United States District Court holds that insurance agent is an independent contractor

Thomas Ruggiero, an insurance agent, sued America United Life Insurance Company (AUL) and its subsidiary OneAmerica Financial Partners, alleging that they had misclassified him as an independent contractor. 

Ruggiero signed a General Agent's contract with AUL in February 2009, with the intent of establishing an agency that would sell AUL products.   AUL lent Ruggiero money to assist him in developing his agency.
 

Under his contract with AUL Ruggiero was to recruit, train and supervise agents and brokers for AUL in Massachusetts without exclusive representation, and to solicit applications for AUL's insurance policies. 

AUL would pay Ruggiero commissions and service fees on policies and contracts serviced by Ruggiero or his agents or brokers, as well as allowances, writing commissions, bonuses, and services fees. 

The contract classified Ruggiero as an independent contractor, and required him to pay his own expenses for maintaining an office. 

Under the terms of the contract Ruggiero was not permitted to act as a general agent, agency manager, or hold a full time contract with another insurer, or to enter into an employment contract or agreement without the approval of AUL. 

During his relationship with AUL Ruggiero also maintained relationships with numerous other insurance companies.  He never asked AUL permission to do so, and AUL did not believe that by doing so Ruggiero violated his contract with it. 

Ruggiero recruited and trained approximately thirty agents during his contract term with AUL.  Those agents entered into contracts with AUL and other insurers, at Ruggiero's direction. 

After winding down his agency, Ruggiero sued AUL and OneAmerica, asserting that he had been misclassified as an independent contractor. 

In Ruggiero v. Am. United Life Ins. Co., __ F. Supp. 3d __, 2015 WL 5822622 (D. Mass.), the United States District Court for the District of Massachusetts held that Ruggiero was an independent contractor under all three prongs of the independent contractor test. 

The court first held that Ruggiero was "free from control and direction in connection with the performance of the service."  Other than general principles the contract did not prescribe how the work was to be performed, and left Ruggeiro discretion in running his agency.  Certain requirements that were placed on Ruggiero were mandated by regulations and therefore did not affect his employment status. 


The court then held that the service Ruggiero performed was outside the usual course of the business of AUL.  Sales of AUL's insurance products were outside of AUL's usual course of business because AUL did not itself sell the insurance and financial products it offers.  Instead, it provides the products through a national network of agents.  While sales of the products are essential to AUL's business, it is not in the business of selling them directly; it is in the business of determining which products to make available, structuring and drafting the policies, and investing the policy premiums.  Within the insurance industry there is a recognized division between producing the insurance product (the insurance carrier) and selling it (the insurance brokerage or agency). 


Similarly, Ruggiero's services in recruiting and training career agents and brokers were outside of AUL's usual course of business.  Ruggiero was acting in his own interest in doing so because he would receive a commission for the sales attributable to them.  Those services were in the interest of AUL only to the extent that they generated sales of AUL products, rather than products of other insurers. 


Finally, the court concluded that Ruggiero was customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service performed.  Ruggiero was in the business of selling insurance products, and  sold the products of both AUL and other insurance companies. 

Thoughts on the upcoming Restatement of the Law of Liability Insurance

Last week I posted about the January 22 Insurance Law Symposium sponsored by the American College of Coverage and Extra-Contractual Counsel.  It was a great conference, with excellent panel discussions on emerging issues in coverage law and on ethical issues relating to the tripartite relationship. 

Several of the discussions were devoted to the Restatement of the Law of Liability Insurance, which is currently being completed.  Although I had been vaguely aware that the Restatement was in the works, it was fascinating to get the details. 

Restatements are books that provide guidance on a particular area of law.  They are published by the American Law Institute, and are highly regarded by judges.  Where an issue of law is undetermined in a particular state, judges will often turn to Restatements as at least a starting point (and not infrequently an end point) for their analysis.

Restatements provide general principals of law followed by comments that explain the principle more fully and give examples of how it is applied. 

One of the presenters at the conference, Kyle Logue of the University of Michigan Law School, is one of the two reporters for the Restatement of the Law of Liability Insurance.  That means that he is responsible for drafting, getting comments, redrafting, getting more comments, redrafting . . .  He discussed the history of the project and how the reporters make choices about the content of the Restatement.

When it is completed the Restatement will have four chapters:  Basic liability contract rules, management of potentially insured liability claims, general principals regarding the risks insured, and advanced contract issues.  The first three chapters are in close to final form.  The draft document is available on Westlaw (and maybe Lexis; I didn't quite catch it). 

By the end of Professor Logue's presentation I had the distinct idea that the existence of the Restatement will work in favor of insurers at the expense of insureds. 

The Restatement of the Law of Liability Insurance differs from other Restatements in an important manner: it sets forth principles that can easily be made inapplicable, without the intervention of legislation or judicial opinions.  And that action can be done in in response to the very principles set forth in the Restatement. 

According to Professor Logue, with the exception of rules with respect to contract interpretation and bad faith, any principle in the Restatement can be overcome by changing policy language. 

As an example, the Restatement provides that in long tail losses a pro rata time on the risk method of allocation should be used.  (A long tail loss is a loss, such as a hazardous waste site, that occurs over a number of years before being discovered.  Because of the length of the occurrence many annual insurance policies are triggered and the damages must be allocated among them.)  

While pro rata time on the risk allocation is the law in Massachusetts, many states use the all sums approach to allocation.  Pro rata allocation tends to favor insurers, because the insured is responsible for the percentage of loss allocated to periods of time when there is no coverage due to lost policies, insurers who have since gone out of business, or applicable exclusions in some policy years.  All sums allocation tends to favor insureds, because they can choose one insurer to bear the initial burden of paying the loss up to the policy limits; it is up that insurer to reallocate the loss among other insurers on the risk.

The reason the Restatement will benefit insurers at the expense of policy-holders is not because the particular allocation principle the drafters chose favors insurers; that's just an example of a split rule where the drafters chose one side.  The Restatement will benefit insurers because it provides that any rule it sets forth can be changed by new policy language.  So if a policy expressly states that an all sums method of allocation will be used, then the Restatement's principle of pro rata allocation will not apply.

Insurers, however, will not change policy language that favors them.  For example, they will not adopt policy language requiring all sums allocation. 

And, in general, it's insurers that write the policies.  ISO forms, standard forms used in many insurance policies, are developed by Verisk Analytics, a company that provides services to insurers, not policy-holders.

There is no ISO equivalent for policy-holders.  While some large entities can and do negotiate policy provisions with their insurers, such negotiations do not result in the issuance of standard forms used in many policies.  Smaller business and consumers very rarely negotiate terms.   

Insurers are repeat players in the industry and therefore have the incentive and the economic means to change policy terms that policy-holders simply do not have.  Homeowners insurers in Massachusetts probably adjusted tens of thousands of water dam claims last winter.  But each homeowner made only one claim.  An individual homeowner has no incentive to try to change policy terms that worked against him or her; new terms in a future policy will not affect the adjustment of a loss that has already happened.  But the insurance industry, in anticipation of more ice dam claims, has every reason, and the economic power, to change policy terms that don't favor it.

Therefore insurers will change the policy provisions where the Restatement principles favor the policy-holders, but the reverse is not true.  In time, the policy terms that the Restatement interprets in a manner that favors insurers will remain, while the policy terms that the Restatement interprets in a manner that favors policy-holders will be changed.

For that reason, regardless of whether the Restatement principles as written collectively favor insurers or policy-holders, or are overall neutral, the eventual net effect of the very existence of the Restatement will be to benefit insurers to the detriment of insureds. 

Insurance Law Symposium at Boston College on January 22, 2016

The American College of Coverage and Extra-Contractual Counsel (ACCEC) is sponsoring an Insurance Law Symposium at Boston College on Friday January 22, 2016.

Michael Aylward, one of the organizers, writes: 

It isn’t often that you can get cutting edge insurance CLE this close to home, much less a program with speakers from firms such as Covington & Burling, Jenner & Block, Perkins Coie and Wiley Rein.  This year’s symposium will feature panels discussing new trends in intellectual property claims; new coverages for cyberpiracy, the criminalization of D&O liability claims and ethical and bad faith problems arising out of the defense of disputed coverage claims.   A substantial portion of the program will also focus on the American Law Institute’s nascent Restatement of the Law of Liability Insurance, including presentations by one of the Restatement reporters and Justice Herb Wilkins, who is an Advisor to the Project.

The registration brochure, including the agenda, is here.  Note that online registration is not available.  The registration deadline is Friday, January 15, 2016.