SC Administrative Law Court Decisions

The South Carolina Department of Insurance (DOI) filed a Motion for Reconsideration under ALJD Rule 29C, SCRCP 59(e) and 60(B)(1). The ground for the reconsideration is that a prior decision of the Administrative Law Judge Division (ALJD) in South Carolina Dep't of Ins. v. Curtis E. Grant, 96-ALJ-09-0093 (May 21, 1996), held the ALJD had no contested case jurisdiction but had only appellate jurisdiction over the revocation of an insurance agent's license. On appeal by DOI, the Honorable Alexander S. Macaulay reversed in South Carolina Dep't of Ins. v. Curtis Grant, 96-CP-40-2190, Court of Common Pleas (January 31, 1997).⁽¹⁾ Judge Macaulay concluded that contested case jurisdiction resides in the ALD. not in the DOI. No appeal followed.

DOI argues the instant case is identical to the controversy decided in Grant, and that the same result should apply. I reluctantly hold that contested case jurisdiction is proper in the ALJD. Thus, the order dated March 17, 1998, is vacated and this order decides all issues on the merits.

DOI seeks the revocation of an agency license held by the Allen Watson Agency, Inc. (Watson). Watson opposes DOI's position by asserting it has not violated any insurance law and is not liable for revocation. Watson's disagreement with DOI's determination places jurisdiction in the Administrative Law Judge Division (ALD.). S.C. Code Ann. §§ 38-43-130, 1-23-600 (B), and 1-23-310 (2) (Supp. 1997). The hearing in this matter was held February 12, 1998 at the Edgar Brown Building, Columbia, South Carolina. Based upon the evidence and the argument presented by the parties, Watson is directed to cease and desist from engaging in the unfair method of competition addressed in this order, and Watson is liable for a $500 fine. However, no requirement exists for Watson's clerical staff to obtain an insurance agent's license prior to providing insurance premium quotes to prospective clients.

1. Did Watson violate S.C. Code Ann. § 38-57-30 by employing an unfair method of competition in its insurance business?

2. Did Watson violate S.C. Code Ann §§ 38-43-10 and 38-43-20 by using unlicensed agents to provide quotes to prospective insurance clients?

1. Positions of Parties

DOI asserts Watson violated S.C. Code Ann. § 38-57-30 (Rev. 1989) by engaging in an unfair method of competition in its insurance business. DOI argues that an unfair method of competition results from Watson's practice of issuing a quote for insurance coverage based on the agency intentionally altering the facts of the identity of drivers of private passenger automobiles.

Watson argues no violation occurred since a violation must involve a completed transaction. Here, since no funds were paid as the result of the quote given, the incident under review did not result in unfair competition. Further, Watson argues that a single incident does not amount to unfair competition.

2. Findings of Fact

Based on the preponderance of the evidence, the following findings of fact are entered:

1. On April 9, 1996, an undercover individual operating on behalf of DOI telephoned the Watson agency.
2. An employee of the Watson Agency answered the telephone call.
3. The undercover DOI employee stated that she and her husband were moving into the state and would be living in Lexington County.
4. The DOI employee asked the employee for a quote for automobile insurance on a 1994 Ford Escort LX and an second unspecified car which was ten years old.
5. The DOI employee told the employee the 1994 Ford Escort LX was the vehicle used by the husband.
6. The DOI employee told the employee the ten year old vehicle was the vehicle used by the wife.
7. The DOI employee told the employee that during 1995 the husband had two speeding tickets (over ten miles per hour) and that during 1996 the husband was involved in an accident for which the husband was at fault and which resulted in injuries.
8. The DOI employee told the employee she needed "full coverage" on the 1994 Ford Escort and only liability on the ten year old vehicle.
9. The Watson employee gave the DOI employee a verbal quote of $2,303 for both cars.
10. While other factors were considered, the Watson employee arrived at the quote by placing the husband as the driver of the ten year old vehicle and the wife as the driver of the 1994 Ford Escort LX.
11. The placing of the husband as the driver of the ten year old vehicle and the wife as the driver of the 1994 Ford Escort LX was a decision contrary to the facts given by the DOI employee.
12. The decision to provide a quote based upon the husband as the driver of the ten year old vehicle and the wife as the driver of the 1994 Ford Escort LX was a decision made solely by the Watson employee.
13. Watson's employee intentionally assigned the high risk driver to the older car.
14. When asked to explain why the switch was made, the Watson employee responded that making the switch was done to produce a lower premium.
15. A typical charge for coverage on both cars with the husband as the driver of the 1994 Ford Escort LX and the wife as driver of the ten year old vehicle would have been between $4,000 and $4,500.
16. The method of competition employed by Watson quotes an insurance premium based on assigning drivers to vehicles in a manner diametrically opposed to the factual information given by the prospective client.
17. The method assigns a "bad" driver to an older car in order to produce a lower insurance premium.
18. The purpose of the method is to provide an insurance premium lower than a competitor's premium.
19. The method is a deliberate and common method of competition used by Watson.
20. No insurance policy was issued by Watson to the DOI employee.
21. No money was paid by the DOI employee to Watson for insurance coverage.
22. The violation charged by DOI is the first violation for the Watson agency.
23. Watson cooperated fully with the investigation.
24. Watson acknowledges the need to accurately and fully comply with the facts presented by a client when providing quotes.

3. Discussion

A. Background

DOI initiated an undercover operation involving randomly selected insurance agencies in the State. A telephone call to Watson was recorded by DOI. The DOI employee pretended to be a new state resident shopping for quotes on insurance for two cars she and her husband operated. She portrayed her husband as a "bad" driver with speeding tickets and an accident with injuries which was his fault. The DOI employee portrayed herself as a "good" driver having no violations and no accidents. The DOI employee explained that the husband principally operated the new vehicle for which full coverage was needed and that she principally operated the ten year old vehicle for which only liability coverage was needed. The Watson employee gave a quote based upon the husband being the driver of the older car and the wife the driver of the new car even though the DOI employee expressly told the Watson employee that the husband drove the newer car and the wife drove the older car.

B. Applicable Law

The Act under review here is the Insurance Trade Practices Act (ITPA).⁽²⁾ Similar Acts such as the South Carolina Unfair Trade Practices Act (SCUTPA) and the Federal UTPA, while not applicable to the insurance practices involved here, present relevant case law since those two acts contain prohibitions virtually identical to the prohibitions found in the ITPA.⁽³⁾ Thus, in identifying what methods, acts, or practices are unfair, the SCUTPA and the Federal UTPA case law is informative.

Under the ITPA an insurance agency may not engage in "an unfair method of competition or an unfair or deceptive act or practice in the business of insurance." S.C. Code Ann § 38-57-30 (Rev. 1989). In deciding whether a set of facts demonstrates the presence of an unfair method of competition, "the word 'competition' imports the existence of present or potential competitors, and the unfair methods must be such as injuriously affect or tend thus to affect the business of these competitors--that is to say, the trader whose methods are assailed as unfair must have present or potential rivals in trade whose business will be, or is likely to be, lessened or otherwise injured." F.T.C. v. Raladam Co., 283 U.S. 643, 648-49 (1931). In other words the method used must be unfair and competitors must be likely to suffer from the practice.

While other scenarios could be posed, at a minimum, a method is unfair if it "casts upon one's competitors the burden of the loss of business unless they will descend to a practice which they are under a powerful moral compulsion not to adopt, even though it is not criminal. . . ." F.T.C. v. R. F. Keppel & Bro., 291 U.S. 304, 313 (1934) (interpreting F.T.C. v. Winsted Hosiery Co., 258 U.S. 483 (1922)). Likewise, a competitor suffers from an unfair practice when the competitor is forced "to choose between . . . [adopting the unfair practice] or the loss of their trade." Id.

C. Law Applied To Facts of Watson Agency

The unfair method of competition employed by Watson is that of quoting an insurance premium based on assigning drivers to vehicles in a manner diametrically opposed to the factual information given by the prospective client. The method places the "bad" driver on the older car in order to produce a lower insurance premium. The purpose of the method is to provide a "price" lower than a competitor.

In the instant case, the facts establish Watson engaged in the unfair practice. Under the facts of this case, Watson's employee intentionally assigned the high risk driver to the older car. That action was taken in direct contradiction of the client's express statement that the high risk driver was the principal driver of the newer car. By incorrectly assigning the high-risk driver to the older car (the liability-only vehicle) Watson was able to offer a lower rate than his competitors. The method is unfair competition since the competitors "bear the burden of the loss of business unless they will descend to a practice which they are under a powerful moral compulsion not to adopt." Id. Accordingly, Watson's practice impacts his competitors and therefore constitutes an "unfair method of competition" under § 38-57-10.

D. Watson's Defenses

Watson argues that unfair competition cannot result under the facts of this case since no completed trade occurred. Since no funds were paid, Watson argues, no violation results. In addition, Watson argues that a single incident does not rise to the level of unfair competition so that no violation should be found. I cannot agree.

1. Lack of Transfer of Funds

In its simplest form, Watson's argument is that no unfair competition resulted in this case since the method did not bear fruit, i.e., funds were not produced. The argument is unpersuasive. The fact that no premium payment resulted from Watson's intentional assignment of the high risk driver to the older vehicle does not mean unfair competition has not occurred. Rather, the pertinent fact is whether Watson's competitors are unfairly disadvantaged by the method.

The unfair method is designed to place Watson at a competitive advantage based upon its lower premiums. Competitors who become aware of the method are faced with having to adopt the same improper method or expect the possibility of losing clients. Thus, examining whether a particular instance produced a premium payment may be relevant but the lack of a payment is not controlling. More important, however, is the mere use of the method since that use constitutes the unfair competition.

2. Single Incident

Watson argues that a single incident does not establish an unfair method of competition. Under the facts here, I disagree. The evidence shows that the Watson employee intentionally switched the drivers of the cars despite specific facts to the contrary. The mere fact that the Watson employee made the switch without prompting from the DOI employee is an indication that the practice was common. Even more compelling evidence that the practice was the norm is that when asked to explain, the Watson employee responded that making the switch was done to produce a lower premium. Such actions argue against the employees response being only an isolated incident. Rather, the evidence indicates a deliberate and common method of unfair competition is used by Watson.

E. Penalty

A violation of the prohibition on unfair competition requires an order directing the violator to cease and desist the unfair practice along with an order imposing a penalty. S.C. Code Ann. § 38-57-200 (Supp. 1997). The penalty is either or both a fine not to exceed $2,500 or a suspension or revocation of the license under review.

Where the General Assembly authorizes a range for an administratively imposed penalty, the administrative adjudicator sitting as the fact-finder may set the amount of the penalty after a hearing on the dispute. Walker v. South Carolina ABC Comm'n, 305 S.C. 209, 407 S.E.2d 633 (1991). The amount of the penalty is reached after an examination of the facts arising from the contested case. S.C. Code Ann. § 1-23-350 (Rev. 1986).

Based on the record in this case, the violation is the first for the Watson agency. No evidence indicates Watson failed to cooperate with the investigation, but, rather, Watson and its employees fully assisted DOI. In addition, the evidence shows the Watson agency now recognizes the need to accurately and fully comply with the facts presented by a client when providing quotes. Finally, while the fact that no premiums were received does not eliminate the violation, such is a mitigating factor in establishing a penalty. Accordingly, a $500 fine is proper. However, neither revocation nor suspension is warranted.

4. Conclusions of Law

Based upon the above Findings of Fact, I conclude as a matter of law, the following:

1. An insurance agency may not engage in "an unfair method of competition or an unfair or deceptive act or practice in the business of insurance." S.C. Code Ann § 38-57-30 Rev. 1989).

2. Competition requires the existence of present or potential competitors. FTC v. Raladam Co., 283 U.S. 643, 648-49 (1931).

3. The unfair method must be one that will injuriously affect or at least tend to injuriously affect the business of the competitors. F.T.C. v. Raladam Co., 283 U.S. 643, 648-49 (1931).

4. At a minimum, a method is unfair if it "casts upon one's competitors the burden of the loss of business unless they will descend to a practice which they are under a powerful moral compulsion not to adopt, even though it is not criminal. . . ." F.T.C. v. R. F. Keppel & Bro., 291 U.S. 304, 313 (1934) (interpreting F.T.C. v. Winsted Hosiery Co., 258 U.S. 483 (1922)).

5. A competitor suffers from an unfair practice when the competitor is forced "to choose between . . . [adopting the unfair practice] or the loss of their trade." Id.

6. The unfair competition employed by Watson is that of quoting an insurance premium based on assigning drivers to vehicles with that assignment diametrically opposed to the factual information given by the prospective client.

7. The purpose of Watson's practice is to produce a lower insurance premium in an attempt to provide a "price" lower than a competitor.

8. Watson's practice is injurious to competitor's since the competitors "bear the burden of the loss of business unless they will descend to a practice which they are under a powerful moral compulsion not to adopt."

9. The practice is a method which impacts competitors and constitutes an "unfair method of competition." S.C. Code Ann. § 38-57-30 (Rev. 1989).

10. The method is unfair competition since the competitors "bear the burden of the loss of business unless they will descend to a practice which they are under a powerful moral compulsion not to adopt." F.T.C. v. R. F. Keppel & Bro., 291 U.S. 304 (1934).

11. Watson's practice impacts his competitors and therefore constitutes an unfair method of competition. S.C. Code Ann. § 38-57-30 (Rev. 1989).

12 Watson engages in an unfair method of competition.

13. The fact that no premium payment resulted from Watson's intentional assignment of the high risk driver to the older vehicle does not mean unfair competition has not occurred.

14. The unfair practice was a deliberate and common method of unfair competition used by Watson.

15. A violation of the prohibition on unfair competition requires an order directing the violator to cease and desist the unfair practice along with an order imposing a penalty not to exceed $2,500 or a suspension or revocation. S.C. Code Ann. § 38-57-200 (Supp. 1997); S.C. Code Ann. § 38-2-10 (Supp. 1997).

16. Where the General Assembly authorizes a range for an administratively imposed penalty, the administrative adjudicator sitting as the fact-finder may set the amount of the penalty after a hearing on the dispute. Walker v. South Carolina ABC Comm'n, 305 S.C. 209, 407 S.E.2d 633 (1991).

17. The amount of the penalty is reached after an examination of the facts arising from the contested case. S.C. Code Ann. § 1-23-350 (Rev. 1986).

18. A $500 fine is proper, and no revocation or suspension is warranted. S.C. Code Ann. § 38-57-200 (Supp. 1997); S.C. Code Ann. § 38-2-10 (Supp. 1997).

1. Positions of Parties

DOI asserts that providing an insurance quote to the public constitutes conducting an insurance business. From this premise DOI argues that the individual providing quotes must be licensed by DOI. Here, DOI asserts the Watson employee that gave the quote to the DOI employee was not licensed and thus Watson was in violation of the law.

Watson argues that merely providing a quote is not conducting an insurance business. Further, Watson argues that an unlicensed employee may provide quotes as long as the employee is under the supervision and direction of a licensed agent. Since several Watson employees are licensed and the employee providing the quotes is directly supervised by a licensed employee, Watson argues the giving of the quotes is proper.

2. Findings of Fact

Based on the preponderance of the evidence, the following findings of fact are entered:

1. Watson employs three licensed insurance agents.

2. The employee that gave the quote to the DOI employee was not a licensed agent.

3. The employee that gave the quote to the DOI employee was under the direction of and directly supervised by one of Watson's licensed agents.

4. The licensed agent was authorized to write insurance coverage based upon a stated insurance premium.

5. The licensed agent was operating within the scope of the license held.

6. Watson employees give 15 to 20 telephone quotes per day.

7. No quote is binding until an application is taken and information verified.

8. Prospective clients routinely seek quotes based upon the applicant's expectations of coverage.

9. Of quotes given over the telephone, approximately 70 to 80 percent are changed to account for additional information received prior to insurance coverage being extended.

10. The quote was given by a Watson employee who was physically present within the confines of the Watson location.

3. Discussion

A party who solicits insurance on behalf of an insurer must have an insurance agent's license. S.C. Code Ann. § 38-43-10 (Rev. 1989). Thus, the issue here is twofold. The first is whether a party who provides a quote for an insurance premium is soliciting insurance. If yes, the second is whether an exception from the licensing requirement applies.

a. Providing Insurance Quotes

Watson notes that no contract resulted from the quote given and thus suggests that no insurance solicitation occurred. Certainly without more, the mere providing of a quote will not create an insurance contract. See Gulf Gate Management Corp. v. St. Paul Surplus Lines Ins. Co. 646 So.2d 654 (Ala. 1994) (sending of quote letter to a prospective insurance purchaser did not amount to contract of insurance where letter failed to state when policy would be effective and failed to identify the insured). However, the issue here is not whether a contract was completed. Rather the issue is whether the solicitation of insurance occurred. S.C. Code Ann. § 38-43-10 (Rev. 1989).

Here, Watson's unlicensed employee provided a quote based upon a specific set of facts. Providing quotes is an established duty performed by a licensed agent in the process of soliciting business. See Brosam v. Employer's Mut. Casualty Co., 209 N.E.2d 350 (Ill. App. 1965) (powers of a soliciting agent include the power to take applications and to quote premium rates). Thus, in the absence of a contrary statute, a party who solicits insurance by providing quotes must be licensed as an insurance agent. S.C. Code Ann. § 38-43-10 (Rev. 1989).

b. Statutory Exception

Watson argues no license is required for the employee since a contrary statute is controlling. I agree. Under specific circumstances, § 38-43-20(e) (Supp. 1997) provides an exemption from the licensing requirement. First, the agency office employee must act within the confines of the agent's office. Second, the employee must operate under the direction and supervision of a licensed agent. Third the licensed agent must be acting within the scope of the agent's license. Fourth, the employee's actions must be in the acceptance of a request for insurance and payment of premiums and the performance of clerical, stenographic, and similar office duties. Here, the providing of a quote is within the exception and thus no license is required.

No dispute exists that the quote was given by a Watson employee who was physically present within the confines of the Watson location. Further, no doubt exists that the employee operated under the direction and supervision of a licensed agent who was operating within the scope of that license. The dispute is whether the employee's action was "in the acceptance of request for insurance and payment of premiums and the performance of clerical, stenographic, and similar office duties." S.C. Code Ann. § 38-43-20(e) (Supp. 1997).

The giving of a quote is within the meaning of the phrase "in the acceptance of request for insurance" and constitutes "clerical, stenographic and similar office duties." The Watson employee was performing an office duty that is clerical in nature (i.e. giving a quote) in accepting from a prospective client a "request for insurance." Prospective clients routinely seek quotes based upon the applicant's expectations of coverage. When given, the quote is not binding, is only an estimate, and frequently changes when the policy is written. Quite simply, the quote provides information that is a necessary part of the process by which the agency handles a request for insurance. Accordingly, for an employee such as the Watson employee who merely provides "quotes," the statute creates an exception relieving the employee from having to obtain an insurance agent's license.⁽⁴⁾

4. Conclusions of Law

Based upon the above Findings of Fact, I conclude as a matter of law, the following:

1. A party who solicits insurance on behalf of an insurer must have an insurance agent's license. S.C. Code Ann. § 38-43-10 (Rev. 1989).

2. Without more, the mere providing of a quote will not create an insurance contract. See Gulf Gate Management Corp. v St. Paul Surplus Lines Ins. Co. 646 So.2d 654 (Ala. 1994)

3. In the absence of an applicable contrary statute, a party who solicits insurance by providing quotes must be licensed as an insurance agent. S.C. Code Ann. § 38-43-10 (Rev. 1989).

4. An exemption from the licensing requirement exists where the agency office employee acts within the confines of the agent's office, the employee operates under the direction and supervision of a licensed agent, the licensed agent is acting within the scope of the agent's license, and the employee's actions are in the acceptance of a request for insurance and payment of premiums and the performance of clerical, stenographic, and similar office duties. S.C. Code Ann. § 38-43-20(e) (Supp. 1997).

5. The giving of an insurance quote is within the meaning of the phrase "in the acceptance of request for insurance" and is in the nature of a clerical duty. S.C. Code Ann. § 38-43-20(e) (Supp. 1997).

6. The Watson employee was performing a duty that is clerical in nature (i.e. giving a quote) in accepting from a prospective client a "request for insurance." S.C. Code Ann. § 38-43-20(e) (Supp. 1997).

7. The Watson employee was not required to hold an insurance agent's license to provide an insurance quote, and, thus, no violation occurred from her giving the quote. S.C. Code Ann. § 38-43-20(e) (Supp. 1997).

Watson is directed to cease and desist from engaging in the unfair method of competition addressed in this order. Further, Watson is directed to pay a fine of $500 for having engaged in the unfair method of competition. However, no requirement exists for Watson's clerical staff to obtain an insurance agent's license prior to providing an insurance premium quote to a prospective client.

AND IT IS SO ORDERED.

RAY N. STEVENS

Administrative Law Judge

Dated: April 7, 1998

Columbia, South Carolina

1. At both the ALD. level and in the appeal to the Court of Common Pleas, Curtis Grant failed to appear. Thus, Grant presented no argument and made no defense.

2. The South Carolina Unfair Trade Practices Act, S.C. Code Ann. §§ 39-5-10 et seq. (1976 and Supp. 1997) (SCUTPA), does not apply to insurance companies since "all unfair trade practices regarding the insurance industry are regulated by the Insurance Trade Practices Act, § 38-57-10 et seq. (ITPA), (Rev. 1989 and Supp. 1997) and are exempt from the coverage of SCUTPA." Grace Episcopal Church v. Charleston Ins. Co., 868 F. Supp. 128, 130 (D.S.C. 1994) (applying S.C. Code Ann. § 39-5-40(c)).

3. SCUTPA § 39-5-20 prohibits "[u]nfair methods of competition and unfair or deceptive acts or practices in the conduct of any trade or commerce," while the Insurance Trade Practices Act prohibits any "unfair method of competition or an unfair or deceptive act or practice in the business of insurance." S.C. Code Ann. § 38-57-10. Likewise, the Federal UTPA declares unlawful "[u]nfair methods of competition in commerce, and unfair or deceptive acts or practices in commerce." 15 U.S.C. § 45(a)(1).

4. The only issue decided here is whether an employee under the facts of this case may provide quotes of insurance premiums without holding an insurance agent's license.