Recently, IIAT joined TAHU (Texas Association of Health Underwriters) in filing an Amicus Brief in the case of Papalia vs. Richard Bryan, currently pending on appeal at the Texas Supreme Court.
Q: What is the issue that IIAT and TAHU is concerned about?
A: The original lawsuit involves a transaction in which an insurance agent set up a Welfare Benefit Plan in an effort to reduce the taxes paid by a small business and its owner. This plan involved the purchase of a premium variable life insurance policy, which resulted in the insurer’s payment of a large one-time commission to the agent.
While the agent was not a certified financial advisor, the plaintiff presented evidence at trial that the agent acted as his financial advisor and that the plaintiff relied on him as such. After the IRS audited and challenged the tax deductions, the business owner sued the agent for fraud and negligent misrepresentation and obtained a jury verdict for return of the commission and out-of-pocket losses, as well as $2.5 million in exemplary damages. After the trial court granted judgment notwithstanding the verdict and ordered that the plaintiffs take nothing, the plaintiffs appealed.
On appeal the Houston Court of Appeals reversed, concluding that there was sufficient evidence to support the jury’s fraud finding on the plaintiffs’ failure to disclose theory. In so ruling, the court rejected the agent’s argument that he had no duty to disclose a commission paid solely by the insurer based on Section 4005.004 of the Texas Insurance Code.
This statute says that an agent who accepts compensation from a customer may not also accept compensation from an insurer unless the latter is disclosed and approved in writing by the customer; however, section 4005.004(c)(3) of the statute also says that it does not apply to an agent whose sole compensation is derived from commissions or other payments from the insurer. Despite this provision, the court of appeals suggested that the agent could have had a duty to disclose the commission because he was also acting as a financial advisor or under various scenarios where the common law has recognized a duty to disclose. In other words, the court did not interpret section 4005.004 to relieve an insurance agent of a duty to disclose a commission in all circumstances. This interpretation would seem to render the statute meaningless and potentially impacts all insurance agents in Texas in the sale of any product involving a commission. If applied across the board, the case would mean that every Texas agent has a duty to disclose every commission they receive on any product, whether paid by the carrier or the consumer.
Q: What does the brief say?
A: The crux of IIAT’s and TAHU’s argument is that the appellate opinion in this case ignores the plain language of the Insurance Code, which only requires commission disclosure for an insurance agent if that agent is paid by both the consumer AND the carrier. It clearly excludes disclosure if the commission is only paid by the carrier (which was the case for Mr. Bryan). By doing so, it creates uncertainty for agents everywhere as to when and if we are required to disclosure commissions. It will also lead to an increase of litigation filed against agents for failing to disclose in all cases.
The legislature carefully considered the issue of when to require agents to disclose commissions and the law it passed on that issue is codified in the Insurance Code. We encourage the Court to uphold and follow the law as written since it is the job of the legislature to decide these issues. It is not appropriate for one appellate court in Texas to create a different and conflicting duty of disclosure. It will create chaos in the marketplace if that court case is allowed to stand.
The brief does not expressly or impliedly argue against the idea of disclosure in any way. It in fact states that consumers are free to ask their agents about commissions and find another agent if theirs will not disclose a commission. The Brief makes clear that we are only asking the Court to follow the current law on this issue for purposes of consistency. Our Brief does not argue that agents should not be required to disclose commissions or imply that we would oppose a requirement to do so.
Q: What happens next?
The Plaintiff filed a Response to our Brief, asking the court to disregard our arguments. The Texas Supreme Court now gets to decide whether to take up the case. The Court doesn’t have to issue an opinion on every appeal that is filed so it is possible the Court will do nothing and let the appellate court opinion stand. Typically they take up cases of first impression (an issue that has never been decided before) or cases where a conflict between appellate courts or statutes exist.
Our hope is that we have convinced them some clarification is needed on the Insurance Code interpretation in this case and they will take it up. We will monitor it and provide you with updates on the Supreme Court’s actions. We are hopeful the Court will overturn or clarify the holding in this case which sets a confusing precedent that agents may have an additional duty to disclose commissions above the one required by the Texas Insurance Code. We will inform the membership once that occurs.