. Laws § 500.454 (Supp. 1956); W is. Stat. A nn . § 201.47(2) (1957). Some states require the agent, if he mentions the insurer in his advertising, to give the insurer’s name and home address. I owa Code A nn . § 515.122 (1946) ; N.Y. I n s . Law § 126(2); Ore. Rev. Stat. § 736.455 (1957); Utah Code A nn . § 31-27-5 (1953). Moreover, Utah Code Ann . § 31-27-6 (1953) and W ash . R ev. Code § 48.30.060 (1951) forbid a non-insurer’s use of a name suggesting that he is an insurer.


for innocent conduct, and, thus, devising techniques for the control of misrepresentation is a particularly difficult problem.152

b. Improper advertising. False or misleading advertising is but a variant of misrepresentation. I t deserves independent consideration, however, because it involves a more formal device that is substituted for the informal words or acts of the agent in communicating a proposal to the insured. Because the communication itself provides evidence most problems of proof disappear, and improper agent advertising can be regulated with relative ease by the insurance departments. This is less true, of course, for radio and television advertising.153

Statutes that prohibit false advertising are universal in the United States.154 The Model Act provides:

No person engaged in the business of insurance in this state shall make, publish, disseminate, circulate, or place before the public, or cause, directly or indirectly, to be made, published, disseminated, circulated or placed before the public, in a newspaper or other publication, or in the form of a notice, circular, pamphlet, letter or poster, or over any radio station, or in any other way, an advertisement, announcement or statement of any sort containing any assertion, representation or statement with respect to the business of insurance or with respect to any person in the conduct of his insurance business, which is untrue, deceptive, or misleading.1515

The issuance of false financial statements is also specifically prohibited in most states. While the provision of the Model Act was aimed primarily at companies rather than agents it provides that “No person engaged in the business of insurance . . .” shall file or issue inaccurate financial statements.®0

c. Twisting. One of the practices most abhorred by life insurance men is twisting. This is the practice of inducing a policyholder to cancel his life policy with one company to take out another with a different company. The practice is so abhorred that at least one reputable company has recently circulated with its premium notices anti-twisting folders, which

52. See text accompanying, notes 176-82 infra.53. In addition to advertisements that are unlawful because false, there are ad

vertisements that are true but that are unlawful because they offer improper inducements to insure. Here the impropriety lies in the illegality or unfairness of the practice proposed. See text accompanying notes 34-38 supra.

54. See Chellberg, Regulation of Insurance—The State-Federal Controversy, 7 De P aul L. Rev. 25, 39 n.29 (1957), for statutory citations for all states, as of 1957.

55. 1 Richards, I nsurance 199 n.13, § 3(b) (Sth ed. 1952).56. Id. § 3 (e). I II . A nn . Stat. ch. 73, § 760(1) (Smith-Hurd 1940), and N.Y.

I n s . Law § 97(1) require that any financial statement of an insurer coincide with the last verified financial report filed in the insurance department. Moreover, I owa Code A nn . § 515.92 (1946); I nd. Ann . Stat. § 39-5020 (1952); N.J. Rev. Stat. § 17:18-10 (1937); and N.Y. I ns. Law § 97(1) require that any published statement of assets include, a. statement of other information such as paid in capital and surplus of assets over liabilities. But compare provisions making such advertisements an unfair practice only when issued with an intent to deceive. Ala. Code tit. 28, § 90(4) (5) (1958) ; Alaska Comp. Laws Ann . § 42-5-3(e) (Supp. 1958).


themselves make seriously misleading statements. The Model Act provision prohibiting twisting states:

Nor shall any . . . person [engaged in the business of insurance] make any misrepresentation to any person insured in any company for the purpose of inducing or tending to induce a policyholder in any company to lapse, forfeit, or surrender his insurance.157

Though there is widespread agreement that twisting is ordinarily harmful to the policyholder, the law does not prohibit twisting as such, but only twisting accompanied by misrepresentation.57 58

d. Coercion. Innumerable pressures are applied in the marketing of insurance, as in the business world generally, in an effort to influence business decisions. In prohibiting rebating, the law has characterized as improper one kind of pressure, the monetary inducement In the term “coercion” we include a variety of practices that are, in a sense, the complement of rebating, differing only in that the inducement is negative rather than positive. For example, an insurance agent may refuse to service his car at a certain garage or to buy his groceries at a certain store unless he receives some of the owner’s insurance business. Although such coercive pressure seems unobjectionable, or at least is not prohibited, up to a point, it is not easy to decide at what point coercive acts become unlawful rebating.

Only certain types of coercion are regarded as unfair and are prohibited. One such type is coercion in the financing of major consumer purchases, especially homes and automobiles. The purchaser of a home or an automobile may be pressured to obtain his insurance from an agent associated with the lender. Sometimes the pressure is direct and insistent; sometimes it is more subtle and the coupling of the transactions is only made the more convenient course of action, the purchaser assuming that the purchase of insurance is part of a “package deal.” This practice is very widespread, and perhaps the extent of the practice coupled with the importance of these purchases to ordinary people puts it on a different footing. The quasi-public character of the lender’s business and the frequently necessitous circumstances and ignorance of the borrower add to the argument for proscription. This kind of coercion is widely recoguized as unfair, and a large number of states have prohibited making the purchase of insurance through a particular person a condition of a sale or the lending of money.59 Moreover, the Department

57. Section 3 (a ) ; see 1 Richards, I nsurance 199 n.13 (5th ed. 1952).58. For further discussion of the twisting problem see text accompanying notes

168-75 infra.59. Mich. Comp. Laws § 500.2077 (Supp. 1956) is a typical statute. The provi

sion is not in the Model A c t Some efforts have been made to stop this coercion under controlled business statutes, but the thrust of such statutes is different. See Florida Ass’n of Ins. Agents v. Larson, 155 Fla. 13, 19 So. 2d 414 (1944). In other jurisdictions commissioners sought to prevent the coercion by ruling that agents’ licenses would not be issued to employees of finance companies or auto dealers. Good-


of Justice is engaged in efforts to eliminate such coercion under the federal power to prevent boycott, coercion, and intimidation reserved in the Mc- Carran Act.80 I t has obtained some important consent decrees, such as one against tie-in sales of insurance by mortgagees.81 Nonetheless, many agents and insurance department personnel think the practice is still widespread. I t is difficult to prevent because of the difficulty of proof when the coercion is subtle. One attempt at solution requires that the lender inform the borrower that he is entitled to purchase his insurance from any agent.82 The effect of such a provision is questionable. The statement, “You may purchase your insurance from whomever you please," may be made in such a manner as to convey the opposite meaning, or the transaction may be so structured that any statement is irrelevant.

Another consideration that quickly renders coercion improper is the danger of subverting the integrity of political processes. In one instance, for example, a construction firm secured favorable rulings on zoning ordinances from a justice of the peace who also provided the construction bonds for the contractor. In another case, an agents’ association received a complaint about an agent who was a member of a state administrative commission that determined the amount of unemployment levy employers would have to pay. The possibility of improper influence on his decisions as a public official was perceived as an unfair lever that could be used to obtain insurance clients. Similar considerations have led to a prevalent prohibition against the purchase of insurance by a public agency through insurance agents who are members of the public agency.83

Aside from the specific statutes mentioned above, there seems to be no general prohibition of coercive activity in the sale of insurance, except to the extent that it is contained in the provision of the Model Act that reads:

No person engaged in the business of insurance in this state shall enter into any agreement to commit, or by any concerted action, * 60 61 62 63

paster v. Southern Ins. Agency, 293 Ky. 420, 169 S.W.2d 1 (1943), held issuance of such a ruling beyond tire commissioner’s power. Accord, Department of Ins. v. Motors Ins. Corp., 236 Ind. 1, 138 N.E.2d 157 (1956). For the culmination of a line of cases treating the problem with the aid of an explicit statute, see Motors Ins. Corp. v. Robinson, 62 Ohio L. Abs. 58, 106 N.E.2d 572 (C.P.), aff’d, 62 Ohio L. Abs. 72, 106 N.E.2d 581 (Ct. App. 1951), appeal dismissed per curiam, 344 U.S. 803 (1952).

60. 59 Stat. 33 (1945), 15 U.S.C. §§ 1011-15 (1958).61. United States v. Investors Diversified Serv., T rade Reg. Rep. (1954 Trade

Cas.) H 67799, at 69574 (D.C. Minn. June 30, 1954). See also United States v. Liberty N a tl Life Ins. Co., T rade Reg. Rep. (1954 Trade Cas.) ft 67801, at 69580 (N.D. Ala. June 29, 1954) (consent decree enjoining life insurance company and subsidiaries from funeral service contracts with funeral directors). See also the statement of Robert A. Bicks, Acting Assistant Attorney General in Charge of the Antitrust Division, Department of Justice, Hearings on S. Res. 57 Before the Subcommittee on Antitrust and Monopoly of the Senate Committee on the Judiciary, 86th Cong., 1st Sess., pt. 2, at 917-47 (1959). See also id. at 955.

62. See W is. Stat. A nn . § 134.10 (Supp. 1960).63. See K imball, I nsurance and P ublic P olicy 128 (1960).


commit, any act of boycott, coercion or intimidation resulting or tending to result in unreasonable restraint of, or a monopoly in, trade or commerce.64

This statute may catch some institutionalized coercive practices, but its thrust is against concerted action, and thus it cannot catch the wide variety of coercive practices engaged in by individual agents in individual cases.

3. Service and claim settlement. In general the quality of the agent’s service is not the subject of regulation. If a policyholder is dissatisfied his remedy is to change agents. But state insurance departments do pay some informal attention to the general business practices of agents in order to correct seriously prejudicial practices. This power is claimed on the basis of statutes that vest the insurance commissioner with discretion to determine who is a “proper or fit person” to hold an agent’s license.65 An agent persistently derelict in his duty to policyholders is not considered “proper o r fit” and the commissioner may threaten action leading ultimately to temporary or permanent loss of license.

Many complaints to the departments involve failure to collect premiums promptly, or delay in delivery of the policy. Except for recurrent offenses these practices result at most in a letter from the department suggesting that this is a bad way to run a business or a reference of the matter to the agent’s company. If an agent collects a premium but fails to remit it to the company, the possible effects, including lapse of the policy, are more serious. For the purpose of premium collection most states treat even brokers as agents and hold that the coverage is in effect,66 thereby protecting the policyholder and leaving the company to protect itself.

It is in connection with claim adjustment that the departments receive most of their complaints about the agent’s services. Among the less serious complaints are delay by the agent in transmitting a claim to the company or delay in remitting a settlement check to the insured. Unless such complaints recur frequently, they are generally disposed of by a letter from the insurance department.

But there are more serious practices. When the agent participates in the settlement of the claim two types of abuses sometimes arise: (1) excessive payment67 and (2) insufficient payment. An agent settling claims may make an excessive payment through mistake or ineptness, or out of a desire to

64. 1 Richards, I nsurance 199 n.13, § 3(d) (Sth ed. 1952).65. See Mich . Comp. Laws § 500.1472 (Supp. 1956).66. See N.Y. I ns. Law § 121; P atterson, E ssentials of Insurance Law 45

(2d ed. 1957). For the distinction between brokers and agents, see notes 94-95 injra and accompanying text.

67. Though excessive payment harms the company, not the policyholder individually, it is convenient to treat it here.


retain clients. Generous claim payments enhance his reputation with policyholders and may result in new business. The law leaves it largely to the companies to protect themselves against excessive payments. The company expects the agent to stay within bounds in disposing of claims, though deviation usually results only in letters of inquiry from the home office. Occasionally the company will terminate an agency contract for an excessive loss ratio. A less drastic but more effective sanction is withdrawal of the privilege of settling claims. Indeed, recognition of the danger inherent in agent settlement of claims has led the companies to protect themselves by separating the adjustment of claims from the agency organization as completely as competitive considerations permit Thus an effort to settle claims independently of agents has been an aim of fire insurance companies for many generations.88 Even when the adjusters are formally independent of the agents, however, as they are in most lines of insurance, there is still a possibility of discriminatory claim settlements, for an insurance agent with a large account may exert pressure to obtain favorable treatment of borderline claims. Such pressure might be resisted if it were direct and extreme, but companies are aware that a good agent may move on to a more favorable “claim climate” if he becomes dissatisfied, and they will respond to subtle pressure. This pressure is a service to policyholders that is not available to all agents, and it gives a competitive advantage to the better agents.

Department control of excessive payments would be difficult because it would involve the departments in the detailed supervision of claims settlement on an impossibly large scale. Fortunately, such extensive intervention is not necessary, for the self interest of the companies provides much better protection than would regulation.68 69

Because of the reduced participation of agents in claims settlement, there is also less opportunity for them to harm policyholders directly by making insufficient settlements. In one situation, however, it had recently become a formidable problem in New York. New York permitted companies to make agency contracts under which the agent remitted only IS per cent of the premium received for automobile insurance to the company; expenses and claims were to be settled out of the 85 per cent that the agent retained. The company paid only those claims that exceeded the amount retained. The inducement for the agent to “chisel” on claims is quite apparent. This abuse was particularly prevalent with small claims that did not justify litigation. The

68. K imball, op. cit. supra note 63, at 216. See also 1960 I ns. L.J. S08 (Nevada Commissioner directive forbidding agents to adjust losses in excess of $100).

69. If the excessive claim payment is a disguised rebate given at the expense of the company, as it may occasionally be, it could theoretically be controlled under the anti-rebating laws. The difficulties of detection and proof, however, would be unusually difficult.


practice would now seem to be effectively prohibited by a New York State Insurance Department regulation.70

Even when the only function of the agent in the settlement of a claim is the delivery of the check, there is a possibility of dishonesty. The agent may induce the insured to endorse the check, and then he may seek reduction in the bill to which the check was to be applied. The practice is infrequent, and, since it is a violation of criminal statutes as well as of the insurance code, it leads to revocation of the agent’s license when discovered.

B. Practices Harming Competing Companies or Agents

Although most of the practices discussed as being injurious to the insuring public harm other agents incidentally, defamation and certain other acts of unfair competition are primarily detrimental to other agents or companies and harm the insuring public only incidentally.

1. Defamation. Defamation of one agent by another injures the insured only in the most indirect way. If successful, its effect is to shift business from the defamed person to the offender. Though most agents to whom we spoke think that it is not good business to “knock the competition” in an obvious way, more subtle disparagement is not uncommon. A common means of disparaging a competing company is to state that it is a “tough claim settler.” The possibility of a tort action against such defamation is hardly significant'protection.

Defamation is prohibited only if the defamatory statements are false o r malicious. The Model Act provides:

No person engaged in the business of insurance in this state shall make, publish, disseminate, or circulate, directly or indirectly, or aid, abet or encourage the making, publishing, disseminating or circulating of any oral or written statement or any pamphlet, circular, article or literature which is false or maliciously critical and which is calculated to injure any other such person.71

Between truth and falsity is a wide penumbral area of ambiguity. The difficulty in controlling defamation is the subtlety and variety of its expression. Statements reflecting upon the character, personality, or competence of the competing agent are harmful even if not clear untruths. A statement that “A does not provide proper service,” for example, coupled with a contemptuous tone of voice, may hurt A even though it is too vague to

70. N.Y. Insurance Department, Amendment to Regulation 27B (Jan. 6, 1959) reads in part:

No insurer or representative thereof shall enter into or renew any agreement with any agent, broker or other person which permits the retention o r ’ withholding by such person for the purpose of payment of losses, or loss or adjustment expenses of any portion of premiums collected under policies issued by the insurer.71. 1 Richards, I nsurance 199 n.13, § 3(c) (5th ed. 1952).

160 COLUM BIA L A W R E V IE W [Vol.61:141

be prohibited effectively. In an extreme case the commissioner might punish an agent guilty of such statements, on the broad ground that he is not a “fit and proper person.” Such action may be challenged, however, if based on grounds that are too tenuous. Moreover, it would not be desirable to permit the commissioner to base action on this broad language unless the agent’s conduct is clearly wrongful.

Many defamatory statements arise from a conflict of interest between different types of insurance organization. The conflicts between stock and mutual companies and between the American Agency System and the direct writing marketing system are very deep. We do not attempt to judge here the merits of the different systems but only to point out that the conflicts foster defamation.

The stock-mutual conflict was once violent, though it is now much less fierce. Attacks on stock companies by mutual agents usually focused on the higher rates of the former, which allegedly went to line the pockets of stockholders. Stock agents, on the other hand, stated that mutual policies were assessable and that mutual companies were not sound financially. On these two opposing themes an infinite variety of defamatory statements could be constructed. Companies of one kind refused to license brokers or agents who were licensed by companies of the other kind.72 This reciprocal exclusiveness is now breaking down.

However, as the stock-mutual controversy has lessened, the conflict between direct writing companies and the companies that utilize the American Agency System has intensified. I t concerns the agent more than the stock- mutual debate because the divergence between the two systems is in marketing organization. Many direct writers offer lower rates, which they attribute in part to a reduction of acquisition cost, accusing the independent agents of receiving excessive compensation for limited service. The response of the independent agents is that they serve the policyholders better, as the direct writer is an employee controlled by his company. This probably expresses the honest viewpoint of the independent agents, though it ignores their fiduciary duties to their companies. The agents are deeply concerned with the inroads direct writers have made on their business and are spending large sums advertising the benefits of dealing with independent agents.73 Though such advertising is seldom derogatory, the bitter conflict, almost ideological in its nature and intensity, is the framework for many defamatory statements

72. For a judicial discussion of some aspects of this competition, see United States v. Insurance Bd., 144 F. Supp. 684 (N.D. Ohio 1956). See also United States v. New Orleans Ins. Exch., 148 F. Supp. 915 (E.D. La.), aff'd, 355 U.S. 22 (1957). The latest event in the Cleveland conflict, United States v. Insurance Bd., 29 U.S.L. W eek 2185 (N.D. Ohio, Oct. 7, 1960), is discussed by The National Underwriter, Oct. 21, I960, p. 10, col. 1-4.

73. 181 W eekly U nderwriter 16 (1959).


by individuals on both sides. This problem is not easily subjected to legal control, and it may be that there are no effective solutions.

2. Other unfair competition. We have already discussed a variety of other forms of unfair competition harmful to the insuring public that threaten the competing agent as well. Incomplete comparison, improper influence, and coercion are such practices. Sometimes devices that are much less harmful to the policyholder may yet be seriously unfair to other agents. For example, in a novel method of “stealing” clients, a fire insurance agency somehow secures lists of the people in new real estate subdivisions, together with the expiration dates of their Are insurance policies. Three or four months prior to the expiration date the agency sends cards to the owners that read: “Shortly the fire insurance policy on your house will expire. Please sign and return card as soon as possible. The mortgage company requires policies in their files before expiration date. Thank you.” Few of the owners are acquainted with the original agent because the first policy was usually handled as “part of the mortgage deal.” Some send in the card and, when the agent calls, sign the application -without realizing that they have changed insurance agencies. Another practice unfair to other agents is the sale of insurance to a public board or agency of which the agent is a member.74

C. Practices Directed Primarily Against the Company

1. Misrepresentation to the company. Some agents may misrepresent to their company in applications for insurance or in settling claims. Misrepresentations in the application, which are widely prohibited,75 are of two kinds, depending upon whether the policyholder participates. If the insured is a party, he subjects himself to loss of coverage under traditional doctrine. This may be excessively heavy punishment in many cases in which the insured’s participation is purely technical, as when he signs without reading an application form completed by the agent. Recently a few agents in one state sold accident and sickness coverage to widows over 70 years of age, misstating the ages of the applicants on the application and failing to note affirmative responses to questions about recent illnesses. The women signed the applications and the included misrepresentations resulted in considerable “post-claim underwriting.” That applicants often sign without reading facilitates such agent misrepresentation, and the protection to the company afforded by contract doctrines puts an unwarranted hardship on the policyholder without providing an adequate sanction against the agent.

The second type of misrepresentation, which might be termed mis

74. See Ohio Ops. Att’y Gen. 36 (1944) ; Kimball, op. cit. supra note 63, at 128.75. See, e.g., Ga. Code A nn . § 56-9910 (1960) ; Ind. A nn. Stat. § 39-4220 (1952) ;

cf. M ich . Comp. Laws § 500.2086 (Supp. 1956) (physician).


representation of the application, does not involve anyone besides the agent. Occasionally an agent writes a completely fictitious application. If his motive is the desire to fulfill a certain quota to qualify for a convention trip or a bonus, he may never pay any premium, or at most only one. More puzzling is the writing of fictitious applications by an agent who continues to bear the cost of the premiums, sometimes for years. In a recent case, a large accident and health company constantly pushed one of its good agents for higher production, even threatening to replace him, despite his consistently good production record. The agent began to -write so many fictitious applications that he became insolvent. Though the practice of writing “graveyard applications” does not appear to be extensive, it is remarkable that it exists a t all.76

In recent years there has also been considerable concern with the problem of “flat cancellation,” which is the practice of dating the cancellation back to the date of issuance when the policy is cancelled soon thereafter, with the result that no premium is earned. This is subject to serious abuse by agents who wish to do favors for policyholders. The National Association of Insurance Agents conducted a survey in 1958 and reported that the results tended to show that this was not a major problem, but not all spokesmen for the companies were convinced.77 In any case, the companies can easily control such conduct by appropriate changes in marketing methods.

Misrepresentation in the settlement of claims occurs when an agent who is permitted to settle small claims by himself files false claims and appropriates the payments. Occasionally an insured will conspire with him. This is a risky undertaking with a small reward, and even an unscrupulous agent would only engage in it when in desperate financial straits.

2. Conversion of funds. As intermediary between the company and the insured the agent handles money going to the company for premium payments and to the insured for the settlement of claims. It is customary in fields other than life insurance for the premium to be paid to the agent in his own name. This provides an opportunity for conversion of the funds by the agent, at least on a temporary basis. The company executives with whom we discussed this problem, and many of the agents, believe that this is the most frequent of the unfair practices discussed.

Since premiums are often received in advance of the time when the agent must account for them, he may come to rely on the use of the company’s funds as working capital to finance his own business, without intending any

76. In another curious case, after a company had raised its rate the agent did not inform the policyholder of the increase, and paid the difference himself, although it took most of his commission.

77. Compare 180 W eekly U nderwriter 258 (1959) with a speech by E. F . Gallagher in Journal of Commerce, Apr. 6, 1960, p. 10, col. 1.


permanent appropriation. This practice is dangerous because it subjects the company’s funds to possible loss. The agent may miscalculate and become in arrears in his payments; he may become hopelessly insolvent, owing large stuns to the company. In one recent case a company cancelled the agency contract of its general agent but failed to pick up his supplies or his license. Before the license could be effectively revoked the agent had collected $40,000 in premiums, which he did not remit to the company.

Some states have statutes that forbid commingling of premium or claim funds with the agent’s personal account.78 In such jurisdictions a failure to keep separate books and bank accounts will result in a warning and sometimes in a revocation of the agent’s license. This seems the appropriate rule. Funds thus collected should be regarded as trust funds and should not be treated as his own by the agent. In Michigan the agent is specifically made a fiduciary of premiums collected, and conversion of premium funds is made larceny by embezzlement, punishable under the appropriate criminal statutes.79 As a policy question, the problem is the extent to which it is sound to make use of the state’s regulatory machinery to assist companies to collect from agents.

3. Multiple representation of companies. W e have already pointed out that some agents obtain preferred claim settlement treatment for their clients by the threat to transfer business to another company. Sometimes agents change companies annually to procure the higher first year commissions available on some coverages. For example, some accident and health companies offer a high first year commission on group and franchise business, but reduce the commission in subsequent years. One agency transferred its group clients three times within a five-year period. A related practice involves abuse of the financing plan that is offered by most life insurance companies to beginning agents. The companies allow the agent to draw a salary that greatly exceeds the commission that the agent earns in the early part of the financing period. Some agents transfer from one company to another as quickly as the drawing account in the first is exhausted. Strenuous competition for agents makes it difficult for the companies to protect themselves against this practice.80

78. For example, see N.Y. I ns. Law § 125.79. Mich . Comp. Laws § 500.1456 (Supp. 1956). See also P a. Stat. A nn . tit. 40,

§ 273.1 (Supp. 1959).80. The practice of some life insurance agents to represent mutual funds as well is

a fairly new problem of multiple representation. Some companies strenuously oppose such dual representation; others encourage it. Some mutual fund agencies recently have sought to use established insurance marketing organizations for their own purposes, and a t least in one case an agency went so far as to buy the insurance company. See N.Y. Times, April 6, 1960, p. 67, col. 1; N.Y. Times, Nov. 9, 1959, p. 48, col. 2. The National Association of Life Underwriters and the National Association of Investment Companies adopted a joint statement of principles discouraging such dual representation. They still adhered to the statement in 1959. N.Y. Times, Feb. 16, 1959, p. 40, col. 2.


D. Miscellaneous Practices

The Model Act provides machinery for the designation of additional unfair practices that are not specifically prohibited by statute.81 There are two alternative proposals in the Model Act. The first gives the power to designate additional unfair practices to the commissioner subject to court review; the second permits the commissioner to initiate proceedings to have additional acts designated as unfair practices, but puts the power of decision in the court. Most states that have adopted the Model Act have chosen the latter alternative. In none of the states that we studied had this power actually been exercised. The existing statutes are very comprehensive, and, if the need for extension does arise, the departments use the less cumbersome methods of finding that the conduct of the agent was within the statute by implication if not by its express terms, or that the conduct indicates that the agent was not a fit and proper person to hold an insurance license. Some states prohibit wrongful conduct by the agent in even broader terms, thus making the power to designate new offenses unnecessary if the courts sustain the statute against challenges on constitutional grounds.82

A variation of the power to designate unfair practices is given to the Michigan Insurance Commissioner, who may call a trade conference, composed of representatives of the various segments of the business, to advise the commissioner on the designation and prohibition of unfair trade practices.83 Such a conference has never been convened in Michigan.

A few practices enumerated in the statutes do not lend themselves readily to our classification. In aid of the power of control, it is of course an offense to sell insurance without a license,84 or to appoint as solicitor an unlicensed person,85 86 or to represent an unauthorized company.80 An occasional statute forbids wilful overinsurance.87 Another forbids discounting

81. 1 R ichards, I nsurance 199 n.13, § 4 (Sth ed. 19S2). For specific statutory provisions, compare N.Y. I ns. L aw § 278 with W ash. Rev. Code § 48.30.010 (1952).

82. See Cal. I ns. Code § 1731(e), which authorizes the Commissioner to suspend or revoke a license if the agent “has shown incompetency or untrustworthiness in the conduct of his business or has by commission of a wrongful act or practice in the course of his business exposed the public or those dealing with him to the danger of loss.” Fisher v. State Ins. Bd., 139 Okla. 92, 281 Pac. 300 (1929), held that "other bad practices” was too indefinite to serve as the basis for revocation of license. Sec also Welch v. Maryland Cas. Co., 47 Okla. 293, 147 Pac. 1046 (1915). But sec Murphy v. Hobbs, 139 Kan. 799, 33 P.2d 135 (1934), which upheld a very broad discretion in the commissioner. Noble v. English, 183 Iowa 893, 167 N.W. 629 (1918), upheld a refusal of the commissioner to license a nonresident, when the statute only gave him power to refuse “for good cause.” See also Drake v. United States ex rcl. Bates, 30 App. D.C. 312 (D.C. Cir. 1908) ; Williams v. O’Connell, 76 Idaho 121, 278 P.2d 196 (1954) ; State ex rel. Mackey v. Hyde, 315 Mo. 681, 286 S.W. 363 (1926).

83. M ich. Comp. Laws § 500.2047 (Supp. 1956).84. This may be sanctioned by refusing to assist the seller in the recovery of his

commission. Howard v. Bean, 275 Mass. 115, 175 N.E. 295 (1931).85. T ex. I ns. Code a r t 21.14, §§ 4, 24 (1952).86. T enn . Code A nn . §§ 56-706 to -712 (1955), as amended, T enn. Code A nn.

§§ 56-707, -708 (Supp. 1958).87. Ga. Code A nn . § 56-824 (b) (8) (1960).


of a premium note before delivery of the policy to the applicant.88 89 90 No doubt other prohibited practices could be found in statutes of the various states.

II. I nsurance Department P ractices in the R egulation of Marketing

From our study of the various insurance departments and from our review of the statutes, cases, and opinions of attorneys general there emerges a picture of the regulatory process that, in its main lines, seems common to most states.

A. Organization and Administration

1. Responsibility of insurance departments. The insurance department has primary responsibility for regulating the conduct of insurance agents. Even in those states where the attorney general or a local prosecuting attorney has the duty of prosecuting agent misconduct, the department of insurance is the moving force.88 Statutes define illegal agent activities and specify the sanctions that may be imposed. In addition, there is a wide range of unethical but not illegal behavior over which some departments exercise a measure of regulatory control, under the discretionary power given by the licensing law to determine who is a proper person to become an insurance agent.80

Departments have placed varying degrees of emphasis on the control of different types of conduct. A t one extreme, one department has taken the position that agent misconduct directed against the company is not the concern of the department unless it also harms the policyholder. Other departments believe that the withholding of premiums from the company indirectly affects the insured and forecasts other troubles in which the policyholder may become directly involved. Some of these departments are more concerned with premium withholding than with direct mistreatment of policyholders.

Although such differences in emphasis may depend somewhat on the personal characteristics of the commissioners, the procedures of investigation and prosecution usually become institutionalized and are affected little by personnel changes. Inertia and the toughness of established routines preclude facile change in existing patterns of conduct I t is doubtful if even the recent

88. State v. Cannon, 125 Wash. 515, 217 Pac. 18 (1923), upheld such a statute, Wash. Laws 1911, ch. 49, § 190. The section was restricted in 1947, Wash. Laws 1947, ch. 79, § 30.20, presumably because the marketing method it reflects is no longer of much significance.

89. For an expression of reluctance on the part of a state attorney general to become involved in insurance investigation, see 111. Ops. Att’y Gen. 340 (1913).

90. See Mich . Comp. Laws §§ 500.1424, .1426 (Supp. 1956). An example of “unethical” but not “illegal” conduct that is disapproved by some departments is "knocking” of other agents that does not reach the level of defamation.


adoption of the Model Act resulted in notable changes in department policies or procedures. The primary objective and main achievement of the Model Act was protection of the departments against assertion of federal power, and its widespread passage seems to have had little effect on the types of conduct regulated or the regulatory procedures followed.

Despite the variations in emphasis, however, most conduct that is generally regarded as unfair is regulated to some extent by most of the departments, even if the conduct is not specifically forbidden.01 Of course such regulation may take the form of “gentle persuasion,” sanctioned solely by publicity, and it may not be extensive. Further, it might be held to be invalid if it were properly tested in litigation.

2. Structure of the department. Many departments were formerly organized by line of insurance, with one bureau handling all problems, including complaints, arising in that line. A more recent tendency is to concentrate in one division the handling of unfair trade problems in all lines.02 In states using the second, or functional organization, the investigation and prosecution of unfair trade practices is usually in the same division as agent licensing. In the larger of these states the division may be divided into subunits, each of which handles a particular aspect of agent regulation.03 Although the head of the division reports to the commissioner or his deputy, it is typically the division chief who makes the decision whether an agent who has been in trouble is to be relicensed. The decision turns on the seriousness of the offense and the length of time elapsed since its commission.

3. The licensing process. Supervision through granting the license that every insurance agent and broker must have is the primary technique of control. Revocation or suspension of the license is the principal, and sometimes the exclusive, sanction available to the commissioner.

There are a variety of procedures for the issuance of a license and many different types of licenses. Exhaustive examination of the licensing process * * *

91. See 182 W eekly Underwriter 423 (1960), which reports action by a department to induce a captive accident and health company to stop writing insurance on the loans of its parent finance company, despite the apparent legality of the practice.

92. The Texas department shifted from the "line” type to a “functional” type organization recently, and at the time of our study, the New Jersey department was undergoing a similar reorganization.

93. The Texas License Division, for example, has three sections: Company License, Agents License, and Practices and Claims. The last section investigates, while the second is primarily responsible for initiating action against agents for violations. New York has a Complaint Bureau with branches in New York City and Albany. The Licensing Bureau is in Albany, under separate supervision. This is the most complete separation of licensing from complaints in the states we studied.

Although the smaller states do not have a separate division handling complaints or agency matters, even in the smallest there tends to be some specialization of function. In Montana, for example, the Insurance Department is a part of the State Auditor's office. The Investment Deputy Auditor, charged with administering the “Blue Sky” law, spends part of his time on insurance matters, specializing on complaints. See Kimball & Conklin, T he Montana I nsurance Commissioner 2-3 (I960).


is beyond the scope of this study.94 Because the process is an integral part of the control of unfair trade practices, however, some understanding of licensing procedures is essential.

A person who sells insurance may be designated an agent, a broker, or a solicitor. An agent represents a specific company under an agency contract. A broker is an agent for the policyholder and places the business with any willing company he may choose. Brokers may be further divided into those who are authorized to place business only with companies admitted to the state and those who may place it with nonadmitted insurers. The latter are called excess or surplus line brokers. A solicitor is an employee of an agent or broker. All states issue licenses to insurance agents, but a great many forbid the sale of insurance by brokers, presumably to ensure that even before issuance of the policy there is a principal who can be held on the contracts made by the seller. In states prohibiting brokers, however, there may be surplus line agents who act as brokers. Under the American Agency System, agents are independent rather than captive, securing agency contracts with a number of companies and then placing business with the company that seems best able to serve the needs of the client, or that offers' the most advantage for the agent’s business. Under this system the agent’s attitudes and conduct are much more like those of brokers than like those of “captive” agents.

The department issues the broker’s license directly to him;' some departments issue the agent’s license directly, though more often the license is issued through the company. In the latter case the license may be regarded as the properly of the company, and it is then automatically revoked if the company cancels its agency contract with the agent.95 96

Some states require only that the applicant be of good moral character. When the qualifications are so general, a state may, and some do, easily place the burden of the entire licensing process on the companies, thus freeing the state from some of the trouble and expense.95 In many states97 agents must also pass a competency examination which is usually administered by the department;98 occasionally a department requires a course of studies

94. For more detailed treatment of some aspects of licensing, see Kimball, op. cit. supra note 63, at 120-21; K imball & Conklin, op. cit. supra note 93, at 34-41; Kimball & Hansen, The Utah Insurance Commissioner: A Study of Administrative Regulation in Action, 6 Utah L. Rev. 1, 6-14 (195S). See also P atterson, T he I nsurance Commissioner in the U nited States 157-92 (1927), for an exhaustive study of statutory provisions as they stood in the 1920’s.

95. Compare the old and the new Montana provisions and practice. Kimball & Conklin, op. cit. supra note 93, at 34. Typically the solicitor’s license is issued through the agent or broker who employs him. Ibid.

96. See K imball, op. cit. supra note 63, at 120.97. For example, see W is. Stat. Ann . § 206.41(5) (1957) (life).98. Sometimes the department delegates the examination process to the companies.

See Kimball & Hansen, supra note 94, at 10.


supervised by department personnel as a prerequisite to the examination.01’ Though the tests generally require only a rudimentary knowledge of insurance, the failure rate is often from 25 to 30 per cent.99 100

B. Investigation of Unfair Trade Practices

Control of unfair conduct begins with an investigation. In some states the investigator does no more than collect information, leaving the decision about whether to take action against the agent to supervisory officials. In other states the investigator makes some judgments on the evidence and takes action accordingly. In the Michigan department, for example, a number of investigation reports stated that the investigator had issued a “cease and desist order” to the agent. This informal sanction has the attractions of simplicity and efficiency, though it has obvious dangers, including the risk that it may lessen the objectivity of the investigator. The fact gathering function might be more reliably performed if the investigator did nothing more.

The investigative machinery of an insurance department is generally set in motion when complaint of an agent’s alleged misconduct is filed witli the department by an insured, another agent, or a company. Most complaints are received from policyholders, though we infer from the files that many of those were instigated or encouraged by agents. Few departments begin any investigations without external stimulus, as they are not adequately staffed even to handle all complaints.101

State departments may be divided into those that conduct most investigations themselves and those that forward most complaints to the insurance companies for action.

1. Investigation conducted by the department. In those departments that conduct their own investigations the investigators proceed in one of three ways: they may go into the field; they may require persons who have knowledge of the transactions to come into their office for questioning; or they may investigate by mail and telephone. All three of these procedures may be used by a single department, but generally one is predominant. Other law enforcement agencies may also be called upon to aid in investigation.

The principal justification advanced for field investigation seems to be

99. New Jersey, for example, licenses schools that prepare candidates for the agency examination.

100. The applicant may usually repeat the test until he passes. Some states, such as Wisconsin, issue a temporary 60 or 90 day license while the applicant prepares for the examination. See W is. Stat. A nn . § 209.04(1) (e) (3) (Supp. 1960). A high percentage of applicants (perhaps a third) fail to take the examinations. See, 1959 Wis. I n s . Comm’r A nn . Rep. 70. Though the case for temporary licensing is persuasive in cases such as that of an agent’s widow seeking to carry on after his death, the large number of unqualified agents temporarily engaged in the business suggests a need for closer examination of the problem and tighter control of the process.

101. Thus Michigan has 26,000 agents and only two investigators.


the element of surprise that attends an unannounced interview. In addition, some investigators think it advantageous to visit the “scene of the crime.” There is no advantage in surprise, however, if the interviewee is either a disinterested witness or the complainant, and the locus crimtnis hardly seems relevant to an insurance investigation. Further, field investigations are often inefficient, and although they may be improved by better planning and by wider use of advance appointments when surprise is not crucial, they necessarily constitute a relatively costly process. Thus, a department that conducts many of them is unlikely to have sufficient funds to handle all important cases.

All departments rely to some extent on interviews in the department offices. Since the department can more easily compel the presence of its licensees than of others, the agent and the complainant are usually the only persons interviewed. Although the subpoena power usually exists for use in this kind of investigation,102 it is rarely used outside of a formal hearing. Department reluctance to compel attendance also limits office investigation to the area where the office is located. Even in New York City, where the department relies almost solely on office investigation,103 there is difficulty in inducing disinterested witnesses to come for interviews. The staff of nineteen examiners is overburdened with complaints104 and has little time to go into the field, necessitating the frequent use of correspondence and telephone as supplementary investigative devices.

The telephone provides a useful substitute for correspondence, especially where the population is concentrated in a metropolitan area. In New York we saw the telephone used effectively when the complaint was made in person, the examiner telephoning the agent while the complainant was still in the office. If the agent is asked bluntly, “What’s the story on this?” he may sometimes blurt out information that he would not reveal if he had time to consider how little the examiner might know. The telephone thus provides some of tire element of surprise. The New York examiners also use the telephone to reach other sources of information, such as the district attorney’s office. Use of the telephone seems much superior to correspondence as an investigative technique, and, though traditional attitudes discourage its use outside the city where the office is located, we suspect that a comparative cost analysis would lead to a far more extensive use of the long distance call.

Where field investigation is little used some departments have made use of the hearing as an investigative technique, even to obtain information

102. E.g., N.Y. I ns. Law § 24; M ont Laws 1959, ch. 286, § 37. See also T ex. I ns. Code a r t 1.09-1 (Supp. 1960).

103. The New York office in Albany, however, uses field investigation.104. In 1958 the New York City branch handled over 6,800 complaints, in addition

to an estimated 4,000 requests for information. Each examiner has many investigations in process, variously estimated at from sixty to one hundred at one time.


not directed at immediate enforcement. A number of insurance codes authorize the commissioner to use the subpoena power for investigation as well as for adjudication.105 106 There is an increasing tendency in state courts, paralleling the developments of recent decades in the federal courts, to uphold the use of the subpoena for investigative purposes when there is no adjudicatory proceeding and no probable cause to believe that the law has been violated.100 Despite the growing willingness of the courts to permit tlie wide use of this power by administrative agencies, the departments seem hesitant to use die power to compel attendance at a hearing that is primarily inquisitorial.

The limitations imposed on field investigations by budgetaiy considerations combine with this reluctance to use the subpoena to induce departments to concentrate their efforts on the easily proved offenses, such as premium misappropriation, rather than on misrepresentation, rebating, and other offenses that are difficult to prove and require a more extensive search for evidence.

2. Investigation delegated to companies. In those states where the department can do little or no effective investigating it may rely heavily on the company for investigation of alleged agent misconduct.107 I t is considered the company’s duty not only to investigate a prospective agent before seeking a license for him but also to investigate complaints against him. Delegation of the investigative role to the company may be an effort to do an effective job with limited funds by shifting the cost of investigation to the industry, or it may reflect a judgment that the companies that profit from the improperly solicited business ought to bear the burden of regulating it. The Kansas Commissioner believes that the conduct of a company’s agents indicates whether the company is fit to conduct business in the state; repeated misconduct by a company’s agents could thus lead to its exclusion.

Placing the burden of investigation on the companies seems to produce some results. Its disadvantages are that the investigation is made by an interested party and that there is seldom a suitable check on the report. Upon receipt of a company report that denies the facts alleged the department frequently informs the complainant that, as an administrative agency, it has no power to determine a “question of fact” and that if he is not satisfied he should consult an attorney. As a judgment about the limits of its capabilities this modesty may be sound. We discovered, however, that it was thought in various departments that there was no jurisdiction to determine disputed facts, since “facts” are a “jury question.” Though the scope of a depart-

105. For example, see N.Y. I ns. Law § 24(1).106. 1 Davis, Administrative Law 179-80 (1958), and cases cited therein.107. Complaints are forwarded to the companies, and they are required to submit

investigation reports. If the department is not then satisfied, it will demand additional information and may even call company officers to the department for an explanation.


merit's jurisdiction is statutorily defined, the belief that the department lacks jurisdiction to determine disputed questions of fact seems to result from a misapprehension of the limits on the powers of an administrative agency. Every revocation of an agent’s license rests on a finding of fact made by the department without a jury. A mere conflict in testimony does not defeat the agency’s power to make a factual determination. Constitutional requirements are not so broad. Indeed, judicial review of an administrative determination of facts is usually limited to whether there is “substantial evidence” to support the agency’s findings of fact.108

Reliance on the companies for investigation unfortunately rests, in the usual case, on necessities grounded in inadequate budgetary support of the departments. It may be possible, however, to combine effectiveness with economy. Initial investigation of a complaint might be assigned to the company with moderate pressure to act. This would usually permit practical control of marketing practices without further investigation by the department, and whenever necessary, a smaller force of investigators could verify the company reports and supplement them if the facts warranted. Putting the primary investigative burden on the company, while exercising substantial supervision of the process, would save expense to the department, as well as tend to induce companies to improve their hiring and training practices. It might also lead the companies to discharge agents whose conduct brings repeated complaints, although this informal sanction has its own dangers, which we discuss later. The real effectiveness of company investigations depends on the adequacy of the compulsion felt by the companies, which in turn depends on the adequacy of supplementary investigations by the department.109

C. Prosecution of Unfair Trade PracticesExisting sanctions against agents may be classified as informal or formal.

By formal sanctions we mean those that involve a hearing procedure parallel to that of a court.

1. Informal sanctions.a. “Persuasion” of agents. We include here a variety of practices

108. See generally 4 Davis, op. cit. supra note 106, at 114-88.The termination of many complaint files on a disputed "question of fact’’ accents the

limits on the department’s control of the investigation when it cannot effectively investigate for itself.

109. The license division aids licensing and investigation by maintaining separate master card files for agents and brokers. Each card indicates types of licenses, companies represented (for agents, but not brokers), and license numbers, as well as cross references to the complaint file. I f an agent’s license has been suspended or revoked, or if he has been in serious trouble, a notation is made on the master card, often by a red flag attached to the card, that the complaint file is to be checked before a license is issued or renewed. This process of “flagging” the file is the key to systematic control of the conduct of agents.


that, without a formal hearing, use as a lever to induce action by the agent the power of the insurance commissioner to issue, renew, or revoke licenses. Thus, if a department investigator receives information that an agent is engaged in unfair or unethical conduct, but the evidence is not sufficient to support a revocation of license, the investigator may rebuke the agent and warn him to avoid similar conduct in the future. The agent may alter his conduct irrespective of the merits of the case from fear of embarrassment and difficulty in his relations with the department.

The departments are able to utilize these informal pressures in a variety of ways. In one state, for example, not only may an investigator himself occasionally rebuke an agent or order him to “cease and desist,” but an agent may be called into the department and ordered to bring any pertinent records. No rules of procedure govern the informal conference that follows with the director of the agency division and the investigator. The director may state the charge and request an explanation, or in cases of misrepresentation may require the agent to deliver his sales talk. A t the close of the conference the director often issues a “cease and desist order” to the agent, whether or not the improper conduct is established by legally competent evidence. The agent is then required to write a letter to the department acknowledging the conference and stating what steps he will take to remedy the conduct discussed. Often the letter amounts to a tacit acknowledgment of guilt, which may be induced by a sense of relief that there will be no revocation of license or by a failure by the agent to realize that the department may not have a complete case against him. Such a letter is a real deterrent, for it provides the department with an admission that may be used against the agent in the event of future violations.

This technique seems a useful method of inducing compliance with the law. No department can or should eall a formal hearing for eveiy mistake or transgression that an agent makes, and many minor violations can be stopped by such discussions. There is a danger, however, that some department personnel will abuse this power by intimidating agents whom they dislike, or will become so involved in the investigation that they will cease to be objective, and pressure or trick innocent agents into admissions of guilt. Of course, an agent may always refuse to comply and may demand a formal hearing, but he is not likely to do so. These dangers are explicitly recognized by the Texas Department, which forbids investigators to demand the discontinuance of conduct without prior approval by the head of the Practice and Claims Section, thus providing some sort of a check on arbitrary action by investigators.

b. Sanctions applied through the companies. A second group of informal sanctions are applied in some of the states that issue licenses through


the companies, especially if the department staff is inadequate or if the department has been unsuccessful with its more formal procedures. The department seeks to induce the company to take remedial action, which may or may not be specified. The company may do a variety of things, from refunding the premium to a policyholder and either absorbing the cost or charging it to the agent’s account, to directly punishing the agent, even to the extent of terminating his agency contract. In its more extreme form, the commissioner or a staff member may call the company’s representative into the insurance department and show him the agent’s file. The department official then states or implies that the agent is not fit to hold a license, and the company often takes the hint and terminates the agency contract, thus automatically revoking the agent’s license. The department will then “flag”110 the agent’s file, specifying that no further licenses are to be issued.

Although the various informal sanctions that are exercised through the company have informality and pressure on the company as common characteristics, they differ from case to case in a very significant way. In some the department may hint, or even demand, that the company take specific remedial action. In others the department only asks that the company investigate and take whatever action may appear to be necessary.

The key to the effectiveness of informal sanctions is the application of enough pressure on the company to compel it to conform to the department’s demands. The ultimate pressure is the threat of revocation of the company’s license. This drastic action is seldom used, but it is always possible. Usually milder means are enough, with many companies acquiescing freely to foster department good will. Various devices may induce company cooperation. For example, when complaints against one company persisted, a department threatened to alter the form letter used to respond to inquiries about companies. Ordinarily the form stated merely that all companies licensed in the state had complied with laws deemed sufficient to protect the public. The altered response would have told the number of complaints received against one company as compared to the others. After the threat to give this information complaints dropped at once from an average of forty- seven to an average of three every fortnight. Another way to induce cooperation is to require officials to attend conferences with the department for the discussion of complaints. A series of such conferences is likely to bring quick improvement in the conduct of the agents.

We were surprised at the readiness with which the companies acquiesce in rather explicit suggestions. In one state we found only one case in which a company refused to comply with the department request and demanded a hearing. Even in this case another company had previously terminated its

110. See note 109 supra.

174 COLUM BIA L A W R E V IE W [Voi. 61:141

agency contract under the informal pressure. The fact that the agent obtained the license after the hearing is some indication that the informal procedure may sometimes result in a termination that could not be justified in formal procedures.

In another state using the informal procedure the department often tells the agent explicitly, after the revocation, that he will not be issued further licenses. This ordinarily prevents him from trying to represent other companies, but, more important, it also presents him with an occasion to demand a formal hearing.

The informal method is not successful with brokers because the companies do not own brokers’ licenses. I t is less apt to be effective with large agents who are licensed by many companies, for it is unlikely that the department would pursue the informal process with each of tire companies involved, nor be uniformly successful if it did so. Thus a department that relies heavily on the device tends to be stricter with the smaller agents against whom it can more effectively enforce its will.

We believe that, at least when specific action is requested or suggested, the informal revocation procedure should not be used at all. I t gives the agent no real opportunity to present his side of tire case because tire final decision is made by company officials who may act to placate the commissioner without concern for fairness, and because there is no way to check the objectivity of the commissioner’s or company’s discretion by any review, judicial or other. Such a procedure seems so subject to abuse as to be unfair.111

The constitutional validity of the informal revocation procedure has not been tested, and because it is most likely to be used against a marginal agent who is not apt to litigate the question, it may be long before its constitutionality is challenged. I t is probable that a test of the practice, at least in its more extreme forms, would result in a finding that it is not due process.

State courts divide licenses into those that are mere "privileges” and those involving "rights.” They deny that the granting, renewal, or revocation of licenses of the first class must meet tests of procedural fairness.112 This unsound distinction complicates tire problem of state constitutional safeguards, and we focus our attention on the federal constitutional protection that may be available to the insurance agent. We have found no federal case involving state denial of an insurance agent license.113 However, the recent Supreme Court cases involving admission to the bars of California114 and

111. We take this position whether or not the procedure satisfies the constitutional requirement of due process.

112. See generally 1 Davis, op. cit. supra note 106, at 493, 497-506.113. Cf. Columbia Auto Loan, Inc. v. Jordan, 196 F.2d 568 (D.C. Cir. 1952) ;

In re Carter, 192 F.2d IS (D.C. Cir.), cert, denied, 342 U.S. 862 (1951).114. Konigsberg v. State Bar, 353 U.S. 252 (1957).


New Mexico115 116 add some support for the position that the fourteenth amendment could be invoked by an agent in a case raising a substantial question of denial of procedural due process.110 . .

Even if the fourteenth amendment protects the agent against deprivation of his license in a manner violative of due process, it is questionable whether an effective remedy is available by which the agent can assert his rights. E x hypothesi the agent has already lost his license through the termination of his agency contract.117 Injunction or mandamus would, at most, compel the commissioner to negative the suggestion previously made to the company. This would not automatically restore the license, since the license is dependent on his having an agency relationship with a company. The agent must therefore first induce a now wary company to enter into a contractual relationship with him. Often the agent would gain little from injunction or mandamus except vindication, though the accompanying moral disquisition might help discourage the use of the informal procedure in the future. Criminal prosecution of the commissioner or members of his staff, while theoretically available, presents practical difficulties and neither restores the agent’s job nor compensates him for its loss.118

115. Schware v. Board of Bar Examiners, 353 U.S. 232 (1957).116. Before one may claim protection of the fourteenth amendment he must show

state action that is constitutionally objectionable. That the action of the department official in suggesting to the company that it cancel the agency contract is state action is apparent, but it may be argued that it is merely preliminary, that the private action of the insurance company was the sole effective action, and hence that there was no constitutionally objectionable state action. If the commissioner did no more than suggest that the company investigate, without indicating what further action he desired it to take, this contention might be successful. An analogy might be drawn, however, between this position and the position rejected by the Supreme Court in NAACP v. Alabama ex rel. Patterson, 357 U.S. 449 (1958). To the urging of the Alabama Attorney General that an order to deliver up membership lists was not unconstitutional because any repressive effect would follow from private community pressure and not from state action, Mr. Justice Harlan, speaking for the Court, said, “The crucial factor is the interplay of governmental and private action, for it is only after the initial exertion of state power represented by the production order that private action takes hold.” Id. a t 463. See also Joint Anti-Fascist Refugee Comm. v. McGrath, 341 U.S. 123 (1951). B ut cf. Standard Computing Scale Co. v. Farrell, 249 U.S. 571, 575 (1919), in which an informational bulletin issued by New York Superintendent of Weights and Measures, acted on by certain county and city sealers of weights to the plaintiff’s detriment, was held not state action for this purpose. The Court said, “the opinions and advice, even of those in authority, are not a law or regulation such as comes within the scope of the several provisions of the Federal Constitution desigued to secure the rights of citizens as against action by the States.”

Once the problem of establishing state action is solved, termination of an agent’s contract without notice or hearing, seems so lacking in fairness as to be a clear denial of due process.

117. Under general agency doctrine the company has the power to revoke the agency, though the agent may have a contractual remedy against the company if there is no provision in the contract giving the company a right to cancel on short notice without cause. If the company acts within the terms of its agency contract, however, there would seem to be no remedy available to the agent against the company. Any noncontractual relief the agent has must be against the insurance commissioner.

118. The United States Criminal Code makes it a federal crime for any person to willfully deprive another of constitutional or federal rights under color of law, statute, ordinance, regulation, or custom. 18 U.S.C. § 242 (1958), as interpreted by United States v. Classic, 313 U.S. 299 (1941). See also 18 U.S.C. § 241 (1958). Despite its


The Civil Rights Act of 1871 provides a battery of civil remedies, including an action for damages against any person who, under color of statute, ordinance, regulation, custom, or usage deprives another of constitutional rights.119 This would be a more useful remedy than a criminal prosecution.120 Since success in a suit for damages does not depend on the cooperation of federal prosecuting authorities, the standard of proof required is reduced from the criminal to the civil measure, and juries would probably be less reluctant to award damages than to fine or imprison a public official. I t is not our contention that this is a good and readily available remedy, but it is a possible remedy worth further exploration.121 The difficulty with permitting recovery on this basis is that, if the section is given broad interpretation, making it readily available as a remedy for the agent, such actions would be frequent. This could play havoc with the operation of the department by making it too risky for officials to take action needed to protect the public. This danger probably ensures a cautious and restrained interpretation of the section by the courts.

There remains yet another possibility. It is at least arguable that a licensing statute that makes the granting of a license to sell insurance contingent on a private person’s action, such as the formation of an agency contract by an insurance company, is unconstitutional under anti-monopoly or nondelegation provisions of various state constitutions. In a number of cases state courts have held that licensing statutes that make a license to sell new or almost new cars contingent on the possession by the applicant of a franchise from the automobile manufacturer whose car is being sold are unconstitutional, usually putting the result on anti-monopoly grounds.122 New York has invalidated the delegation of licensing powers for racing activities to private racing associations.123 A successful attack on an insurance agent

historical connection with reconstruction, it is not limited to deprivation because of alienage, color, or race, and could theoretically be invoked to vindicate the rights of the agent. Although criminal prosecution of the commissioner or members of his staff may thus be a potential remedy for the wronged agent, it presents obvious practical difficulties. Prime among these are the reluctance of a United States, District Attorney to take action and of a grand jury to indict or a petit jury to convict. Moreover, the facts are not likely to appear in the extreme form that we postulated. There would, be further difficulties in proving that the deprivation was willful. See Screws v. United States, 325 U.S. 91 (1945).

119. 17 S ta t 13 (1871), 42 U.S.C. § 1983 (1958).120. See note 118 supra.121. Compare Bomar v. Keyes, 162 F.2d 136 (2d Cir.), cert, denied, 322 U.S. 825

(1947), which upheld a complaint for damages by a teacher against her principal who instigated her discharge by the Board of Education for exercising her privilege under federal law to serve as a federal juror. Since the actual discharge was the act of the Board of Education, and the principal only instigated it, there is considerable similarity in the relationship of the parties to the situation under discussion.

122. Nelsen v. Tilley, 137 Neb. 327, 289 N.W. 388 (1939) ; Signore v. Rizzolo, 9 N J . Super. 539, 75 A.2d 757 (Super. Ct. L. 1950) ; Ohio Motor Vehicle Dealers’ & Salesmen’s Licensing Bd. v. Memphis Auto Sales, 103 Ohio App. 347, 142 N.E.2d 268 (1957) ; Joyner v. Centre Motor Co., 192 Va. 627, 66 S.E.2d 469 (1951).

123. Fink v. Cole, 302 N.Y. 216, 97 N.E.2d 873 (1951); Murtha v. Monaghan,


licensing statute would compel the states to license agents directly and would therefore be an effective remedy for an agent who had been denied a license wrongfully.

In summary, the benefit from injunction or mandamus would ordinarily be too slight to justify the expense involved, the criminal remedy would be unlikely to succeed, and neither would provide pecuniary compensation for monetary loss that might be serious. A suit for damages under the Civil Rights Act may be available in a proper case, and there is a slight possibility that a state court would declare licensing through companies unconstitutional. One might conclude that there are no clearly available and adequate judicial remedies.

Even if an insurance commissioner justifiably believes that the risk of successful legal attack on his informal procedures is only slight, he should nonetheless reconsider the practice on basic grounds of fairness. One of the great values in our society is the considerable freedom we enjoy from arbitrary and uncontrolled discretion of public officials.124 Public officials should themselves help preserve this value by providing due process— basic fairness—in procedure, even when practical considerations render them relatively immune to judicial control. There is no doubt that a large number of public officials wish to be fair.125 The departments could manage well without informal revocation procedure if they could make the formal hearings adequate. This requires either better use of available resources, including use of the companies to do much of the task of investigation so that department personnel have more time for the hearings, or, in the alternative, that the legislature provide funds more generously for department activity. The legislature could also effectively prevent resort to informal methods if it provided for direct licensing of agents, eliminating the company ownership of the licenses. Of course this would compel the department to carry the whole licensing and investigating burden, and thus would require additional funds for the department. Moreover, there would be no assurance that an agent was associated with a particular company that he could bind for the protection of the policyholder because licensing by the state would make it possible for an agent to act like a broker despite contrary statutes. This seems to be an important consideration in states that ban brokers. Further, that some companies have repeated trouble with agent misconduct lends plausibility to a program for controlling agent misconduct by the indirect

7 Misc. 2d 568, 169 N.Y.S.2d 137 (Sup. Ct. 1957), aff’d mem., 4 N.Y.2d 897, 151 N.E.2d 83, 174 N.Y.S.2d 648 (1958).

124. As Mr. Justice Frankfurter has said, “The history of liberty has largely been the history of observance of procedural safeguards.” McNabb v. United States, 318 U.S. 332, 347 (1943).

125. See Byse, Opportunity to be Heard in License Issuance, 101 U. P a. L. Rev. 57, 99 (1952). Consider also the procedures described herein.


application of sanctions against agents through the companies. Undoubtedly a company’s attitudes and morality are reflected in the conduct of its agents. Careless hiring policies will also result in frequent trouble with agents. Therefore it does seem a practical solution to hold companies responsible for the acts of their agents, thus giving them reason to clean house. In the extreme form this seems basically unfair and even unconstitutional. In the mild form, in which the company is not pressed to take any specific action, it may not be harmful. The doubt that persists is whether the procedure is sufficiently discriminating, or whether even the mild form harms some innocent agents. However, when the department permits the company to determine its own means for cleaning house, self-interest may give reasonable assurance that the companies will not discharge agents indiscriminately, for they will not desire a reputation for harsh dealing with their own agents nor will they wish to lose agents unnecessarily. All things considered, however, direct licensing by the states seems the best solution, despite its greater cost and any other disadvantages it may have.

c. The role of agents’ associations. The existence of associations of agents, a few of which seem to resist the work of the departments in policing the industry, is sometimes a complicating factor. An occasional association may, for example, conceive its role as one of providing a protective cloak for members. Thus, an insurance department official told us that on one occasion, when an agent complained to the association and to the department about another agent, alleging rebating, he was rebuffed by the association and later received threatening telephone calls demanding that he withdraw his complaint to the department. Other associations, while not obstructing the departments, prefer to police their own members. Some associations, on the other hand, prefer to take no independent action, but forward all complaints to the department and rely on it for enforcement. Some associations help with the investigative task and also terminate membership in proper cases.

If the intervention of agents’ associations is successful, it raises a serious question about the private exercise of significant power without public control. Because agents’ associations are not familiar with problems of law enforcement unwise action may be taken. In a recent case rival agents and associations sought to control the conduct of a number of agents for a single company who, it was alleged, engaged in a common pattern of serious misrepresentation of policy terms. One of the ways chosen by the associations was advertisement in local newspapers and distribution of circulars. The attempt backfired. The accused company sued a number of insurance companies, associations of agents, and individual agents, alleging defamation, various statutory offenses, and violation of the Sherman and Clayton Acts


through a conspiracy in restraint of trade directed at destruction of plaintiff’s business. On a motion to dismiss, the United States District Court upheld some of the counts and dismissed others.126 Thereafter the case was settled out of court. An interview with one agent produced the reflection that the companies and agents would be afraid to engage in self-policing in the future. However, late in 1960 the New York State Association of Life Underwriters proposed establishment of an intra-industry group to police the industry against twisting.127

d. Conciliatory procedures. An informal conference is used by many departments as a method of settling disputes. The conference does not lead to imposition of a sanction but to a compromise settlement. The department serves as a mediator and conciliator, bringing together the complainant and the agent or company. For example, in one case an agent misrepresented to a lawyer, who held his accident and health policy through a bar association group plan, that if he dropped out of the association the coverage would remain in effect. A t the informal conference the agent offered to settle the matter by paying the lawyer’s dues in the organization. The department approved of the arrangement and, because the misrepresentation appeared to be innocent, took no further action.

Tire procedure may be a fact gathering method, as well as a conciliatory device, and for this reason a reporter is often present to record what is said.

2. Formal sanctions.

a. Criminal prosecution in the courts. Many insurance statutes provide a criminal sanction for violation. Most often the proscribed conduct is made a misdemeanor,128 though occasionally it may be designated a felony.129 Some violations of insurance statutes would also come within the ordinary provisions of the penal code.130

In the states we studied the department does not itself prosecute violators in the courts, though it may provide the evidence for such prosecutions. Usually it assumes that its duty is discharged by nothing more than sending the results of the department’s investigation to the prosecuting attorney. Most departments leave the decision whether to prosecute to the prosecuting attorney. The Texas Department recognizes that the typical prosecutor’s office is concerned more with prosecuting larceny, crimes of violence, and

126. Professional & Business Men’s Life Ins. Co. v. Bankers Life Co., 163 F. Supp. 2Z4 (D. Mont. 1958).

127. 183 W eekly U nderwriter 1017 (1960).128. See Mont. R ev. Codes § 40-1307 (1947). This code was superseded by Mont.

Laws 1959, ch. 286.129. See Mont. Rev. Codes § 40-1306 (1947).130. For example, certain cases of misrepresentation would also be obtaining by

false pretenses.

180 COLUM BIA L A W R E V IE W [V ol.61:141

narcotics violations than with prosecuting insurance crimes,131 and thus it not only provides evidence for prosecution but brings pressure on local district attorneys to prosecute the case.

The difficulties encountered by insurance departments in obtaining prosecution of the insurance crimes they uncover suggests the desirability of a reexamination of the traditional procedures. There would seem to be nothing inherently wrong with requiring the legal counsel of the insurance department or a special assistant to the Attorney General to prosecute insurance crimes. Unless there is such explicit responsibility for prosecution, little will ordinarily be done by prosecuting officers who are properly more concerned with crimes against public order than with technical business offenses. If the insurance law deserves the aid of criminal sanctions at all, independent machinery for its enforcement should be provided.

b. Formal procedure within the insurance department.

i. Sanctions. The insurance departments are limited in the punishment they can impose upon offending agents without resort to criminal prosecution. They depend primarily on suspension or revocation of the agent’s license and, in some states, on small monetary fines. In Michigan the department has, and to some extent uses, the power to levy fines up to $25.132 Since an unscrupulous agent can pay his fines as a part of the cost of doing business, such fines are too small to be effective. In one case, for example, a fine of $275 was assessed for eleven related violations of the rebating law against an agent whose premium volume approached $400,000 per year. The rebates in question were far larger than the fines levied for making them. Nor are fines imposed for all detected violations, for even when departments have the power they appear hesitant to use it. Revocation and suspension of the agent’s license are more meaningful sanctions, but because the deprivation of a man’s livelihood is a harsh remedy, departments are hesitant to use them except in serious cases. There is a great need for effective sanctions intermediate between mere warning and the revocation or even suspension of a license.

One intermediate sanction that seems appropriate for certain cases is the restriction of the license. For example, if the offense to be punished is the violation of the controlled business statute, there is poetic justice in restricting the agent’s license to prohibit his writing any controlled business for a

131. Formerly the New York department seems to have pressed more vigorously than it does now for prosecution of insurance crimes; experience of difficulty in inducing action in the prosecutor’s office seems to explain the change.

132. Mich. Public Acts 1959, No. 101, § 500.1448, gives the department power to impose a “civil penalty” of $25 for each offense. Cf. III . Rev. Stat. ch. 73, § 1065.49 (1959), and N.Y. I ns. Law § 132, which permit a penalty of $500.

1961] IN SU R A N C E M A R K E TIN G 1S1

designated period.133 Suspension of a surplus line license while leaving general licenses in effect offers another such possibility.134 Restriction of the license has the advantage of striking effectively at the agent’s pocketbook and thus putting maximum pressure on him, -without destroying his livelihood, and is thus mild enough to permit departments to use it fairly extensively.

More extensive use of fines, particularly for minor or unintended violations, also would meet the need for an effective intermediate sanction. The New York Department, for example, handles many disciplinary matters by using a stipulation that the licensee waives his rights to a formal hearing and agrees to the imposition of a fine, as authorized by statute.135 Such factors as the seriousness of the offense and whether the offender is a repeater should be taken into consideration in determining the amount of the fine. Even more important, the fine levied should be related to the commission received by the agent and be sufficiently in excess of it to provide a punitive sanction. If the fine is no greater than the commission, the most the agent has to fear, if he is caught, is the forfeiture of his commission. If he has acquired the business by illegal practice, that is the very least he should lose.

ii. The formal hearing. If the department believes that the evidence justifies taking action against an agent, it may conduct a formal hearing. In one or two states the department seems to call a formal hearing even if the evidence is less strong, on the theory that the hearing itself may frighten the agent into stopping the objectionable practice. If the hearings are publicized others may also be deterred.

The hearing officer may be the commissioner himself. More often, at least in the larger departments, he is a high ranking subordinate officer, such as a deputy commissioner.

Generally, the hearing procedure is set in motion by a citation enumerating the alleged offenses and requiring the agent to show cause why his license should not be revoked. The agent may fail to respond to the citation, or he may offer voluntarily to relinquish his license. Many states conduct the hearing even when such is the case. Experience has shown them that a failure to make a record may make it difficult for the department to justify a subsequent denial of a license, since the evidence will have become stale and witnesses unavailable. If the hearing is held, a denial of license is subsequent years may be based upon the record of the hearing. One state, emphasizing

133. See Quetnick v. McConnell, 154 Cal. App. 2d 112, 315 P.2d 718 (1st Dist. Ct. App. 1957), which illustrates use of the restricted license to forbid the writing of controlled business.

134. California uses the restricted license. Cal. I ns. Code § 1742.135. N.Y. I ns. Law § 132; see 2 New York I nsurance Department, E xamina

tion of I nsurance Companies 126 (1953).


company “ownership” of the license, terminates it immediately, without further procedures, if the agent signs a waiver of hearing.

The persons prosecuting the case in the formal hearing may be nonlegal personnel of the insurance department, employees of the department who are attorneys, assistants to the attorney general permanently assigned to the department, or assistants to the attorney general specially assigned for prosecution of particular cases.

In states where the department prosecuting personnel are not attorneys there is a danger that the proceeding will be technically deficient and thus subject to attack in the courts, if review is on the record rather than a de novo trial. There is little practical difference between the use of lawyers who are employees of the department and the use of assistants to the attorney general who are permanently assigned to the department. In either case, the lawyer comes to his task with a procedural sophistication that laymen seldom acquire and has the opportunity to acquire expertise in the technical field of insurance law. These arrangements seem the most satisfactory. A less desirable method is the use of assistants to the attorney general who are assigned to the department only for specific cases. Such an attorney has no opportunity to become expert in insurance matters. Moreover, since the case he presents is likely to be prepared without his assistance by nonlegal department personnel, even his legal knowledge is not likely to he used with maximum effect.

Though the agent is called upon to show cause why his license should not be revoked, and though some departments believe that the agent has the burden of proving his innocence,130 the department typically presents its case first and assumes the burden of establishing guilt. The rules of evidence are followed in varying degrees. Some states seem to adhere closely to the formal rules, but others seem to apply only the broadest notions of relevance and probative value, at least for purposes of admission of evidence as distinguished from measurement of its weight In the various files we examined we saw examples of extreme liberality in the handling of evidence as well as indications of extreme technicality. Furthermore, individual departments were not always consistent.136 137

After the case has been presented the hearing officer decides what sanction should be imposed, if any. If the case proceeds to a final decision,

136. Sometimes an applicant for a license is thought to have the burden of showing that he is properly qualified, while in a revocation proceeding the department must justify a revocation by “substantial evidence.”

137. I t is not necessarily an adverse criticism of a department to say that in its proceedings it does not conform to the rules of evidence developed for courts, or even that it is not consistent in its application of the rules. Much of our law of evidence is a reaction to the problems of controlling the jury, and has little relevance to the operation of an administrative tribunal. See generally 2 Davis, op. cit. supra note 106, at 250-337.


the hearing officer will either dismiss the case, issue a warning, assess a fine, suspend the agent’s license, revoke the license, or place restrictions on the use of the license. If the commissioner is the hearing officer, he makes the decision. If a subordinate is hearing officer, he usually makes a recommendation to the commissioner, who almost invariably adopts it.

The crucial question here is whether the person who hears the case actually makes the decision independently. Not uncommonly the hearing officer has assistance in arriving at his decision, usually provided by the department attorney who prosecuted the case, or the investigator who worked on it, or both. This consultation sometimes proceeds to the point of obliterating the distinction between prosecutor and judge that a sound administrative procedure should provide. If a sense of fairness and due process is to be assured, it would be well to divorce the hearing officer entirely from the investigation and prosecution of the case. The prosecutor should not participate in the decision making process. I t is especially dangerous for him to do so if the hearing officer is not a strong and independent man and if he is a layman with the layman’s traditional suspicion of the formality and technicality that mean due process to the lawyer. Separation of the prosecutory and decision making functions, one of the main themes of the Federal Administrative Procedure Act,138 though unfortunately not of the Model State Administrative Procedure Act,139 should apply to the adjudication of insurance disputes. If such a separation is not feasible, as may be true in smaller departments, then a single man could be designated as the hearing officer, and any other tasks he performs should be divorced from prosecution or investigation. This is hardly foolproof, but it would help ensure objectivity in the decision making process and develop a higher degree of competence in the conduct of hearings.140

iii. Regulation of advertising. Because of the ease with which proof of unlawful advertising can be made, with the possible exception of oral advertisements on radio and television, such advertising constitutues a special area of control. A number of insurance departments endeavor to examine insurance advertising to detect unfair or false practices. The departments exercise extensive discretion in determining which advertisements are improper. In those states that have adopted the National Associa

138. See 60 Stat. 240 (1946), S U.S.C. § 1004(c) (1958).139. See Harris, Administrative Practice and Procedure: Comparative State Legis

lation, 6 Okla. L. Rev. 29 (1953) ; Schwartz, The Model State Administrative Procedure A ct—Analysis and Critique, 7 R utgers L. Rev. 431, 451-53 (1953). For the arguments about the lengths to which separation should go, compare F inal Report of the Attorney General’s Committee on Administrative P rocedure 55-60 (1941) with id. at 203-09.

140. Provisions for judicial review of insurance department action are quite variable. They do not pose any problems peculiar to insurance regulation, and we shall not discuss them in this paper.

tion of Insurance Commissioners’ advertising rules141 the standard of fairness may be more specifically defined.

None of the states that we studied had a systematic program for collecting and studying all insurance advertising. The quantity of material that is printed and circulated would put such a task far beyond the scope of any department’s budget. The departments rely mostly on casual observation and on complaints received from the public and from competitors. Various agent associations are quick to call apparent violations to the attention of the departments, and one department, operating on the theory that agents can best be controlled through the companies, requires that companies screen their agents’ proposed advertisements.

If a department considers an advertisement unfair it notifies the agent and orders him to stop using it. Since there is no problem of proof the departments have very little trouble in policing unlawful advertising once it is brought to their attention. Even if the advertisement is not clearly contrary to law, the department can often secure compliance with its wishes.142

On the whole, falsity in insurance advertising does not seem to be a serious problem. This may be attributable to the fact that advertisements in this field generally seem conservative in comparison with the extravagant claims generally characteristic of American advertising. One department official, however, expressed the view that insurance advertising had descended to the level of used car advertising. Most observers would not agree with this opinion. Though no precise measurement of levels of deception is possible, outright misrepresentation does not appear to be common and seems fairly effectively regulated.

When the advertising originates outside the state it presents a special problem to state insurance departments, particularly if the company is not authorized to do business in the state. Such advertising is sent through the mails, and it is difficult for the department to secure jurisdiction over the offending company. An Unauthorized Insurers False Advertising Process Act is now being prepared in an attempt to solve the problem.143 The draft act permits a state to obtain jurisdiction over an unauthorized insurer who circulates false advertising in the state. If the act is widely adopted, and if its constitutionality is upheld,144 it will enable states to control such unfair

141. States that had adopted by 1959 are listed in [1959] 2 N.A.I.C. P roceedings472.

142. But see The National Underwriter, Mar. 4, 1960, p. 7, cols. 3-4 (Minnesota Commissioner’s order in advertising case vacated by court).

143. See Report of the Regulation of Advertising (B I) Subcommittee of the Accident and Health Committee of the N.A.I.C., [1959] 2 N.A.I.C. P roceedings 468, [1960] 1 N.A.I.C. P roceedings 149-52 (text of draft act).

144. See Parmalee v. Iowa State Traveling Men’s Ass’n, 206 F.2d 518 (5th Cir. 1953), which upheld the Florida Unauthorized Insurers Process Law, F la. Stat. A nn . §§ 626.0503-.0509 (1960).

184 COLUM BIA L A W R E V IE W [Vol.61:141


advertising. Some departments have attempted to curb such advertising by issuing statements that brand the advertisements unfair and warn local residents to beware of such false inducements.145 146 I t is doubtful whether this is effective.

The Federal Trade Commission has sought to exercise some jurisdiction over advertising practices, but its initial efforts proved unsuccessful when the United States Supreme Court held that the McCarran Act deprived the Commission of jurisdiction over an insurer who was licensed in every state in which it did business when each such state regulated its advertising practices.148 More recently, the Supreme Court held that mere regulation by the state of the insurer’s domicile was not sufficient to deprive the FTC of jurisdiction even though the state of domicile purported to regulate the nationwide advertising activities of the insurer.147 I t is as yet an open question whether attempted regulation by a state in which the insurer operates, but is not licensed, is sufficient to exclude FTC jurisdiction.

III. Solution of Some P articular P roblems

When legislatures perceive a problem in the insurance field their characteristic response is a prohibition sanctioned by a criminal penalty or license revocation. If the prohibited conduct is thought to represent a serious threat to the integrity of the business, the legislature is apt to make the conduct a felony, attaching a correspondingly severe penalty.148 The legislatures seldom concern themselves with the effectiveness of control, usually considering their task done once they have decided what conduct to prohibit.149 Placing on the department and public prosecutor an increasing burden of investigating and prosecuting insurance offenses would not be objectionable if they had the facilities to do the job well. But when the departments are experiencing serious difficulty in enforcing the traditional forms of control, it seems unfortunate to create new crimes without pro

145. See, e.g., 181 W eekly U nderwriter 273 (1959) ; Journal of Commerce, Aug. 10, 1959, p. 8, col. 7.

146. FTC v. National Cas. Co, 357 U.S. 560 (1958).147. FTC v. Travelers Health Ass’n, 362 U.S. 293 (1960).148. This may be done even for a purely technical offense that has no moral implica

tion. Prior to its recent code revision, Montana, for example, made it a felony for any person to participate in any way in placing insurance with an unadmitted company. Mont. R ev. Codes § 40-1306 (1947); cf. Mont. R ev. Codes § 40-1307 (1947) (collecting premiums for unadmitted company a misdemeanor). This code was superseded by M ont Laws 1959, ch. 286, which repealed these provisions.

149. [T]he means of making legal rules effective . . . has been neglected almost entirely in the past. W e have studied the making of law sedulously. I t seems to have been assumed that, when made, law will enforce itself . . . . But the life of the law is in its enforcement. Serious scientific study of how to make our huge annual output of legislation and judicial interpretation effective is imperative.

Pound, The Scope and Purpose of Sociological Jurisprudence ( p t 3), 25 H arv. L. Rev. 489, 514 (1912).


viding facilities for their effective control. Lawmakers have a responsibility to develop workable techniques of enforcement, not merely to decide what is bad.

In an attempt to arrive at more adequate solutions, we shall explore in greater detail the problems or rebating, twisting, and misrepresentation, the practices most often encountered and most prejudicial to competing agents.

A. Rebating

Essentially, the traditional legislative solution to the rebating problem, considered a serious threat to the integrity of the insurance business by most insurance people, is to make it a crime for an agent to give and for a policyholder to receive any inducement not part of the policy to buy insurance.150 This solution seems simple, but it is not effective.

I t is difficult to estimate with any degree of confidence the extent to which rebates exist in the insurance world. Persons who commit the offense of rebating are not anxious to discuss it, and, since no one is harmed directly, the violation comes to light only in those cases in which a third person stumbles upon evidence or one of the parties admits his guilt.151

If the number of rebating cases investigated and prosecuted by the various insurance departments provided an accurate measure of the extent of the offense, we would have to conclude that rebating rarely occurs. In all the states surveyed, we found only a handful of investigations of agents for alleged rebating, though occasionally we found a rather important one. Moreover, we found few prosecutions, fewer convictions, and almost no application of sanctions.152

That it is difficult to detect and nearly impossible to prove an alleged violation,153 that most departments and agents believe there is extensive rebating,154 and that our own earlier association with the business convinced

150. See N.Y. I ns. L aw § 188(1).151. Occasionally there is some written, evidence of the rebating, but it is rarely

conclusive. In one case, “Less 10%” was written on the premium bill, but the insurance department lost the case because it could not prove that the handwriting was that of the agent. But see Sullivan v. Connecticut Mut. Life Ins. Co., 337 Mo. 1084, 88 S.W.2d 167 (1935), which held a. written proposal to be an illegal twist. Even less frequently are there disinterested witnesses, though occasionally one may be found. For example, one agent complained that a doctor had agreed to purchase a large policy but had demanded a rebate. The department sent the agent back to the doctor, accompanied by a friend. The doctor, more greedy than astute, accepted the rebate in the presence of the witness.

152. We believe that our investigation disclosed most of these cases, although we may have missed some because the files were not designed to accommodate our search. Forty years or so ago many rebating cases were reported in appellate courts. I t is not a t all clear that the decrease shows a reduction in rebating, however; instead it may show a decreasing role in our society for litigation, and especially for appeals.

153. Not every agent is so bold, or so careless, as the one who offered a rebate to an employee of the New York department’s complaint bureau.

154. Department personnel thought that rebating was widespread, despite the lack of frequent enforcement proceedings. W e received a similar response from agents.


us that rebating was common belie the validity of an inference based solely on the extent of enforcement proceedings. We believe that the practice is common and that a large number of agents rebate to some extent.155 This does not mean, of course, that a large percentage of policies are sold at a discount.

The difficulty of detection and proof, the largest obstacle to effective enforcement of the anti-rebating laws, is intensified by the subtlety of the forms in which rebating can be cast. There is nothing illicit, for example, about an advisory board contract under which the policyholder receives compensation, if he in fact renders services to the company or the agent. In order to establish inducement in such a case it becomes necessary to inquire into the purpose and operation of the individual contract, a matter that may often be difficult. Moreover, even when rebating is a straightforward monetary favor, it can easily be made to appear as a loan, and the participants can then testify that it was repaid.

The fact that the anti-rebating law is poorly designed and fails to take into consideration the realities of business and social life creates a second obstacle to its enforcement. Conduct regarded as offensive and business practices generally regarded as legitimate, though coming equally within the plain terms of the statute, must be distinguished. Those administering the law are faced with the dilemma of enforcing it literally and often punishing conduct which most people consider blameless, or enforcing it discriminatorily and subjecting themselves to accusations of favoritism or improper tampering with tire wishes of the legislature.

There are a number of situations in which conduct that is within the terms of the statute may be justified. The amount of the inducement may sometimes be relevent. If the alleged rebate is a cash repayment or a reduction in price, it is clearly within the thrust of the statute, whatever the amount. But suppose the agent takes a client to lunch and pays the check. Is that a rebate? This practice is so common in American business that one is reluctant to conclude that the legislatures of the various states intended to proscribe it. Suppose the client’s wife is included in the

Though few agents admitted to us that they had ever rebated, nearly all agents thought a substantial amount of rebating was done by others. Sometimes this seemed to be only an assumption, on the theory that if the other agents were not rebating, large accounts would go elsewhere. These statements were sometimes qualified by the remark that most of the rebating was done in a line of insurance other than the one in which the speaker was primarily engaged.

155. Our relatively small sampling of the opinions of agents and department personnel, together with our personal judgments, provide no statistical measure of the amount of rebating that exists, but when it is the experience or opinion of a high percentage of people connected with insurance, having different backgrounds and working in different geographical areas, that rebating is a common practice, we think it is likely to be so. W e considered the possibility of an inquiry that would give some quantitative indication of the practice, but the findings would inevitably be so inaccurate and the cost so great that we have contented ourselves with nonquantitative evidence.

1S8 COLUM BIA L A W R E V IE W [Vol. 61:141

luncheon, or the client and his wife are taken to dinner at the agent’s club, or the client and his wife are sent to the club, or the agent takes the client on a one-day deep-sea fishing expedition in his boat, or on a weekend trip to a neighboring city, or takes him to Florida, or sends him to Florida. Just where is the line to be drawn? Although amount is probably irrelevant if the inducement is a cash payment or price reduction, it surely is not irrelevant if the alleged rebate is in the form of a social courtesy common in American business practice.156 Should the distinction depend on the agent’s purpose in making the gift? Motives are inevitably mixed, with friendship and the preservation of a valuable account often being inextricably interwoven in the agent’s thinking.

Close personal relationship presents another situation in which conduct coming within the plain meaning of the statute may be justified. Thus, it is difficult to see any valid objection to an agent’s reducing the price of his son’s policy by the amount of his own commission. Given circumstances of considerable disparity of income and age, most persons would be inclined to extend this exception to a brother, unde, nephew, and even other relatives. I t is common in our society for one person to do a favor for another by giving him the advantage of the donor’s special position in the market. The anti-rebating statutes seem to prohibit such favors, at least when the favor is an inducement to the contract, not only when they are weapons used for competitive purposes, but also when they are gestures of friendship or affection. Since it is doubtful that legislatures intended to or should preclude all such gestures, the relationship between agent and policyholder seems to be a relevant consideration in the enforcement of anti-rebating statutes.

These considerations indicate that the legislature should direct its attention to the difficulties of detection and proof and should carefully redefine the evil that it proposes to prevent. The question arises, however, whether a prohibitory law that can not be enforced effectively nevertheless serves a useful purpose by designating a moral standard to which members of a profession can make obeisance, toward which they should strive, and against which their conduct can be judged. There seems little doubt that widespread agent opposition to the practice of rebating accompanied by express legal prohibition creates a climate unfavorable to the practice, and that some persons are deterred by a conviction that moral duty requires them to obey the law. Others are deterred by fear of detection and adverse public comment, even if they are not afraid of more substantial punishment. Thus, the mere existence of the law reduces rebating to some extent. Some insurance men with whom we talked think that this is sufficient justification

156. See Northern Assur. Co. v. Meyer, 194 Mich. 371, 378, 160 N.W. 617, 619 (1916), which held that it was not a rebate to use the “crude and decadent method of lubricating solicitation of business" of buying drinks for the client.


for the law. The effect, however, is highly selective. Ill-enforced antirebating laws give unfair advantages to those who are least deserving. The policyholder who bargains aggressively for an illegal rebate, the policyholder willing to exploit his “contacts” or to use the large size of his policy to extort concessions that are greater than those justified by the savings in overhead in the marketing of large policies, and the agent bold enough and unscrupulous enough to violate the law all enjoy a significant advantage without serious risk.

Since the prime objective of anti-rebating laws is to prevent such practices by agents, imposing sanctions on the policyholder places unnecessary difficulties in the way of enforcement. Not only does this ensure that the policyholder will not volunteer information, but in many states he will have a constitutional immunity against self-incrimination that will seal his lips even if the rebating is detected and he is examined under oath.157 Further, there seems little doubt about the relative fault of the two persons. The policyholder has committed at most a purely technical offense without moral implications other than those that arise from the mere existence of a prohibitory statute. On the other hand, the agent has participated in conduct that is thought to be prejudicial to the business to which he has committed his life. If the practice of rebating is bad, it is the agent who is the party- most at fault, and the main efforts of the law enforcement agencies should be directed at him. Although, if the policyholder is freed from the risk of criminal prosecution, the difficulty of detection will still be substantial, because he would be disinclined to inform on his benefactor, the possibility of his doing so is greater and, moreover, he would lose his immunity to questioning when the agent’s conduct is investigated.

In addition to eliminating the crime of receiving a rebate, it would be desirable to create, in competing agents, a statutory cause of action against those who grant rebates. While it is clear that competing agents are damaged by rebating, it would be difficult for a particular agent to prove that in the absence of the rebate he would have had the policyholder’s business, and thus it would be difficult to measure the amount of damages suffered. However, similar difficulties have not proved insurmountable in cases involving unfair competitive practices generally, and even were the rebating problem to provide a unique problem, it could be solved by liquidating damages statutorily at the amount of either the commissions received or the rebate granted. The deterrent effect of permitting such suits could be further increased by following the example of the anti-trust laws158 and permitting recovery in some multiple of the damages suffered.159

157. For an example, see Mich . Const, a r t II, § 16 (1908).158. 38 Stab 731 (1914), 15 U.S.C. § 15 (1958).159. If any such means of enforcing anti-rebating laws were to be adopted, how-


Assuming that, with careful thought and some experimenting, methods for enforcing the anti-rebating policy somewhat more effectively could be devised, it is necessary to answer the preliminary question of whether rebating is undesirable and should be suppressed. A difference in attitude was quite apparent from the responses we received to our questions about the “morality” of the practice of rebating. Insurance men invariably agreed that rebating was bad and should be forbidden, even if enforcement was defective. Much less uniformly, but very generally, people unconnected with the insurance business failed to see anything at all objectionable in rebating. Indeed, some persons outside the business were surprised that it was illegal for a policyholder to buy insurance at a discounted price. We did not question a scientific sample of either group, but the divergence was much too pronounced to be accidental. We feel justified in concluding that policyholders by and large see no objection to rebating. While insurance men do oppose the practice, their attitude is partly a result of professional conditioning and partly supposed self-interest.

This divergence of view may be easily explained. To the agent, rebating is apt to appear as a subversive threat to his standard of living. Even an inadequately enforced prohibition protects the level of commissions because agents who rebate do so secretly and not on all policies. On the other hand, to the policyholder a rebate is apt to appear unfair only if he does not enjoy its benefits.

In view of this disparity of attitudes, it may be questioned whether rebating is undesirable and, if so, whether it is sufficiently evil to justify legal prohibition. Were rebating lawful, commissions would be a matter for free bargaining between agent and buyer, and ordinary market forces would determine commission levels. The more astute bargainers among the policyholders would have an advantage, but their advantage would not be due to a willingness to disregard the law. Similarly, the large buyer would enjoy an advantageous bargaining position, but it would be an advantage resulting from the same market conditions that ordinarily favor the large buyer. While it is true that large size can often be used to compel concessions that are not justified by market considerations, the problem might be handled in insurance in the same manner in which it is handled in other areas of the economy, rather than by prohibiting all rebates. Though quantity discounts have not generally been regarded as unfair elsewhere in the economy, unless accompanied by other circumstances of oppression,100 under the present law

ever, it would be very important to redefine the offense, for it would be quite unfortunate to put in the hands of private persons the power to punish an agent for such an innocuous act as rebating to his son or brother. If enforcement were effective and stringent, the legislature would have to make a clearer decision about the scope of the evil it seeks to prevent.

160. For a collection of materials on the Robinson-Patman Act, which seeks to


few insurance buyers can obtain the advantage of a quantity discount except by subterfuge. Thus, from the vantage point of the policyholder alone, there is reason to think that the best solution to the rebating problem is to remove the general restraint, possibly replacing it with particular prohibitions directed at a number of specific problems.

If one views tire problem from the vantage point of the agent, however, the situation is more complex.* 161 Historically the agent has sought an artificial support for the existing marketing structure. He wanted assurance that commission levels could not be undermined by sharp competitive practices, and he viewed rebating as a danger to the proper level of agency compensation. One may ask whether the agent, thus asking to be shielded from the force of open competition, was not unconsciously conceding that market forces would not support the commission level then in effect in the business or that, under tire tests applied in a free enterprise system, the services performed did not justify the compensation.

The history of commission rates in the insurance business in the United States provides an interesting commentary on the way insurance market forces operate.162 During tire nineteenth century commission rates rose fairly steadily. During the twentieth century, since the Armstrong investigation,163 they have been fairly stable.164 As commission rates in life insurance increased in the last third of the nineteenth century, it became increasingly apparent that they were uneconomic, for the increase in commissions was closely matched by the growth in the practice of rebating. As agents re

control price discrimination in marketing generally, including quantity discounts not justified by the savings involved, see Oppenheim , U nfair Trade P ractices, Cases, Comments & Materials ch. 11 (1950).

161. See generally Kenney, Critique of American Agency System, in Snider, Readings in P roperty and Casualty I nsurance 265-79 (1959).

162. See generally Stalson, Marketing L ife I nsurance: Its H istory in America 519-36 (1942). See also the M erritt Committee Report to the New York Legislature, Feb. 1, 1911, reprinted in Hearings on S. Res. 57 Before the Subcommittee on Antitrust and 'Monopoly of the Senate Committee on the Judiciary, 86th Cong., 1st Sess., pt. 5, 2790-882 (1959) ; note especially id. at 2804, 2838, 2844, 2859.

163. J oint Committee of the Senate and A ssembly of the State of New York, Report on the Affairs of Life I nsurance Companies (1906).

164. In the 1830’s and 1840’s commission rates on such life insurance as was sold in this countiy seems to have been about 5 per cent for the first year and 2j4 per cent for renewals, continued for the duration of the policy. By the 1860’s it was common to pay twice those rates; by the middle of the century it became ’usual to concentrate the commissions in the first year, either paying no renewal commissions or a limited number of them. In the post-Civil W ar period commissions increased to levels approximating present figures, and toward the end of the century they became substantially higher. At the peak period it was possible to find companies that granted general agency contracts providing for commission at the rate of 95 per cent for the first year, with twenty renewals at 10 per cent.

Commission rates increased because the companies had to compete for good agents. I t was not the market value of the agent to the policyholder that decided commission rates, but. his value to a company whose main objective, at least in life insurance, tended to be rapid expansion. The leading companies in the late nineteenth century were concerned with little else than the agent’s business-getting ability.


ceived higher and higher commissions without giving more service, they tended to use the increase in commission rates to “buy” sales by offering rebates. Thus agent compensation differed from that received at the lower commission rates and premiums only adventitiously.165

One natural response to the phenomenon of rebating was to forbid the practice as an unfair attack upon the proper level of compensation to agents. That agents did not and still do not fully appreciate the extent to which such laws tamper with the free operation of the market is partially explained by the fact that rebating results in discrimination among policyholders and that the law customarily is rationalized on that basis. Thus, while agents can oppose rebating because it is an attack on the level of agent compensation, laws prohibiting it can be rationalized for the general public on the basis of opposition to discrimination.

At the present time it is significant to note that, while anti-rebating laws prevent the operation of free market forces on commission rates, direct selling has developed in those parts of the insurance business in which there is significant price-consciousness among buyers. Thus market pressures continue to assert themselves. The ultimate consequence of anti-rebating laws, which had as one purpose preservation of the agency system by keeping up the compensation level, may be to undermine that system and substitute direct selling methods. The agency companies recognize the problem166 and have been moving to reduce commissions in order to compete in price with direct writers. The agents, however, resist. In California, for example, agents filed a treble damage suit under the anti-trust laws against a number of companies that had unilaterally reduced commissions to meet price competition from other marketing systems.167

While we are not prepared to assert categorically that the anti-rebating laws should be repealed, and believe that the subject should receive further discussion, we do challenge the traditional assumption that such laws are obviously desirable. If they are desirable, then new thought1 must be given to the development of methods to replace the present inept techniques and to enforce effectively the ban against rebating.

165. In 1877, during a period in which higher commissions, salaries, and expense payments made rebating>by agents very common, Mutual of New York decided to do the price cutting itself as a direct rebate from the company to the policyholder, and it set up an elaborate system of handling the rate reduction, which it called a “dividend- in-advance.” Though the scheme did not last long, it illustrated the true nature of rebates—they were market responses to the fact that commission rates were at an un- economically high level.

166. Both continuous policies and direct billing were being extensively used by agency companies in 1960 in an effort to establish price competition with the direct writers. For a discussion, see Miller, Insurance Perspective, Journal of Commerce, Oct. 5, 1960, p. 9, col. 2.

167. 180 W eekly U nderwriter 121 (1959),. and throughout issues in late 1958 and early 1959. In 1960 some of _ the companies counter-attacked, claiming heavy damages from the agents under antitrust laws. See Journal of Commerce, Feb. 18,

IN SU R A N C E M A R K E TIN G 193

B. Twisting

In the argot of the insurance trade, twisting means the act of inducing a policyholder to replace an existing life insurance policy with one in another company. The statutes do not prohibit twisting as such. They only proscribe the act of inducing a policyholder to replace a policy by misrepresentation. Thus defined, the insurance offense of twisting is but a special case of misrepresentation. As with misrepresentation generally, proof of the offense is difficult, and we found few indications of punishment for it in the records of the departments.

Although we have made no systematic effort to assess the extent to which twisting exists, we believe that it has been occurring frequently for a very long time. As long ago as 1898 the President of the National Association of Life Underwriters, asserted that it was the greatest scourge of his term in office,168 and it has continued to be a problem in many periods since. I t is today a constant complaint of life insurance agents. In a 1958 news release, the Ohio Superintendent decried the increase in unfair practices, among which he emphasized twisting.169 I t has been prevalent in recent years because of the advent of the family protection life insurance plan, which was used extensively by agents to twist other policies, especially juvenile policies, off the books. Some agents even used it to twist policies of their own companies to a degree that created serious internal management problems in some companies. The development of minimum deposit plans also produced extensive twisting.170 This problem thus seems likely to develop and be troublesome for the industry shortly after the development of any new form of policy with particularly attractive sales features.

Unlike rebating, there is little question about the undesirability of twisting in a large number of the situations in which it occurs, from the point of view of both the individual policyholder and the first agent. A life insurance policy is most expensive in the first year because of the first year commission and the expense of placing the policy on the books. If the policy is subsequently placed with another company all of this is wasted, and the policyholder must pay it again. I t is often possible to convert a policy orig

1961]

1960, p. 9, col. 4. See also Journal of Commerce, Oct. 20, 1960, p. 9, col. 6 (speech of John A. North pointing to commissions as the largest area of expense not yet adjusted to its economic level).

168. 179 W eekly U nderwriter 508 (1958).169. 179 W eekly U nderwriter 943 (1958). See also Journal of Commerce, May

31, 1960, p. 9, col. 2 ; 180 W eekly U nderwriter 229 (1959). In November 1960, the New York State Association of Life Underwriters called attention to the “conflagration of twisting” and proposed self-policing within the industry as a partial answer. 183 W eekly U nderwriter 1015, 1017 (1960). But in 1959 the Anti-twisting Laws and Problems subcommittee of the N.A.I.C. inquired of all states whether adequate legislation existed. Out of 28 states replying, 26 replied affirmatively and the subcommittee asked its parent committee to dismiss it. [1960] 1 N.A.I.C. P roceedings 196.

170. See 180 W eekly U nderwriter 1315 (1959).


inally written on a plan not adapted to the needs of the policyholder to an appropriate plan with the same company at a cost much lower than that of replacement with another company. When this cannot be done, replacement may be economically justified, even if the second company is not a lower cost company. Assuming that replacement is not for the purpose of changing to a more appropriate plan, that both policies are of the same nature, and that both are held to maturity, replacement is economically justifiable when the present value of tire sum of all future premiums under the first policy is greater than the present value of the sum of all future premiums under the second policy less the present cash value of the first policy. Actual application of this test requires extensive actuarial computations based on assumptions about uncertain matters, such as future dividends. However, because much insurance is written by companies that are rather closely competitive on cost, and because there is no reason to suppose that only agents of the lower cost companies seek to twist, or that policyholders are convinced only when an actuary would be, it seems likely that replacement is unjustified in a very large percentage of the cases in which it occurs. On the other hand, sample calculations made for us by a competent actuary suggest that there are a surprisingly large number of potential cases in which a “twist” would be clearly beneficial to the policyholder, if the agent of a low-cost company twisted the policy of a high-cost company.

Since the evil of replacement is not dependent on the misrepresentation on which the existing offense is based, it is suggested that the offense should be redefined171 and that new techniques of control be devised.

I t seems quite clear that aggressive selling is the usual cause of twisting and that effective prevention must act on the agent’s motivation. The legislature might provide that, if replacement in fact occurs, the second agent is not entitled to a commission. To provide sanctions the policyholder, the first agent, or the first company might be given a cause of action for the amount of the commission, or some multiple thereof. By making it easy to deprive the agent of his gain from the replacement, the law would make it unprofitable for him to make the strenuous effort that is usually necessary to make the sale. I t is clear that this solution rests on the assumption that replacement is rarely justified, for it punishes the agent even in those cases in which he was doing the policyholder a service. We have concluded, however, on the basis of computations made for us, that one cannot say that twisting is never, or only rarely, justified.

171. The Missouri Superintendent attempted to redefine twisting by a ruling that included replacement without misrepresentation within the prohibition, but the court declared such action to be beyond his power. State ex rel. Prewitt v. Thompson, 334 Mo. 144, 66 S.W.2d 109 (1933). For a case of fairly systematic replacement held not to be twisting, see Sterling Ins. Co. v. Commonwealth, 195 Va. 422, 78 S.E.2d 691 (1953). Twisting is difficult to establish, in part because of the stringency of tile levels of proof demanded. See Collins v. Caminetti, 24 Cal. 2d 766, 151 P.2d 105 (1944).


A less drastic solution would be to create a cause of action against the second agent for the amount of his commission only if the replacement was disadvantageous to the policyholder. Since disadvantage, although fairly probable, would be difficult to establish, there might be added a statutory presumption of disadvantage, thereby imposing the burden of justification on the second agent. A difficulty with this solution is that the question of advantage or disadvantage is rather technical to be decided by a judge who is not an actuary, let alone by a jury.

Since undesirable twisting would often be avoided if the first agent had an opportunity to discuss the matter with the policyholder, the problem could probably be handled by requiring the second agent to inform the company that issued the first policy that a change is contemplated. In order to ensure that this requirement is satisfied, replacement could be made a serious offense, sanctioned by revocation of licence, unless the agent had notified the first company.172

That such a procedure is practicable is suggested by the efforts of some life insurers to control abuses of minimum deposit insurance by their own agents by asking questions in connection with applications both about financing plans and about the replacement of other insurance.173

The Florida Commissioner adopted similar rules in 1959 for minimum deposit plans, stating that lack of notification to the replaced company would be considered prima facie evidence of twisting.174 The New York Department too, in its regulation of minimum deposit plans, ordered th a t:

[I] n connection with all applications for life insurance policies, the company shall have in its files over the signature of the applicant a statement as to whether or not such policies are to replace existing insurance. Where an affirmative answer is given, it is considered in the public interest that an opportunity to present the facts to the insured be given to the insurer which issued the existing insurance so that the insured may have the benefit of all information from both companies as a basis for making a decision in his best interests.175Since misrepresentation itself is bad, quite apart from the consequences

that it may have when it leads to replacement, we believe that the existing

172. An agent writing a new policy could be required by law to obtain the applicant’s signature on a separate and very simple form attached to the new application and to explain its function to the applicant. The form might state that the new policy did not replace, and was not intended to replace, any existing policy. If the applicant could not make the statement, then the agent would have an obligation to notify the first company.

173. 180 W eekly U nderwriter 233 (1959). One company has expressed the view, in a letter dated December 16, 1960, that the system is “a major help in controlling improper practices” and that it expects to continue it indefinitely.

174. 181 W eekly U nderwriter 229 (1959) ; Letter to authors from Florida Insurance Department

175. Regulation No. 39 of New York Insurance Department, as printed in 181 W eekly U nderwriter 254 (1959).


offense of twisting should be left on the books to be punished when it can be proved. But the twisting problem can only be solved if the problem of proof can be minimized, and if self-interest is enlisted in the effort, for merely adding investigators to the department staff in sufficient numbers is too cumbersome and costly. If the procedures outlined above or others serving the same purpose are not adopted, it would at least be desirable to redefine the offense to include any replacement that is disadvantageous to the policyholder, perhaps with a presumption of disadvantage. This would enable the insurance department to do a mote effective job of policing the industry against an offense that is often serious. A t the same time it would remain possible for the agent to perform a service and for the policyholder to be aided in achieving a better or cheaper insurance program in those cases in which replacement is justified.

C. Misrepresentation

Misrepresentation is an offense that is difficult to deal with, for it is very intangible. Its two forms, intentional and innocent misrepresentation, present problems of control that differ from each other. Although intentional misrepresentation is generally accepted as morally wrong, problems of proof present substantial difficulties of enforcement. Ordinarily there will be no disinterested witnesses and no written evidence of an intentional misrepresentation, and proof will depend upon the policyholder’s testimony, contradicted by that of the agent. Occasionally the problem can be surmounted and a dramatic case utilized to frighten agents into compliance. Most often this occurs when a stable pattern of misrepresentation has developed.170 Generally, however, this does not occur. Moreover, it is not easy to conceive of any effective way to employ anyone’s self-interest to aid in policing the agents. Perhaps some thought might be given to the possibility of giving the policyholder who has been deceived a treble damage suit in place of his normal tort suit, in order to ensure that there is someone who has a substantial interest in litigating such cases. Or, if personnel is available, the insurance department might be given the power to bring such suits on behalf of the policyholder. Perhaps it would help to try to educate the public systematically to the dangers of misrepresentation and to the remedies available *

176. In one case an accident and health company printed “COM PENSATION” on the top of its application, and its agents then represented themselves as agents of the state’s Workmen’s Compensation Commission. The department revoked the licenses of a large number of agents and then publicized the scheme and the names in the newspapers. III . Ann . Stat. ch. 73, § 947 (Smith-Hurd 1940), prohibits advertising that indicates a guarantee of mutual benefit companies by the state. Sec also 1960 I n s . L.J. 250-51, for a Pennsylvania department ruling. For a parallel problem concerning the rate making bureaus, see K imball, I nsurance and P ublic P olicy 102 (1960).


to them.177 Beyond that the only remedy seems to be more adequate enforcement machinery in the insurance departments.178

Innocent misrepresentation is even more difficult to regulate because the absence of moral fault makes it less appropriate to apply sanctions such as suspension or revocation of license. Moreover, that the misrepresentation is innocent does not necessarily eliminate the problem of proof. It is especially difficult to determine whether the agent stated something that he erroneously believed to be true or whether the policyholder misunderstood a correct statement of fact. Moreover, a policyholder may claim misrepresentation in an attempt to recover for a loss that is not covered by the policy. Since the misunderstanding often comes to light many months after the sale of the policy, when it is impossible to reconstruct the facts accurately, it does not seem appropriate to penalize the agent, and only indirect correctives seem possible.

One partial corrective now applied by the courts is the much-used but amorphous doctrines of waiver and estoppel. These are relied on to give the policyholder protection if the court is convinced that he was misled by the agent.179 These doctrines, however, do not provide complete protection. For example, it is often said by the courts that estoppel cannot be used to extend the scope of coverage of the policy.180 Moreover, it is the relatively innocent company, rather than the guilty agent, that bears the burden of these corrective measures.

Knowledge on the part of the company that, in the event of an unintentional misrepresentation, it may be held liable for coverage not within the terms of the policy, provides considerable inducement to the company to educate its agents to appreciate their obligations more fully and to understand better the policy coverage that they are selling. Increased expenditures for agent training is one result, and the more responsible companies in the business seem to have made considerable progress in that direction. In addition to the clarifying selling aids that companies now make available to their agents, there are innumerable training courses. Not only do many large

177. The Montana department urges its citizens to make use of the department, by a legend on its letterheads. See K imball & Conklin, T he Montana I nsurance Commissioner 75 (1960). The New York department prepared and circulates a pamphlet, How the New York State Insurance Department P rotects You, explaining to citizens the services of the department

178. The Arkansas Commissioner has attempted to solve the problem by requiring an insurance company “against which a complaint is received alleging a misrepresentation in the sale of its policies . . . to produce and file with this department a copy of its sales kit, presentation, and any other sales material . . . .” 181 W eekly U nderwriter 1053 (1959). Such measures will disclose some but not most cases of intentional misrepresentation.

179. A perceptive analysis of this device is given in Morris, Waiver and Estoppelin Insurance Policy Litigation, 105 U. P a. L. Rev. 925 (1957). See also P atterson, E ssentials of Insurance Law ch. 11 (2d ed. 1957). • ■

180. See id. a t 497.


companies offer special courses for existing or prospective agents, but colleges have added insurance courses to the curriculum, and in many business schools insurance is a possible major course of study. However, the rapid turnover of agency personnel and the large number of part-time agents who sell occasional policies minimize the beneficial effects of these developments.

Part of the solution to the innocent misrepresentation problem may lie in tightening and extending the agents’ qualification laws, as well as eliminating the practice by which temporary licenses are given freely to unqualified persons. The problem could also be alleviated somewhat by greater effort on the part of the companies. Training programs that provide continuing education for agents as new developments occur in the business and efforts to ascertain what the insured may fairly expect from his policy would be helpful.181

One possible solution for misrepresentation is, in theory at least, more promising than any we have yet mentioned, but we have left it to the last because it would require a drastic reorientation of traditional American patterns of insurance regulation. In general, the Europeans regulate marketing of insurance only indirectly, but they may thus actually achieve greater purity of the market. For example, the German regulatory system emphasizes control of the terms of the insurance contract, in an effort to achieve what is called “the transparency of the market.”182 183 * * * * The aim is to have uniform contract terms and complete government control over them. Such control is certain to minimize the use of “gimmicks” and to shift competition measurably from variations in coverage to those aspects of the business, such as price or service, that the policyholder can better understand.188

IV. Conclusions

Though regulation of agents’ marketing practices is a rather small and by no means the most important part of regulatory activity in the field of

181. One company, for example, uses a “coverage conference," which is a committee consisting of representatives of the claims and underwriting department, together ■with others whose identity depends on the. type and size of claim. This committee reviews doubtful claims and tries to reconcile the extent of coverage intended by the company with the reasonable expectations of the insured. The agent’s statements may be considered in this conference. The company believes that publicity about the practice has much improved policyholder relations and the device obviously provides the information that the company needs for better control over iunocent misrepresentations by agents.

182. See Bischoff, “Markttransparenz der AVB in der Sachversicherung als Aufsichtsproblem des 8(1) Ziff. 2 in Verbindung mit 13 VAG,” [1956] Verof- fentlichungen des Bundesaufsichtsamtes fur das Versicherungs und Bausparwescn 33. The original idea of Markttransparenz seems to have been largely one of comparability. Some recent pronouncements put much emphasis on uniformity, however. [1955] id. 154; [1959] id. 130.

183. For an excellent discussion of insurance regulation in Germany see F unfzigJ ahre Materielle Versicherungsaufsicht (Prof. Dr. W . Rohrbeck ed. 1952-55). Seealso Bruck-Moller, K ommentar zuu Versicherungsvertragsgesetz und zu denA llgemeinen Versicherungsbedingungen 49-63 (8. Aufiage 1953); P rolss, Versicherungsvertragsgesetz 4-8, and passim (12. Auflage 1960).


insurance, it takes on additional significance from the duality of regulatory power established by the McCarran Act. That the federal power over insurance continues, and that a federal agency exists ready to act if the states fail to do so, leads to greater state control of unfair marketing practices than would otherwise be likely. Fear of federal incursion into insurance regulation has tended to focus American insurance regulation on rate making and marketing practices and has produced a universal and nearly uniform statutory pattern in both fields. It has been much less successful in producing meaningful and effective regulatory activity.

The unfair practice acts of most states are rather well drafted and comprehensive so far as coverage is concerned. The few practices that are not expressly covered may generally be brought within some broadly phrased prohibition. Further, statutes usually provide for specification of unfair practices by administrative rulings.

When actual enforcement is considered, however, the picture is less satisfactory. If the objective is merely to exclude federal intervention, it apparently has already been attained, subject to possible reexamination of the question by Congress. If it is to achieve meaningful control over marketing practices—to preserve the purity of the market—there is some question whether it has been achieved. I t is probable that offenses such as rebating, twisting, and, to a lesser extent, misrepresentation are more numerous than is generally realized. In addition, the existing legal controls do not provide effective deterrents. The insurance departments exert strenuous efforts to attain the desired results, but they are handicapped by these factors. First, budgets in many states are too small for adequate control. Second, enforcement is handicapped, at least in the case of the more serious offenses, by inadequately conceived machinery that ignores problems of agent motivation. Third, the necessity of preserving basic fairness in procedures precludes use of some effective methods.

One of the characteristics of insurance regulation in the United States is the imposition on departments of tasks more numerous and difficult than they can perform with the available resources. Choices must be made of those regulatory activities most deserving of allocation of the limited funds. Although there is a great need in most states for much closer attention to solvency of the companies, which is the prime object of all insurance regulation, the proviso of the McCarran Act puts such pressure on the states to regulate unfair market practices that they must allocate some part of the department resources to this task. In most cases this allocation is inadequate. The impossibility of effective control with available resources requires redefinition of some of the offenses with a view to a realistic delimitation of the departments’ obligations. The more narrowly the proscribed practices

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are defined, the more adequately a given investment in enforcement machinery can do the job. Rebating, for example, should perhaps be confined to narrower compass by a closer examination of the evil to be prevented. There may even be an argument for repealing this prohibition altogether.

Not only should the prohibited practices be confined within practicable limits, but close attention should be given to techniques of enforcement. Although the heart of the law is in its implementation, techniques of enforcement have been given little systematic thought. Methods need to be adapted to the evils proscribed, to the competitive situation in the industry, and, especially, to the utilization of the motives of interested parties to aid public officials in the enforcement of the law. We think we have suggested some possible lines of approach for rebating, twisting, and misrepresentation, and we suspect that experimentation and thought about methods of enforcement by people in the various departments and representatives of the insurance industry might bring considerable improvement in results.

In addition to more realistic limitation of department tasks, greater budgetary provision for insurance regulation should be provided in many states. The purity of the insurance market is an objective worth this added investment.

In the absence of additional funds for the control of marketing excesses, departments may achieve greater success in regulating the market by regulating agents through the companies. However, there is here a temptation to act in terrorem— a. danger to be resisted. To deprive the insurance agent of his livelihood or to mark him with the stigma of unfair practice is a serious matter, and basic notions of due process must be applied to safeguard the imposition of such sanctions. This objective is transcendent, particularly as the evils to be suppressed are not overwhelming.

In summary, we think that formulation of the law in this area requires the balancing of three objectives that are not altogether consistent with one another. As we see it, the task of the law is to achieve control over the marketing methods of agents as effectively as possible, at a cost that is reasonable in relation to other demands on the limited funds available foi all regulatory activity, while preserving a high degree of fairness in the procedures used. As is true of many other problems, the solution is not one for mechanical application but one that requires in its implementation an ad justment of the three desiderata in relation to the particular context in which resolution is sought.

COLUMBIA LAW REVIEW - AWS

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