Final Countersignature Law Tripped Up

Federal judge bars enforcement of South Dakota statute, citingnew market realities

A federal judge last week barred South Dakota from enforcing thenation's last countersignature law, which requires out-of-stateagents and brokers to obtain a local agent's signature before theycan bind coverage for clients.

South Dakota will likely appeal the decision, according to theCouncil of Insurance Agents and Brokers. At the same time, CIABofficials said, the Council is optimistic that "soon, noout-of-state insurance broker will again be faced with the burdenof having to obtain the signature of a resident agent–and berequired to pay a fee for that service."

"These countersignature laws are stubborn vestiges ofprotectionism that have no place in the 21st century," said KenCrerar, president of CIAB. "The Council is delighted to have helpedbring down these egregious barriers to free commerce."

James Moore, a lawyer at Woods, Fuller in Pierre, S.D., whoargued the case for the state, said he is "disappointed with thedecision," but that state officials will ultimately have todetermine whether it should be appealed.

A representative for Gov. Michael Rounds–an insurance agent whotestified in the case in support of the law–referred all calls tothe state's lawyers and to the state attorney general's office.

Wes Bissett, senior vice president of government affairs andstate relations for the Independent Insurance Agents and Brokers ofAmerica, said in reaction to the decision that "we have had anofficial position in opposition to countersignature laws for morethan 30 years." He noted that IIABA "is not involved in this case,"but added that "we share the Council's commitment to repealcountersignature laws and we hope this case is not appealed by thestate."

"We have even supported such a provision in SMART," he said,referring to the State Modernization and Regulatory TransparencyAct now being drafted in the House Financial Services Committee,which would set federal standards for state regulation. "We arevery committed to having these [countersignature laws] eliminatedin every jurisdiction."

U.S. District Court Judge Charles B. Kornmann for the CentralDivision of South Dakota in Pierre issued the injunction barringenforcement of the state's countersignature law after finding it tobe discriminatory and serving no legitimate state goals.

Gov. Rounds–an agent and owner of Fischer, Rounds &Associates–testified during a trial in late September that thecountersignature law "provides a safeguard to South Dakotans and anopportunity for South Dakotans to have personal contact with alocal insurance agent."

However, Judge Kornmann found that "technological advances havemolded today's marketplace such that business is increasinglyconducted by telephone, facsimile, electronic mail and theInternet." He said such advances "have made communications moreeffective in all industries, including the insurance industry."

"Realistically, no reasonable consumer makes a trip to hisinsurance agent's office each time there is a question of concernabout an insurance policy, even if the agent is just across town,"he added. "Rather, most questions or concerns that South Dakota'sbusinesses or individuals have about their insurance policies wouldbe handled over the telephone or by similarly convenientmeans."

Judge Kornmann ruled that "the notion that a nonresident agentis less capable of providing assistance on a policy outside of thatagent's state of residence does not constitute a sufficient reasonfor the difference in treatment and the discrimination practiced."Furthermore, he said, "the countersignature laws and thediscrimination practiced do not bear a substantial relationship toany legitimate objectives of South Dakota."

There are less restrictive means available to advance thestate's goals, he said. "The Division of Licensing could alterlicensing requirements or even require that nonresidents pass thesame examination that residents take, one which covers South Dakotalaw," he ruled. "Even if licensing requirements were heightened tothe point of requiring nonresident agents to pass an examination,it would be much less burdensome on each and every insurancetransaction where nonresident agents are involved."

Nevada's countersignature law remains on the books pendingdisposition of any appeal to the 9th Circuit Court of Appeals,based in San Francisco, noted Scott Sinder, a CIAB counsel. PuertoRico's countersignature law has also been ruled unconstitutional,but is awaiting appeal, Mr. Sinder said. Disposition of a similarcase is pending in the Virgin Islands, he added.

"These countersignature laws are stubborn vestiges ofprotectionism that have no place in the 21st century."

Ken Crerar, CIAB President