State loses lawsuit with out-of-state insurers
Posted: Saturday, December 03, 2005
PIERRE, S.D. (AP) -- State laws placing additional restrictions on out-of-state insurance companies that do business in South Dakota are not constitutional, a federal judge has ruled.
U.S. District Judge Charles Kornmann issued the ruling in a lawsuit filed against state officials by the Council of Insurance Agents and Brokers, a group representing 300 of the nation's largest commercial property and casualty companies.
Complaining that state laws discriminate against out-of-state insurers, the council sued the state in February 2004. State laws that establish disparate treatment of nonresident insurers are unconstitutional because they give an unfair competitive advantage to local insurance agents and brokers, the council argued.
One voided law had required out-of-state agents to get South Dakota agents to co-sign on policies sold by the nonresident companies. Another law that was thrown out said out-of-state agents must pay those resident agents 5 percent of the total insurance premiums or 25 percent of commissions.
Ruling those laws invalid, Kornmann said the requirements violate the U.S. Constitution's Privileges and Immunities Clause, which generally says states must apply their laws equally to residents and nonresidents.
"There is no substantial valid reason for the difference in treatment," the federal judge said.
Among those who testified at the Sept. 29 trial was Gov. Mike Rounds, an owner of an insurance and real estate business in the capital. Rounds said the co-signature requirement for out-of-state insurance agents provides a safeguard to South Dakotans dealing with those firms and an opportunity to have personal contact with their local insurance agents.
The governor estimated that his firm earned between $3.5 million and $4 million in commissions in 2002, and about $3,000 to $5,000 of that was received for co-signing.
Rounds, who said he would distance himself from his insurance business after being elected governor in late 2002, also testified that he had earlier co-signed on some out-of-state policies as a resident agent. The governor said he caught some errors on occasion in those dealings.
Another insurance agent, representing Howalt McDowell Insurance in Sioux Falls, said he has reviewed nonresident policies for errors to be sure everything was done correctly. That firm, according to court records, makes about $10 million in commissions annually, and up to $60,000 of the total has come from the co-signing process.
With modern technology, such as faxes, telephones, e-mail and the Internet, there is no persuasive evidence that nonresident insurance agents and brokers are less available to clients in South Dakota, Kornmann said.
He noted that state law does not require a South Dakota agent who co-signs to even live in the area where the insured company is located.
"In other words, a resident agent in Buffalo, South Dakota, can countersign a policy for an insured living in Elk Point," the judge said.
Out-of-state agents must pay fees to resident agents even if they do no more than just sign their names on those policies, Kornmann said.
"There is no requirement that they look at the policy or vouch for anything," he said.
"The notion that a nonresident agent is less capable of providing assistance on a policy outside of that agent's state of residence does not constitute a sufficient reason for the difference in treatment and the discrimination practiced," Kornmann added.
South Dakota and Nevada are the only two states that place co-signing restrictions on nonresident insurance agents, the federal judge said.
The Council of Insurance Agents and Brokers said the restrictions are an unfair financial and administrative burden.
James T. Joyce, an official with JMB Insurance in Illinois, was also a plaintiff in the lawsuit. Joyce places insurance policies with Larson Manufacturing Co. in Brookings, and he said state laws cause him to lose money in those dealings.
JMB gets about $150,000 in commissions from insurance companies providing coverage to Larson Manufacturing, and about $20,000 of the commissions go to co-signing agents in South Dakota, court records show.
A private law firm represented the state in the lawsuit. There was no immediate word Friday on a possible appeal.
There are about 9,000 resident insurance agents and brokers in South Dakota, and some 24,000 nonresident agents are licensed by the state.
U.S. District Judge Charles Kornmann issued the ruling in a lawsuit filed against state officials by the Council of Insurance Agents and Brokers, a group representing 300 of the nation's largest commercial property and casualty companies.
Complaining that state laws discriminate against out-of-state insurers, the council sued the state in February 2004. State laws that establish disparate treatment of nonresident insurers are unconstitutional because they give an unfair competitive advantage to local insurance agents and brokers, the council argued.
One voided law had required out-of-state agents to get South Dakota agents to co-sign on policies sold by the nonresident companies. Another law that was thrown out said out-of-state agents must pay those resident agents 5 percent of the total insurance premiums or 25 percent of commissions.
Ruling those laws invalid, Kornmann said the requirements violate the U.S. Constitution's Privileges and Immunities Clause, which generally says states must apply their laws equally to residents and nonresidents.
"There is no substantial valid reason for the difference in treatment," the federal judge said.
Among those who testified at the Sept. 29 trial was Gov. Mike Rounds, an owner of an insurance and real estate business in the capital. Rounds said the co-signature requirement for out-of-state insurance agents provides a safeguard to South Dakotans dealing with those firms and an opportunity to have personal contact with their local insurance agents.
The governor estimated that his firm earned between $3.5 million and $4 million in commissions in 2002, and about $3,000 to $5,000 of that was received for co-signing.
Rounds, who said he would distance himself from his insurance business after being elected governor in late 2002, also testified that he had earlier co-signed on some out-of-state policies as a resident agent. The governor said he caught some errors on occasion in those dealings.
Another insurance agent, representing Howalt McDowell Insurance in Sioux Falls, said he has reviewed nonresident policies for errors to be sure everything was done correctly. That firm, according to court records, makes about $10 million in commissions annually, and up to $60,000 of the total has come from the co-signing process.
With modern technology, such as faxes, telephones, e-mail and the Internet, there is no persuasive evidence that nonresident insurance agents and brokers are less available to clients in South Dakota, Kornmann said.
He noted that state law does not require a South Dakota agent who co-signs to even live in the area where the insured company is located.
"In other words, a resident agent in Buffalo, South Dakota, can countersign a policy for an insured living in Elk Point," the judge said.
Out-of-state agents must pay fees to resident agents even if they do no more than just sign their names on those policies, Kornmann said.
"There is no requirement that they look at the policy or vouch for anything," he said.
"The notion that a nonresident agent is less capable of providing assistance on a policy outside of that agent's state of residence does not constitute a sufficient reason for the difference in treatment and the discrimination practiced," Kornmann added.
South Dakota and Nevada are the only two states that place co-signing restrictions on nonresident insurance agents, the federal judge said.
The Council of Insurance Agents and Brokers said the restrictions are an unfair financial and administrative burden.
James T. Joyce, an official with JMB Insurance in Illinois, was also a plaintiff in the lawsuit. Joyce places insurance policies with Larson Manufacturing Co. in Brookings, and he said state laws cause him to lose money in those dealings.
JMB gets about $150,000 in commissions from insurance companies providing coverage to Larson Manufacturing, and about $20,000 of the commissions go to co-signing agents in South Dakota, court records show.
A private law firm represented the state in the lawsuit. There was no immediate word Friday on a possible appeal.
There are about 9,000 resident insurance agents and brokers in South Dakota, and some 24,000 nonresident agents are licensed by the state.
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