Franchisee Verdict Rattles Insurers

Lawyers for the plaintiff, Alex Charts, received the large-award verdict after making a novel and successful argument in the case that Mr. Charts should be treated as a franchisee, not merely as an agent, and given franchisee benefits allowed in Connecticut.

Mr. Charts' agreement with Nationwide Insurance, as is generally the case with other agent agreements, referred to the agent as an independent contractor that could be terminated without cause at any time.

A franchisee in Connecticut, on the other hand, cannot be dismissed without good cause, such as fraud or failure to comply with obligations of the agreement. Several other states?including Illinois, Delaware and Florida?also have such franchise laws, which prohibit termination of franchisees without cause.

"In Connecticut, the state franchise law trumps whatever the agent agreement says," observed Charles Gfeller, insurance attorney for Boston-based Edwards & Angell, who has been monitoring the case, Charts v. Nationwide.

Mr. Gfeller said the idea that an agent could be deemed a franchisee is both new and startling and could have significant ramifications for other states with franchise laws. He noted this is the first time an insurance agent has been found to be a franchisee, anywhere in the country.

"The jury found that the facts that were demonstrated to them showed this was a franchise-franchisee relationship. Typically, the law looks to see whether there is a franchisee relationship?whether there is a marketing plan or a system prescribed by the franchise, like in McDonald's," Mr. Gfeller said.

Nationwide is expected to appeal the decision, and the appeal process would go to the Second Circuit U.S. Court of Appeals. But this verdict should make insurers with exclusive agents very nervous, Mr. Gfeller said, because there has never been a situation in court where any type of agent has been found to be a franchisee.

"This turns insurance into a whole different ball game, because it's taking franchise law and throwing it into an insurance context. This is something no one had to look at before. It's something insurers never considered as they use insurance agents," he said.