Legislative Updates

You may not know about a recent court decision concerning agent commissions that the TAHU Legislative Committee became aware of through TAHU's lobbyist Shannon Meroney. Ms. Meroney is also an insurance attorney. She monitors court cases of importance to our industry as part of her duties with TAHU. The fourteenth Court of Appeals out of Houston recently issued the case of Papalia vs. Richard Bryan and the Bryan Group, LLC. The case has been appealed to the Texas Supreme Court where it is still pending. 

The lawsuit arises from a transaction in which a financial advisor/insurance agent set up a Welfare Benefit Plan in an effort to reduce the taxes paid by a small business and its owner.  This plan involved the purchase of a premium variable life insurance policy, which resulted in the insurer's payment of a large one-time commission to the agent.  After the IRS audited and challenged the tax deductions, the business owner sued the advisor/agent for fraud and negligent misrepresentation and obtained a jury verdict for return of the commission and out-of-pocket losses, as well as $2.5 million in exemplary damages.  After the trial court granted judgment notwithstanding the verdict and ordered that the plaintiffs take nothing, the plaintiffs appealed.   

On appeal the Houston Court of Appeals reversed, concluding that there was sufficient evidence to support the jury's fraud finding on the plaintiffs' failure to disclose theory.  In so ruling, the court rejected the agent's argument that he had no duty to disclose a commission paid solely by the insurer based on Section 4005.004 of the Texas Insurance Code. 

This statute says that an agent who accepts compensation from a customer may not also accept compensation from an insurer unless the latter is disclosed and approved in writing by the customer; however, section 4005.004(c)(3) of the statute also says that it does not apply to an agent whose sole compensation is derived from commissions or other payments from the insurer.  Despite this provision, the court of appeals suggested that the agent could have had a duty to disclose the commission based on his role as a financial advisor or under various scenarios where the common law has recognized a duty to disclose.  In other words, the court did not interpret section 4005.004 to relieve an insurance agent of a duty to disclose a commission in all circumstances.  This interpretation would seem to render the statute meaningless and potentially impacts all insurance agents in Texas in the sale of any product involving a commission.

After learning about this case, TAHU engaged in discussions with another statewide industry trade association - IIAT (Independent Insurance Agents of Texas) - about whether the two groups should weigh in on the issue through the filing of an Amicus Brief. This is a type of legal pleading filed in appellate court cases by a non-party with a strong interest in the subject matter. Amicus Briefs are used to advise the court of relevant additional arguments the court might wish to consider. The Boards of both organizations considered the issue and voted to come together and file a brief in the case. Together, TAHU and IIAT retained the firm of Thompson Coe to draft the brief which was filed last Friday.

The Court's deadline to take up the case is this coming Friday so time was of the essence on this issue. We will monitor the case and provide you with updates on the Supreme Court's actions. We are hopeful the Court will overturn this case which sets a confusing precedent that agents may have an additional duty to disclose commissions above the one required by the Texas Insurance Code.

Your TAHU lobby team, Shannon a nd Mike Meroney

shannon@meroneypublicaffairs.com

mike@meroneypublicaffairs.com 

 Ron Buffum. AAHU Legislative Chair