Wednesday, January 31, 2007

$19 Million Award for Termination of Insurance Agents Overturned

In a decision with ramifications for franchises and dealerships, State Farm Insurance Company’s termination of five insurance agents who had made public statements critical of the company was held not to breach the exclusive agency agreements, violate the covenant of good faith and fair dealing, or tortiously interfere with the agents’ relationships with their clients.

Jury verdicts in favor of the five agents and awarding $19.7 million were reversed by the Missouri Court of Appeals on a holding that the agency agreements permitted the company to terminate the agencies at any time upon written notice.

The agents were independent contractors who sold insurance products for State Farm on an exclusive basis in Missouri, Maryland, Ohio, and Texas. They all executed State Farm Agency Agreements. After discovering in that the agents had made statements critical of State Farm, the company sent letters to agents, terminating their agreements effective in January or February 2000.

The agents sought internal termination reviews, pursuant to the agency agreements. After the review committees recommended that the terminations be upheld, the Missouri agent filed suit in Missouri state court, alleging wrongful termination. The court allowed the other four agents to join as additional plaintiffs. The complaint brought by the five agents alleged that (1) their agreements were terminated without good cause, (2) the terminations breached the covenant of good faith and fair dealing, (3) the company intentionally interfered with the agents’ business relationships with current and future clients, and (4) the agents were entitled to punitive damages.

Following a 14-day trial, the jury returned verdicts in favor of the agents on breach of contract and tortious interference claims, awarding $8.7 million in actual damages and $11 million in punitive damages. State Farm brought an appeal.

On January 23, 2007, the Missouri Court of Appeals, Western District, reversed the trial court, on the following rulings:

Termination at will. The terminations did not breach the agency agreements, which were terminable at will by either party, upon written notice. The contractual language was not ambiguous as to whether a party must have good cause terminate the agency. Thus, the trial court should not have considered parol evidence and interpreted the agreement to require good cause for termination. All of the jurisdictions involved in this case followed the at-will doctrine, under which an agreement with no fixed duration is deemed to be at-will and terminable by either party, absent a specific contract term to the contrary.

Termination review process. The inclusion of a termination review process in the agency agreement does not imply that good cause is required for termination, according to the appeals court. Such a process is not inconsistent with at-will termination and did not limit the company’s right to terminate without cause. On the contrary, the termination review provision suggests that State Farm wishes to prevent arbitrary terminations without limiting its legal entitlement to terminate at will by written notice.

Implied covenant of good faith/fair dealing. There can be no claim for breach of an implied covenant of good faith and fair dealing in the termination of an at-will independent contractor relationship. Such an implied covenant can not overcome a contractual right to terminate at will.

Tortious interference with business relationships. The terminated agents did not have any business relationship with the policyholders that did not arise from their acting as agents for State Farm. The relationships between the agents and the policyholders were simply not the type of business relationships protected by the tort of interference with business expectancy.

Punitive damages. Because the agents failed to prove an underlying cause of action that could support a punitive damage award, the trial court’s award of $11 million in punitive damages had to be reversed.

The decision is Kelly v. State Farm Mutual Automobile Insurance Co., Missouri Court of Appeals, Western Division, Case No. WD66408, January 23, 2007.

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