New Jersey insurers and insurance agents must be aware that agents are not entitled to the broad protections of the New Jersey Franchise Practices Act (“NJFPA”) pursuant to a recent Chancery Division decision in DeLuca v. Allstate Insurance Co., in which the Court held that insurance agents do not meet the definition of a “franchise.” The Court thus concluded that Allstate Insurance Company was free to terminate its agents pursuant to the terms of their respective agency agreements, which permitted termination with or without cause.
In August 2011, Allstate terminated its relationship with three New Jersey based agents, who then sued Allstate, asserting the protections of the NJFPA to preclude Allstate from unilaterally terminating their relationships. In an unpublished decision the Court held that the protections of the NJFPA did not extend to the insurance agents. In reaching this conclusion, the Court concluded that, because the agents did not sell any goods or services, a necessary ingredient for a franchisor-franchisee relationship — and the application of the NJFPA — was missing.
Judge Robert P. Contillo, P.J. Ch., held that insurance agents “do not sell insurance products” because “they are not permitted to do so in New Jersey,” and thus, they could not meet the NJFPA’s requirement that a franchise has a place of business at which it “displays for sale and sells the franchisor’s goods or … services.” Judge Contillo emphasized that an insurance agent’s role is merely to solicit business for the insurer and act as the conduit through which the insurer writes and issues a policy to the customer. The Court found controlling the fact that the agent cannot “reject or accept an application” nor “issue, modify or terminate any policy,” and thus the agent does not “sell” anything. Essentially, the Court determined that “the agent buys nothing from the insurer and sells neither product nor services to the public,” a key characteristic of a franchisor-franchisee relationship.
The Court further found that the NJFPA does not apply under the particular circumstances of the case, because the “absence of substantial franchise-specific tangible or capital investments” made it impossible to establish the sort of “community of interest” required to invoke the NJFPA’s protections. Specifically, the record established that the agents “pa[id] no monthly franchise fees,” their office spaces were “non-specific to [Allstate] and may be used for any other business purpose,” they “did not pay for the ‘Allstate’ sign for their offices, rather the signs were furnished by [Allstate],” and Allstate “paid for their computers and supplied their phone system.” Id. at 40-41.
Judge Contillo largely relied upon the amicus curiae submission from the Department of Banking and Insurance, which argued that allowing the NJFPA to inject further regulation into the insurer-agent relationship would “interfere with the Department’s exclusive jurisdiction over regulation of the business of insurance.” The Department argued that subjecting an insurer to multiple sets of conflicting regulations would prove problematic, an assertion that Judge Contillo agreed with by alluding the inherent tension that exists between the various termination provisions mandated by the statutes. Specifically, referencing N.J.S.A. 17:22-6.14a(e) which permits an insurer to immediately terminate its agents for, among other causes “insolvency, abandonment, gross and willful misconduct, or failure to pay premiums,” Judge Contillo posited that should an insurer seek to immediately terminate an agent as authorized by this statute, the NJFPA would prohibit the insurer from taking action for 60 days (unless certain notice provisions were satisfied), causing an immediate tension between the two statutory frameworks. The Court, therefore, concluded that “[t]here is no reason to suppose that the Legislature intended to superimpose the NJFPA upon this highly regulated aspect of the insurance industry…”
New Jersey based insurance agents should consider the DeLuca decision when contemplating entering into an agency agreement with a carrier. Likewise, New Jersey insurers should be aware of DeLuca when considering their exposure for terminating an agent. Although an appeal is likely, it should not be presumed that an agent’s relationship with an insurer will be covered by the broad protection of the NJFPA, regardless of how many indicia of a franchise relationship otherwise exist.