The Washington State Supreme Court started the month of August with an opinion finding Chicago Title Insurance Company (CTIC) liable for regulatory violations of its “agent” – Land Title Company (LT).  Chicago Title appealed a fine imposed by the Washington Insurance Commissioner (OIC) for the illegal inducements made by LT to various people in the real estate industry. The appellate court found that CTIC could not be held vicariously liable for the actions of LT not least because of the contract between the parties. The Supreme Court overturned the appellate court ruling in favor of the OIC.

In 2007 [yes, six years ago!], the OIC demanded that CTIC pay a fine of $114,500 for LT’s alleged violations of the illegal inducement laws. CTIC said no and went to an administrative law judge who agreed with CTIC and overturned the fine. The OIC’s own administrative law judge then overruled the outside administrative law judge [don’t ask how this is possible]. After the local judge rubber-stamped the OIC decision without comment, CTIC appealed. The appellate court described CTIC’s due process at the OIC as follows:

“The OIC judge ruled that the ALJ’s “[u]ndisputed findings of fact” were “actually disputed” by the OIC and she deleted or revised them. AR at 122. The OIC judge also deleted or revised the ALJ’s conclusions of law and rejected the ALJ’s reliance on “the principles of common law agency,” and instead adopted the conclusion that the insurance code determined the insurer/insurance agent relationship. Although stating it was not necessary, the OIC judge added to the findings of fact that Chicago Title was vicariously liable under a strict common law analysis, including the theories of actual authority and apparent authority. The OIC judge determined that the OIC can hold Chicago Title responsible for Land Title’s regulatory violations and transferred the case back to the [Office of Administrative Hearings] for phase II of the proceedings.”  [166 Wn. App. 844, CHI. TITLE INS. CO. V. OFFICE OF THE INS. COMM’R, 2/29/2013]

In ruling against the OIC, the appellate court found:

“[T]he OIC neither has statutory authority to impose vicarious liability nor shows that vicarious liability is proper under the common law, we do not reach Chicago Title’s alternative argument that the OIC judge exceeded its delegated legislative authority and effectively promulgated a de facto regulation.” [Id.]

The OIC appealed to the Washington Supreme Court and the Court found that despite contract provisions between CTIC and LT to the contrary, CTIC was responsible for the actions of LT, because “solicitation was necessary to effectuate Land Title’s authority to sell CTIC insurance under the Agreement, and violating the anti-inducement provisions was customary in the title insurance industry. [No. 87215-5 WA Supreme Ct., Chicago Title Insurance Company v. Washington State Office of the Insurance Commissioner, August 1, 2013 at 10]

Yes, read that quote again – appointing a title insurance agent necessarily implies illegal inducements. Since, an agent given authority to do something is presumed to be given authority to do all related things necessary to the primary task (e.g., a rental agent is presumed to be given authority to take applications, collect rent, etc.), CTIC was liable for LT’s illegal acts.

Even if the principal purports to forbid certain acts on the part of an agent, the agent may reasonably believe itself to be authorized if the principal “affirmatively approve[s] of the agent’s unauthorized act or silently acquiesce[s] in it by failing to voice affirmative disapproval.”

“[U]nlawful inducements were the norm in the title insurance industry, CTIC was aware of the pervasiveness of unlawful inducements in the industry, and CTIC took no affirmative steps to stop Land Title from engaging in unlawful inducements. CTIC should have foreseen Land Title’s unlawful inducements, and CTIC is vicariously liable for those acts.” [Id. at 20]

As the Supreme Court concluded:

“[The law] means what it says: an insurer may not make inducements exceeding $25.00, “directly or indirectly,” through its own channels or through an appointed agent that carries sole responsibility for soliciting and effectuating the parent insurer’s policies in a locality.” [Id at 24]

In dissent, Justice Johnson noted the obvious consequences of the majority opinion and the inappropriate interpretation of law:

“I would hold that the Washington Insurance Code’s provisions for the appointment of agents do not, without more, allow for the imposition of vicarious liability for regulatory violations.” [Id. at 27]

“Pursuant to the entities’ agreement, CTIC has no right to control the marketing practices of its appointed agent, Land Title. For this reason, CTIC cannot be held vicariously liable for Land Title’s violations of the illegal inducement regulation.” [Id. at 28]

 “If OIC wishes to fine an entity for Land Title’s noncompliance, it is free to do so. It must simply go after Land Title directly. I see no wisdom in this court second-guessing efficient and effective business relationships that leave open avenues for punishing regulatory or statutory noncompliance.” [Id. at 35]

Justice Johnson was no less editorial than the majority when he added this bit of “dicta”

“It is difficult to understand that this statewide elected insurance commissioner holds nothing more important to Washington insured citizens than the de minimis golf games or baseball tickets underlying this case with the expenditure of thousands of dollars in attorney fees, most funded by taxpayers.” [Id.]

He made no mention of the six years it took the courts to come to this variety of conclusions. What I love most about law is its certainty and finality. Nevertheless, we learned at least two things from this court case:

  1. The Supreme Court did not like CTIC, particularly since an OIC report noted that CTIC had made the same type of unlawful expenditures while seeking to avoid fines for LT.
  2. Insurers must now calculate how much time, effort and money to put into policing its producers/contractors since a contract clause disclaiming liability means little.

The Supreme Court dismissed contract language governing mutual liabilities by noting that CTIC “did not attempt to dissuade Land Title from engaging in the usual practice of unlawful inducements, outside of boilerplate language in the Agreement.” I don’t know whether dismissal of the contract clause is worse or that an illegal practice would be presumed customary and thus, somehow a permissive instruction to an agent.

I guess insurers will have to give its producers a stern lecture; alternatively, the regulatory agency can fine the party who engages in the unlawful conduct.