Woodford v. Insurance Department

243 A.3d 60

Michael William WOODFORD and Options Insurance Agency, Appellants

v.Commonwealth of Pennsylvania INSURANCE DEPARTMENT, Appellee

No. 65 MAP 2019

Supreme Court of Pennsylvania.

Argued: March 11, 2020

Decided: December 22, 2020

OPINION

JUSTICE DOUGHERTY

We granted discretionary review to consider, as a matter of first impression, whether Section 310.74(a) of the Insurance Department Act of 1921 (the Act), 40 P.S. §§ 1 - 326.7, prohibits a licensed insurance producer from charging fees in addition to commissions in non-commercial, i.e. personal, insurance transactions.

I. Background

Appellant Options Insurance Agency is owned by appellant Michael Woodford and both are licensed insurance producers that facilitate motor vehicle insurance contracts between insurance consumers and insurance carriers. Adjudication and Order, 6/21/2018 at ¶¶1-5, 8; see 40 P.S. § 310.1 (insurance producer is a "person that sells, solicits or negotiates contracts of insurance"). In June 2015, the Pennsylvania Insurance Department (the Department) began investigating appellants following a market conduct examination of a different insurance agency, and receipt of a consumer complaint concerning appellants' fee practices. During its investigation, the Department discovered that, between March 2011 and October 2015, appellants charged a non-refundable $60-$70 fee to customers seeking to purchase personal insurance products.¹ Id . at ¶6. These fees were collected from the customers before appellants prepared the insurance policy applications. Id . at ¶7. One consumer complaint indicated appellants kept an "unrefundable broker application fee" when the consumer declined to buy a policy. N.T., 11/15/2017 at 300-01, 309. The Department's investigation also revealed appellants paid a "one-time" $50 referral fee to car dealership sales personnel when they referred their customers in need of insurance. Adjudication and Order, 6/21/2018 at ¶¶9-10.

The Department concluded appellants' fee practices included improper fees charged to consumers "for the completion of an application for a contract of insurance" and prohibited referral payments to the car dealerships. See 40 P.S. § 310.74(b) ("no insurance producer shall charge a fee for the completion of an application for a contract of insurance"); § 310.72(b)(2) (authorizing payment of certain limited referral fees).² Accordingly, on November 2, 2016, the Department filed an Order to Show Cause with the Insurance Commissioner (the Commissioner) alleging appellants violated the Act when they paid referral fees to non-licensed individuals contingent on the sale of insurance, charged consumers a fee for completing insurance applications, and demonstrated unworthiness of licensure, acted unfairly and used fraudulent practices. Order to Show Cause, 11/2/2016, ¶¶10-29; see 40 P.S. § 310.11(20) (relating to general lack of fitness, competency or reliability); § 310.11(7) (prohibiting fraudulent, coercive or dishonest practices); § 310.11(6) (prohibiting "unfair insurance practice or fraud"). The Department requested that the Commissioner revoke appellants' insurance producer licenses, bar them from future licensure, or from applying to renew any license previously held in this Commonwealth, impose a civil penalty of $5,000 per violation, order appellants to cease and desist from violating the Act, order restitution for each of the illegal fees charged to insurance consumers, and impose any other conditions deemed appropriate, including supervision for a minimum five-year period should appellants become relicensed. Id ., citing 40 P.S. § 310.91(d) (penalty provision).

In an Answer and New Matter, appellants admitted they paid referral fees to automobile dealerships and charged "broker fees" to their customers, but maintained those fees did not violate the Act. Appellants also filed a Motion to Dismiss the Order to Show Cause, and provided an affidavit from Michael Woodford as evidentiary support. Woodford averred, with respect to fees paid to car dealerships, to his knowledge none of the salesmen ever "discuss specific terms or conditions of any insurance policy[,]" and appellants pay the referral fee "irrespective of whether a sale is consummated[.]" Affidavit of Michael William Woodford, 12/2/2016 at ¶¶8-10. Woodford further stated in his affidavit that appellants "charge[d] customers a broker's fee, which is also perfectly common throughout the Commonwealth[;]" the "fee is always fully disclosed in writing to and signed off on by all of our consumers, and rightfully earned for valuable insurance services rendered by Options[,]" specifically because appellants "work[ ] to identify carriers to best serve its customers' automobile insurance needs based on the individual circumstances presented with each account[;]" and that the fee "has nothing to do with the preparation or completion of any application for auto insurance[,] in fact, that task is handled by the insurance carriers that ultimately write the business." Id . at ¶¶12-14.

A. The Insurance Commissioner's Adjudication

Efforts to resolve the dispute amicably failed and, during a February 16, 2017 prehearing conference, the parties agreed to treat appellants' Motion to Dismiss as a Motion for Summary Judgment. On April 11, 2017, the Department finally filed an Answer to appellants' December 2016 Motion to Dismiss, supported by three affidavits from automobile dealer sales representatives who asserted appellants paid them improper referral fees. Appellants filed a Motion to Strike the Department's Answer as untimely. Following oral argument, the Commissioner granted appellants' Motion to Strike but denied summary judgment in their favor. The Commissioner reasoned appellants' motion was supported only by Woodford's affidavit and although his averments about the fees were uncontradicted, an evidentiary hearing was necessary to test the affiant's credibility. See Order Denying Motion for Summary Judgment, 7/31/2017 at 11, citing Borough of Nanty-Glo v. American Surety Co. of New York , 309 Pa. 236, 163 A. 523 (1932).

Prior to the hearing before the Commissioner, the Department amended its Order to Show Cause to include an allegation that the $60-$70 fees appellants charged consumers in non-commercial personal insurance transactions also violated Section 310.74(a) which permits a "fee in addition to a commission" only in commercial transactions.³ See Amendment to Order to Show Cause, 8/25/17 at 2. In response, appellants again admitted charging what they deemed "broker" fees, but asserted they were permissible in this context because Section 310.74(a) does not expressly prohibit a "fee in addition to a commission" in personal insurance transactions.⁴

At the hearing, the Department's special investigator Michael Fissel testified appellants violated the Act because "the Department does not allow any fees to be charged in the context of personal insurance." N.T., 11/15/2017 at 302. He explained the Department had previously investigated agencies for charging "fee[s] in addition to [ ] commission[s]" in personal insurance transactions and it was currently investigating three to six others. Id . at 324, 348. The Department also presented Kelly Krakowski, chief of market conduct, property and casualty division, who testified the Department consistently maintained its position that "fee[s] in addition to [ ] commission[s]" in personal insurance transactions violated the Act. Id . at 428-29. Krakowski admitted she was unaware whether the Department ever issued guidance about this interpretation.⁵ Id . at 442. She further testified the Department was concerned about additional fees in personal insurance transactions because automobile insurance is compulsory and consumers could thus be unfairly forced to pay higher fees. Id . at 428-29.

Finally, appellant Woodford testified, admitting he had previously lied to investigators about paying referral fees to the automobile dealers, because he did not want the Department's investigator "to go kick down doors flashing his badge[.]" Id . at 488-89, 498-99. Woodford otherwise testified consistent with his affidavit and reiterated that the non-refundable fees charged to his customers were "broker fees" rather than prohibited application fees. Id . at 480-86, 490-93, 503-10, 518.

In post-hearing briefing, the Department took the position that, since Section 310.74(a) expressly allows producers to charge fees in the commercial insurance context, it clearly, by omission, precludes those fees in the non-commercial insurance context. Department's Brief at Adjudication at 16-17, citing 40 P.S. § 310.74(a). Even if the statute were deemed ambiguous, however, the Department asserted its interpretation effectuated the intent of the General Assembly — "to protect insurance consumers from unscrupulous acts of insurance producers and licensees" charging fees in addition to a commission. Id . at 19 (internal quotations and citation omitted). The Department also argued its interpretation is based on the presumption the General Assembly intends to favor the public interest — by protecting consumers from unlimited fees — over the private pecuniary interest of insurance producers. Id . at 20, citing 1 Pa.C.S. § 1922(5). The Department emphasized appellants' interpretation would result in the absurd result, contrary to statutory construction principles set forth in 1 Pa.C.S. § 1922(1), of placing personal insurance transactions in the same category as commercial transactions despite the fact personal insurance consumers are less sophisticated than commercial consumers and deserve more protections. Id . at 21-22 & n.5, citing , e.g., 25 Pa. Bull. 35 (Sept. 2, 1995) (Insurance Department bulletin announcing "Deregulation of Commercial Lines Property and Casualty Forms"). The Department further claimed appellants' reading conflicts with Section 310.71(b) of the Act, which allows broker fees only when a producer acts as a broker and does not...