Council of Ins. Agents + Brokers v. Viken, No. Civ. 04-3003.

• Decision Date: 29 November 2005
• Docket Number: No. Civ. 04-3003.
• Citation: 408 F.Supp.2d 836
• Parties: COUNCIL OF INSURANCE AGENTS + BROKERS, and James T. Joyce, Plaintiffs, v. Gary R. VIKEN, in his official capacity as South Dakota Secretary of Revenue and Regulation, and Gary Steuck, in his official capacity as Director of South Dakota Division of Insurance, Defendants.
• Court: U.S. District Court — District of South Dakota

Page 836

408 F.Supp.2d 836

COUNCIL OF INSURANCE AGENTS + BROKERS, and James T. Joyce, Plaintiffs, v. Gary R. VIKEN, in his official capacity as South Dakota Secretary of Revenue and Regulation, and Gary Steuck, in his official capacity as Director of South Dakota Division of Insurance, Defendants.

No. Civ. 04-3003.

United States District Court, D. South Dakota, Central Division.

November 29, 2005.

Daniel S. Blynn, Scott Sinder, Collier Shannon Scott, PLLC, Washington, DC, David A. Gerdes, Michael F. Shaw, Robert B. Anderson, May, Adam, Gerdes & Thompson, Pierre, SD, for Plaintiffs.

James Ellis Moore, Woods, Fuller, Shultz & Smith, PC, Sioux Falls, SD, for Defendants.

FINDINGS OF FACT, CONCLUSIONS OF LAW, and OPINION-ORDER

KORNMANN, District Judge.

[¶ 1] Plaintiff ("Council") brought this suit against defendants alleging that certain requirements imposed by the State of South Dakota and enforced by the South Dakota Secretary of Revenue and Regulation and the Director of the South Dakota Division of Insurance are unconstitutional under the U.S. Constitution's Privileges and Immunities Clause.¹ U.S. Const., art. IV, § 2. The parties submitted cross motions for summary judgment (Docs. 28 and 30). The Court denied those motions (Doc. 53). The Council then moved to add another plaintiff (Doc. 60) and moved to amend the complaint (Doc. 62). The parties entered into a stipulation allowing for the amendment to the complaint and the addition of a plaintiff (Doc. 64). The Court granted the plaintiff's motions (Doc. 65). James Joyce ("Joyce") was added as a plaintiff and an amended complaint (Doc. 67) was filed. A trial to the Court was held on September 29, 2005.

FINDINGS OF FACT

[¶ 2] 1. The Council is a trade association founded in 1913. Its membership consists of more than 300 commercial insurance agencies and brokerages. The member agencies and brokerages sell insurance in multiple states and territories, including the State of South Dakota. The Council has no natural person members. All members are corporations or partnerships.

[¶ 3] 2. Among those claimed to be "represented" by the Council are individuals who are licensed as insurance agents and brokers in South Dakota but who do not reside in South Dakota. Joyce is the vice president of commercial operations for JMB ("JMB"), an insurance agency. Joyce is licensed in South Dakota as a nonresident agent. JMB is a member of the Council.

[¶ 4] 3. The South Dakota Secretary of Revenue and Regulation is statutorily charged with enforcing the insurance laws of the State of South Dakota. SDCL 1-47-9. The South Dakota Division of Insurance is statutorily charged with administering the insurance laws of the State of South Dakota. SDCL 58-2-1.1.

[¶ 5] 4. There are approximately 9,000 licensed resident insurance producers in South Dakota. There are approximately 24,000 licensed nonresident insurance producers.

[¶ 6] 5. South Dakota requires that every agent or broker who sells or solicits the purchase of insurance in South Dakota be licensed by the South Dakota Division of Insurance. SDCL 58-30-143.

[¶ 7] 6. Nonresident, agents' requirements, in order to be licensed and participate in the South Dakota insurance industry, are slightly different than resident agents' requirements. Residents of South Dakota are required to complete an application, send in the requisite fee, and take an examination before becoming a licensed insurance agent. The examination is only initially and there is no test or examination to ensure that, after the first year, resident agents are cognizant of changes in the law. Nonresident insurance agents must also complete an application and send in the requisite fee but are not required to take a written examination. Nonresident agents are exempt from South Dakota continuing education requirements, so long as they continue to satisfactorily participate in continuing education in their state of residence.

[¶ 8] 7. Additional requirements are imposed on nonresident agents and brokers. The requirements that nonresident agents selling policies for use in South Dakota obtain a countersignature from a licensed resident agent and pay a countersignature fee to the South Dakota resident are challenged in this lawsuit. See SDCL 58-6-62 to 58-6-64.

[¶ 9] 8. Larson Manufacturing Company ("Larson") is a South Dakota corporation for whom Joyce, through JMB, annually places insurance policies covering risks located in South Dakota and elsewhere. Larson's business with JMB represents a small percentage of JMB's overall insurance business.

[¶ 10] 9. Joyce's compensation from JMB is comprised of a salary and an annual bonus. His latest bonus check, which was at the discretion of the corporation's president and drawn from an employee bonus pool, was approximately $15,000. This amount represented about 10% of his annual salary.

[¶ 11] 10. Complying with South Dakota's countersignature laws results in a lower bonus pool at JMB because of the amount that is paid out to countersigning agents. JMB earns about $150,000 in gross commissions from the insurance companies insuring Larson. Of this $150,000, approximately $20,000 goes to countersigning agents who are South Dakota residents. Everything being equal, with the countersignature laws in place, it costs JMB more to do business in South Dakota than it does in other states. A lower bonus pool adversely affects JMB producers, including Joyce.

[¶ 12] 11. As part of Joyce's duties to Larson, he reviews its current coverages, selects appropriate insurance carriers for its various needs, and checks to be sure that policies comply with the laws of the state where the coverage is required. A corporation of Larson's size has myriad insurance needs, including, inter alia, property insurance, general liability insurance, director and officer liability insurance, worker's compensation insurance, automobile insurance, and umbrella coverage. In total, Larson presently requires eleven policies, which are provided by five different carriers.

[¶ 13] 12. The countersignature requirement creates a separate and distinct process which Joyce must monitor. This includes multiple follow up calls to all five individual insurance carriers to ensure that the appropriate endorsements are issued by the local South Dakota countersigning agents. In Larson's case, where different policies and different carriers are involved, there are different rules that have to be followed vis-a-vis the countersignatures. Multiple signatures are required as to each policy. Joyce testified that it could take three or four months to complete all of the applicable steps. The countersignature requirement also causes delays in getting the policies to the insured, sometimes twice as much time being involved; this is detrimental to the insured to not readily have the policies on hand to check them and be knowledgeable about them.

[¶ 14] 13. Once the endorsements are in place, it is necessary to check to see that fees have been properly computed and paid. If the countersignature fee is paid by the carrier, the commissions from the carrier to JMB are reduced. If the countersignature fee is not paid by the carrier, it comes directly from JMB.

[¶ 15] 14. Once a policy is delivered to a client such as Larson, changes may occur throughout the year. Examples include additional insurance coverage needed when the corporation acquires more vehicles, locations, or property, or simply desires more or different coverage for whatever reason. The countersignature requirement affects this additional coverage as well. Any new premium amounts as to these areas would affect the calculation of the proper countersignature fees.

[¶ 16] 15. One of the challenges inherent in the insurance industry is keeping abreast of individual state laws with respect to tort law, worker's compensation, unfair practices, cancellation of policies, mandated benefits, and other items. Such laws vary from jurisdiction to jurisdiction.

[¶ 17] 16. Nonresident agents must certify that they are familiar with the requirements of South Dakota law in applying for a license. As Joyce testified at trial, there are numerous ways in which nonresident agents can and do stay apprised of changes in the law, in South Dakota and elsewhere. Many insurance companies, including JMB, have checklists in place that are reviewed each time an insurance policy is placed. Nonresident agents are capable of obtaining information on changes in the law by reviewing web sites, speaking with resident agents with whom they are familiar (without forfeiting a set portion of commission proceeds), speaking with the companies they are representing, obtaining legal advice, relying on trade associations such as the Council, and even speaking directly with the Division of Insurance. The evidence presented did not demonstrate that nonresident licensed insurance agents are less competent or have inferior access to information regarding South Dakota law.

[¶ 18] 17. Gary Joyce, an agent with Howalt McDowell Insurance, Inc. ("Howalt McDowell"), in Sioux Falls, South Dakota, testified that, as a countersigning agent, he reviews policies and informs nonresident agents of items that are inappropriate or illegal, responds to questions regarding bonds, and generally gives South Dakota individuals and businesses dealing through a nonresident licensed agent "another set of eyes" to see that everything is done correctly.

[¶ 19] 18. Howalt McDowell receives about $10 million in commissions annually. This includes approximately $50,000 to $60,000 for countersigning policies.

[¶ 20] 19. South Dakota Governor M. Michael Rounds ("Rounds"), who is an insurance producer and owner of Fischer, Rounds & Associates, Inc. ("Fischer Rounds"), testified that he countersigned policies as a resident agent. Rounds believes that the countersignature provides a safeguard to South Dakotans and an opportunity. for South Dakotans to have personal contact with a...