Nationwide Insurance

January 19 2005

JURY VERDICT THREATENS TO CAUSE MAJOR CHANGES IN RELATIONSHIP BETWEEN INSURANCE COMPANIES AND AGENTS

An eight person jury in the United States District Court in Connecticut awarded $2.3 million in compensatory damages to an independent insurance agent in a decision expected to have serious ramifications on the relationship between insurance companies and their independent agents all across the country. The case, which had been pending for seven years, was decided December 9, 2004 after a seven day trial and marked the first time an Independent Contract Agent had been held to be a Franchisee and therefore covered under Franchise law. Judgment on the verdict entered on December 13, 2004.

Alex Charts, for 23 years one of the most successful and respected agents for Nationwide Insurance, and at one time the number two agent in the United States, sued Nationwide after it terminated his contract in January 1996. The jury found that Nationwide terminated Mr. Charts without good cause. It also found that Nationwide violated the implied covenant of good faith and fair dealing and, more significantly, violated The Connecticut Franchise Act and the Connecticut Unfair Trade Practices Act. Nationwide never informed Charts in writing why it terminated their agreements with him, but contended that Charts had violated unidentified state law and unwritten company policy; that it did not have to show it had good cause to terminate the agreements; and that it was not required to inform Charts in writing of the reasons for his termination.

"The typical industry contract with an Independent Contract Agent contains a clause that says it can be terminated at any time 'with or without cause.' Nationwide argued that Mr. Charts' agreement had such a clause," says Ray Garcia of Garcia & Milas, P.C., the law firm representing Charts. "This jury decision is groundbreaking in that it is the first in the United States to apply Franchise rules to the Insurance business, in effect invalidating the 'without cause' provision."

The potential impact of this verdict reaches far beyond Mr. Charts and his case. According to federal law and many state laws, before requiring a franchisee to sign any contracts, a franchisor must provide detailed disclosure documents that describe company business plans and pending and resolved litigation. No franchise can be sold until such disclosures are provided. Some states also ensure that no franchisee can be terminated without good cause. Several of the major insurance companies such as Nationwide, Allstate and Prudential operate through networks of independent agents just like Mr. Charts.

The jury's decision means that independent agents, acting as stand alone businesses, fall under the purview of franchise law and therefore have far more protection against some actions taken by insurance companies. It opens up the possibility of future class action suits against major insurance companies from independent agents terminated in the last few years without cause, or those who were not given reasons for their termination even when accused of illegal conduct. Nationwide claimed that it could terminate Mr. Charts regardless of cause and that it acted in good faith after conducting a "fulsome" investigation.

During the pretrial phase, Nationwide made very significant stipulations which bear on the franchise law issue. Nationwide stipulated that the Company: controlled the pricing and availability of its insurance products subject to applicable law and regulation; was able to audit and/or examine the Charts business at all times; required Charts to comply with the advertising rules and regulations prescribed by Nationwide; and maintained supervisory responsibility over Charts' performance and business operations.

Charts contended that he had been terminated by a vindictive manager who aborted a bungled investigation into rumors based on hearsay. Charts also contended that he had done nothing wrong and had been made a sacrificial lamb by a company that paid a $50,000 fine to the Connecticut Insurance Commissioner in 1998 arising from its sales practices from 1993 to 1997.

Post trial motions for legal fees and prejudgment interest are expected to be filed this week. If granted, those motions could increase the verdict by more than $3,000,000. Nationwide will move to set aside the verdict.

For further information contact Raymond Garcia at Garcia & Milas, P.C. 203-773-3824 or [EMAIL LAW FIRM]


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