Wednesday, August 17, 2011

Insurance Agent Could Be Connecticut “Franchisee”

This posting was written by Pete Reap, Editor of CCH Business Franchise Guide.

An insurance agent plausibly alleged that the relationship between himself and an insurance company was a “franchise” under the meaning of the Connecticut Franchise Act (CFA) for purposes of the company’s motion to dismiss, a federal district court in Hartford, Connecticut has ruled.

Thus, the agent’s claims that the company violated the CFA by terminating the parties’ Agent Agreement without adequate notice and “good cause” could proceed.

The insurance company moved to dismiss the agent’s CFA claims on the ground that the relationship was a traditional agency relationship and that “the financial realities of the business relationship between an insurance agent and an insurance company are inconsistent with such a franchise relationship.”

The agent cited another case decided in the federal district court for the District of Connecticut for support for his contention that the CFA applied to insurance agents, Charts v. Nationwide Mutual Insurance Co. (CCH Business Franchise Guide ¶ 13,200).

At most, the Charts court concluded that the Connecticut Insurance Code did not preempt the CFA and acknowledged that an insurance agency relationship could possibly meet the test for a franchise relationship, the court noted.

The insurance company countered the agent’s arguments by pointing to courts in other jurisdictions that concluded that an insurance agency relationship was not a franchise relationship within other state franchise laws.

As there was no direct case law on point, this was a matter of first impression, the court observed.


The Connecticut Supreme Court established a two-step inquiry for determining whether a “franchise” existed under the CFA:

(1) The franchisee must have the right to offer, sell, or distribute goods or services; and

(2) The franchisor must substantially prescribe a marketing plan for the offering, selling, or distributing of goods or services.
Right to Offer, Sell, or Distribute

The terms of the Agent Agreement suggested that the agent did have the right to offer, sell, or distribute the insurance company’s goods and services, in the court’s view. Paragraph 4 of the agreement provided in relevant part: “[i]t is agreed and understood that you will represent us exclusively in the sale and service of insurance.”

Marketing Plan

The agreement also suggested that there was a marketing plan or system prescribed in substantial part by the insurance company and that the plan or system was substantially associated with the insurance company’s trademark, the court decided. For example, the agent agreed to use the company name and logo in any material which could directly or indirectly lead to the sale of the company’s product, in accordance with the company policies and procedures.

Further, the agreement expressly granted the agent “a personal, non-exclusive, non-transferable, limited license to use the trademarks, service marks and names . . . in connection with the business conducted pursuant to this Agreement.” The agent agreed that all materials bearing the company’s marks shall be maintained at a high-quality standard acceptable to the company.

In another paragraph, the parties agreed that “the Company will prescribe rules, regulations, price and terms under which it will insure risks” and that those rules were subject to change by the company at any time.

Although the agent plausibly pled a relationship entitled to protection under the CFA, whether the nature of the relationship in practice met the statutory definition for a “franchise” was a question best left for summary judgment or trial after the parties conducted discovery into the issue, the court held. The larger question of whether the CFA was intended to extend to such a relationship also was left for a later stage of the proceedings.

The decision in Garbinski v. Nationwide Mutual Insurance Co. appears at CCH Business Franchise Guide ¶14,655.

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