Kent v. Lyon, 19459

Citation1996 SD 131,555 N.W.2d 106
Decision Date06 November 1996
Docket NumberNo. 19459,19459
PartiesEugene KENT, Appellant, v. Darla L. LYON, Director of Division of Insurance, Appellee.
CourtSupreme Court of South Dakota

Thomas J. Welk, Tamara A. Wilka of Boyce, Murphy, McDowell & Greenfield, Sioux Falls, for appellant.

Mark Barnett, Attorney General, Timothy E. Reilly and Elisabeth O'Toole, Assistant Attorneys General, Pierre, for appellee.

SABERS, Justice.

¶1 Kent appeals the South Dakota Division of Insurance's revocation of his resident insurance agent's license. The Division found Kent violated seven provisions of the Insurance Code. Kent disputes the violations and claims that the revocation of his license is too harsh a penalty. The circuit court agreed with the Division. We affirm.

FACTS

¶2 Eugene Kent was a licensed insurance agent in South Dakota for twenty-two years prior to the revocation of his license in January of 1996. He owned and controlled Kent Insurance, Inc. (Kent Insurance), which has been licensed to transact insurance business in South Dakota since 1979. 1 He continues to own and control Kent Financial Services, Inc. (Kent Financial), a business corporation which has never been licensed to transact insurance business in South Dakota.

¶3 Kent became affiliated with the Independent Community Bankers (ICB) in the mid-1980's. ICB is an incorporated association of banks, formed in part to obtain favorable group rates for services, such as insurance, for its members' employees. A member of ICB's board of directors contacted Kent in 1985 about securing health insurance for ICB. He agreed to obtain group insurance for ICB, and ICB ultimately selected him as its exclusive insurance agent and adviser for policy years 1986 through 1991.

¶4 For the policy years 1986 through 1989, he procured a fully-insured group health plan for the employees of member banks of ICB through Central Life Insurance Company (Central). In August of 1989, he received notice from Central that the policy would be cancelled effective November 1, 1989. Apparently the cancellation stemmed from Central's business decision to exit the group health insurance business. He convinced Central to extend coverage through the end of 1989, but he immediately began the search for a new carrier. ICB instructed Kent to obtain a fully-insured health plan similar to the one provided by Central.

¶5 A replacement was found in United of Omaha Insurance Company (United), and after a few months of negotiation, United informed Kent it would provide coverage for ICB, so long as he would handle the administrative work. He agreed, and United issued a group policy effective January 1, 1990. ICB was the policy holder, or owner, of the master policy. The policy was a fully-insured group health plan with United responsible for insurance claims, less deductibles and copayments, up to the policy limits.

¶6 When Central insured ICB, it paid ICB a fee of 1% of the premiums. The fee was designated a "marketing fee" and was intended to reimburse ICB for its promotional efforts to increase enrollment in the insurance program, although it bore no relationship to expenses actually incurred by ICB. During the 1990 policy year, Kent paid ICB the 1% fee from the 8% administration fee which he received from United.

¶7 In late 1990, Kent and United began negotiations for the 1991 policy year. The character of the policy was changed from a fully-insured plan to a self-insured plan. Under the new policy, effective January 1, 1991, coverage was to be self-funded with United liable only for losses in excess of specified limits as set forth in a "stop-loss" insurance policy. United also agreed to provide services to the plan under an "administrative services only" (ASO) agreement, for which it would be paid a fee in addition to the premium it would receive for the stop-loss coverage. Despite a provision in the 1990 plan for a 30-day notice of cancellation, neither United nor Kent informed ICB the fully-insured plan was cancelled.

¶8 Kent approached the ICB board of directors in December of 1990 to inform them of new premium rates. He also told the committee that, as a money saving measure, Kent Financial would act as a clearinghouse for the payment of claims in 1991. This change would mean benefit checks would bear Kent Financial's and United's names. He did not tell the committee the plan had been converted to a self-insured policy. He also informed the committee United would not pay the 1% marketing fee because United questioned its legality. 2

¶9 He opened separate bank accounts for ICB funds and designated United and Kent Financial as cosignatories on the accounts. He then began to calculate, bill, and collect premiums. In January and May of 1991, he deposited funds received from United into these accounts.

¶10 Despite ongoing negotiations, the agreement between Kent and United was never finalized. Impasse occurred when United drafted an ASO agreement listing ICB as the policyholder, which Kent refused to sign unless he was designated policyholder of the plan.

¶11 In August of 1991, the Division of Insurance (Division) wrote to United, requesting an explanation regarding the cancellation of the ICB health insurance policy, as the proper forms had not been filed. United informed Kent of the letter, prompting him to travel to Omaha on August 23, 1991. At that meeting, United learned for the first time that he did not have unbridled control of the plan and that ICB was not aware of the self-insured plan. He informed United the banks would leave the plan if they learned the policy was self-insured and that he could not or would not tell the banks they were self-insured.

¶12 After that meeting, United and Kent began to negotiate an agreement where the plan would retroactively be made fully-insured for the 1991 policy year. On November 25, 1991, two agreements were executed--a deposit premium agreement and a terminal liability agreement. Embodied in these agreements was a provision requiring ICB to indemnify and hold harmless United should an action be brought against United relating to a violation of the Employee Retirement Income Security Act (ERISA) or any other federal or state law. 3 Although Kent represented he was acting under authority to sign, ICB was unaware of the negotiations or the agreements.

¶13 As part of the two agreements, Kent was required to account to United for the premium income which was under his control. Only then did United learn that in addition to the 8% administration fee, Kent Financial was paying itself $10,000 each month. Prior to that, the only compensation authorized by United was the 8% administration fee in the service agreement. Apparently, United later approved the additional $10,000 per month as Kent Financial's compensation for 1991.

¶14 ICB terminated Kent effective January 1, 1992. That decision was based, at least in part, on his refusal to pay the marketing fee. The Division filed notice of hearing on February 17, 1994, alleging various acts of misconduct and illegal transactions on his part. An administrative hearing was held on December 20 and 21, 1994. The Administrative Law Judge (ALJ) recommended to Darla Lyon, Director of the Division (Director) that Kent's insurance license be revoked. Director revoked his license on August 21, 1995. 4 The circuit court affirmed. Kent appeals.

¶15 Generally, our standard of review is:

This court's standard of review of administrative appeals is clearly defined. We will overrule an agency's findings of fact only when they are clearly erroneous. The question is not whether there is substantial evidence contrary to the agency finding, but whether there is substantial evidence to support the agency finding. In other words, even if there is evidence in the record which tends to contradict the Department's factual determination, so long as there is some "substantial evidence" in the record which supports the Department's determination, this court will affirm. Great weight is given to the findings made and inferences drawn by an agency on questions of fact. Conclusions of law are given no deference and are fully reviewable.

Hendrix v. Graham Tire Co., 520 N.W.2d 876, 878-79 (S.D.1994) (citations and internal quotations omitted). We have modified that standard of review with respect to professional licenses:

The general burden of proof for administrative hearings is preponderance of the evidence. We are inclined to adhere to this general principle with the following exception. In matters concerning the revocation of a professional license, we determine that the appropriate standard of proof to be utilized by an agency is clear and convincing evidence.

....

The quality of proof to be clear and convincing is somewhere between the rule in ordinary civil cases and the requirements of our criminal procedure, that is, it must be more than a mere preponderance but not beyond a reasonable doubt.

In re Zar, 434 N.W.2d 598, 602 & n. 7 (S.D.1989) (citations and internal quotations omitted). Kent argues Director violated certain provisions of SDCL 1-26-36, which provides, in relevant part:

The court may reverse or modify the decision if substantial rights of the appellant have been prejudiced because the administrative findings, inferences, conclusions, or decisions are:

....

(3) Made upon unlawful procedure;

(4) Affected by other error of law;

(5) Clearly erroneous in light of the entire evidence in the record; or

(6) Arbitrary or capricious or characterized by abuse of discretion or clearly unwarranted exercise of discretion.

GENERALLY, THE ISSUE IS WHETHER KENT'S CONDUCT VIOLATED THE SOUTH DAKOTA INSURANCE CODE, AND IF SO, WHETHER HIS CONDUCT WARRANTED REVOCATION OF HIS LICENSE.

¶16 1. Whether Kent violated SDCL 58-8-1.

¶17 The Director found Kent violated SDCL 58-8-1 by acting as an agent for an unauthorized insurer that did not have a certificate of authority to transact insurance in...

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