1-1004-10706-2

STATE OF MINNESOTA

OFFICE OF ADMINISTRATIVE HEARINGS

FOR THE COMMISSIONER OF COMMERCE

In the Matter of the Certificates of Authority of American Family Mutual Insurance Company, American Standard Insurance Company of Wisconsin, American Family Life Insurance Company, Wisconsin corporations, doing business in the State of Minnesota

FINDINGS OF FACT,

CONCLUSIONS OF LAW

AND RECOMMENDATION

The above-entitled matter came on for hearing before Administrative Law Judge George A. Beck at the Office of Administrative Hearings and the Hennepin County Government Center on February 18 through February 26, 1997. The record closed upon receipt of the final memorandum from a party on June 4, 1997.

Joan C. Peterson, Michael A. Sindt, and Gregory D. Gisvold, Assistant Attorneys General, 1200 NCL Tower, 445 Minnesota Street, St. Paul, Minnesota 55101-2130, appeared on behalf of the Department of Commerce. Corey J. Ayling Esq., and Kathleen M. Brennen, Esq., of the firm of McGrann, Shea, Franzen, Carnival, Straughn & Lamb, 2200 LaSalle Plaza, 800 LaSalle Avenue, Minneapolis, Minnesota 55402-2041, appeared on behalf of the Respondents, American Family Insurance Companies.

NOTICE

This Report is a recommendation, not a final decision. The Commissioner of Commerce will make the final decision after a review of the record. The Commissioner may adopt, reject or modify the Findings of Fact, Conclusions, and Recommendations. Under Minn. Stat. § 14.61, the final decision of the Commissioner shall not be made until this recommended decision has been made available to the parties to the proceeding for at least ten days. An opportunity must be afforded to each party adversely affected by this Report to file exceptions and present argument to the Commissioner. Parties should contact David B. Gruenes, Commissioner, Department of Commerce, 133 E. 7th Street, St. Paul, Minnesota 55101, to ascertain the procedure for filing exceptions or presenting argument.

STATEMENT OF THE ISSUES

The issue in this contested case proceeding is whether or not the Respondents violated insurance regulatory statutes contained in Chapters 45, 60A, and 72A of Minnesota Statutes and, if so, whether disciplinary action should be taken against the Respondents' certificate of authority or whether a censure or civil penalty should be issued.

Based upon all of the files, records and proceedings herein, the Administrative Law Judge makes the following:

FINDINGS OF FACT

1. American Family Mutual Insurance Company, American Standard Insurance Company of Wisconsin, and American Family Life Insurance Company, (hereinafter "Respondents" or "American Family") are organized under the laws of Wisconsin and hold, and at all times material hereto, certificates of authority as insurance companies pursuant to Minn. Stat. Ch. 60A to transact insurance business in the state of Minnesota. Respondents are affiliated companies operating under common management and control. Exs. 183-185. Respondents sell multiple lines of insurance, including property and casualty insurance, auto insurance, life insurance, and various commercial lines. T. 805.

2. American Family sells its insurance products through 3,000 captive or exclusive agents. It has approximately 480 agents in Minnesota. T. 463, 543. American Family's agents are all independent contractors, bound by a uniform contract with Respondents. Ex. 133, Hammer, p. 84; Exs. 3, 4, 5, 6. The contract is terminable at will by either the company or the agent. Ex. 31, p. 6. The agents are required to sell all lines of American Family products. Ex. 31. The agents may sell only American Family products, with some limited exceptions. T. 14-15, 477-78; Ex. 31 p. 3.

3. American Family agents receive commissions for their sales and renewals according to a compensation schedule, plus bonuses based upon profitability. Ex. 31 p. 5; T. 475, 815.

4. Gary Kemp was an agent with Respondents, located in West St. Paul, from February 1, 1968 until January 11, 1996. T. 802. Mr. Kemp's direct supervisor believed him to be a hard working, professional, profitable and intelligent agent who was good with customers. T. 591, Exs. 159-162. Mary McClure was an agent with Respondents, located in Mankato, from August 1, 1986 until January 11, 1996. She had previously been an insurance agent for MSI from 1979 to 1986. T. 1020, 1027.

5. Respondents' agents are directly supervised by district managers. State directors manage several districts, which may extend beyond geographic state borders. T. 543. A regional vice-president supervises a region. During the events at issue, Allen Baumgartner was Kemp's district manager. Derwin Dugger was McClure's district manager. Gary Hammer was the state director for Minnesota South. David Krueger was the regional vice-president for the Northwest Region. T. 412; 475-76. Krueger had ultimate authority to hire and fire Minnesota agents. T. 412.

6. All of the Respondent's officers, from CEO Dale Mathwich, to state director Hammer, started as agents. T. 473.

AFAAMN

7. Both Kemp and McClure were active members of the National American Family Agents' Association ("the Association"), and its state affiliate organization, the American Family Agents' Association of Minnesota ("AFAAMN"). T. 826; 839; 1037. The Association's goal is to address the separate needs of agents and promote networking, educational, and legislative opportunities. T. 826.

8. Respondents did not recognize the Association, but occasionally monitored its activities. Exs. 25, 92-96; Ex. 133, Krueger, pp. 99-101. Respondents preferred to meet with individual agents. T. 558. Respondents also believed the Association publications and hotlines were unduly negative and critical of the company. T. 547-48.

9. Kemp was a president of AFAAMN and, in 1995, became present-elect for the national Association. T. 826; 840; 861. He became President of the national Association on January 1, 1996. T. 840. McClure held board positions in AFAAMN. T. 1037. Both Kemp and McClure were active in the state and national legislative committees. T. 859; 875-76, 1023.

10. AFAAMN actively lobbied the Minnesota legislature on insurance issues. It actively supported the Unjust Termination bill, which granted agents a right to a termination hearing, the Loss Ratio bill, which prohibited carriers from terminating agents based on their agency loss ratios, and the Quota bill, discussed below. T. 842-43; 852.

11. The national Association regularly distributed a magazine publication, The Agents' Voice, to all American Family agents and employees. T. 840, 844. Respondents criticized the magazine as being too negative. One of Mr. Kemp's goals as President was to have the national Association project a more positive and professional message. T. 840, Ex. 172, p. 2.

12. American Family has excluded agents from participation on company committees and roundtables if the agents were members of AFAAMN. T. 317-18, 534-36; Ex. 153; Ex. 133, Hammer, pp. 198-201. Harvey Pierce, CEO of the Respondents, directed the removal of an AFAAMN member who had been elected to serve on a company roundtable, if he remained in the Association. The policy was later changed. T. 534-36, 569, Exs. 92-95.

13. As members of AFAAMN's legislative committee, Kemp and McClure worked with legislative personnel and oversaw the work of Doug Ewald, the Coalition's lobbyist in 1995. T. 1049-50.

Other Agent Groups

14. The Association of Life Underwriters, and its affiliates, the Minnesota Association of Life Underwriters (MALU), the National Association of Life Underwriters (NALU), and its local chapters, is an association of professional life and health insurance agents and managers from different companies. T. 745. It includes both independent and exclusive agents as members. A member belongs to all three (local, state, and national) levels of the association. T. 745. MALU lobbied legislators in Minnesota. Ex. 133, McClure, pp. 37-39.

15. Respondents supported MALU and its affiliates. Respondents encouraged agents to join NALU and provided some financial support. T. 560-61, T. 977-78, Ex. 178. Respondents praised MALU's training in life insurance sales. T. 560.

16. Kemp was a member of the MALU. T. 823. McClure was a member and officer of MALU, and was in line to be the first woman state president. T. 1037-38.

17. The Coalition of Exclusive Agents ("Coalition") was an organization that included exclusive agents' associations from specific carriers such as MSI, Farmers, American Family and State Farm. T. 824-25. It was an umbrella group for the various carriers' agents' associations. Both Kemp and McClure were officers of the Coalition. T. 826; 1037. The Coalition was also active in legislative lobbying. T. 824.

Past Incidents

18. In December of 1994, State Director Gary Hammer met with Mr. Kemp and agent Bruce Isom and their district managers about what he perceived to be the negative nature of a recent issue of the Agent's Voice, the Association's magazine. Hammer had highlighted sentences in the magazine that he felt was not true. T. 863. The magazine had an article on Respondent's compensation cut for agents. T. 538, Exs 26, 155. It suggested that agents could no longer take what the company said at face value. T. 550. Mr. Hammer advised the agents that they were getting close to the line of working against the company and that they should check their contracts. T. 549-550, 582, 864, Ex. 101.

19. An annual conference of the NALU was held in the Twin Cities in September 1995. As part of the conference, Respondents hosted a dinner for all American Family members of the NALU and MALU. McClure addressed the group at the dinner. It was not a prepared speech. T. 626; 1040.

20. McClure told the managers they should be more involved in and supportive of the MALU. T. 561, 626; 1040. Some members of the audience reacted adversely to her speech. Managers and agents criticized the speech to McClure's supervisors. T. 562, 664.

21. State Director Hammer, District Manager Dugger, and McClure arranged a meeting to discuss the speech. But McClure called Hammer at home one evening, apologized for the speech and asked if she should send apology or explanation letters to audience members. T. 563; 1043-44. Hammer said he would think about it, but advised McClure not to do so unless they spoke again. T. 563. The meeting was then canceled.

22. The National Association had a 900 "hotline" number. One message in November 1995 informed agents about open positions with Farmers Insurance Company. T. 658; Ex. 25. Kemp was on the editorial board for the hotline. T. 942; 944. Mr. Kemp was never told by American Family management that they objected to the hotline message, however, he later shut the hotline down when he became national President. T. 869, 1003.

23. In November of 1995, the national Association organized a "March to Madison" which was intended to bring agent policyholders to Madison to attend the company's annual meeting. T. 949-50; Ex. 172 p. 7. The purpose of the trip was to allow agents to express their concern about the direction management had taken. T. 951. Some agents, including Mr. Kemp but not Ms. McClure, were soliciting proxies from agents to vote against management. T. 952, 1055. The goal was to elect an agent to the Board. Ex. 34. American Family terminated the Wisconsin agent who was leading the proxy campaign. The agent was also an officer of the Wisconsin Association. T. 885-86. The national Association did not directly support the proxy campaign. T. 886-87.

The 1995 Legislative Session

24. In the 1995 legislative session, State Representative Greg Davids introduced the so-called Quota bill, which prohibited insurance carriers from requiring independent insurance agents to sell a quota of life insurance in order to be able to sell the carrier's property and casualty insurance. Ex. 125, p. 121. Dominic Sposeto, a registered contract lobbyist, lobbied in favor of the Quota bill for the Independent Insurance Agents. T. 740.

25. Independent insurance agents work for several insurance carriers. Independent agents are expected to investigate all possible products and sell the customer the best possible policy. By contrast, exclusive agents like American Family agents may only sell American Family products. An exclusive agent may present the best American Family product, rather than the best product among several carriers, for the customer's needs. T. 41; 741.

26. The Coalition of Exclusive Agents actively supported extending the quota bill to exclusive agents. Doug Ewald worked as a lobbyist for the Coalition on this issue during the 1995 legislative session. T. 871. Kemp and McClure, as members of AFAAMN's legislative committee, had numerous discussions with legislators regarding the merits of the 1995 quota bill for protecting agents. T. 358-61, 363-64. Kemp spoke to Representatives Davids, Tomassoni, Simoneau and Senators Larson and Metzen. T. 358-61, 363-64. Kemp's efforts when communicating with these legislators was to ensure that exclusive agents would also be covered by the 1995 quota bill. T. 358-61, 363-64.

27. AFAAMN expressed the concern that without passage of the quota bill, pressure would be put on agents to sell life insurance and that could cause the agents to come into conflict with suitability laws. Generally, however, American Family has no particular problem with suitability violations. T. 1090, 1176. Ex. 190. Agents were also concerned that they could be terminated for not selling enough life insurance. T. 236, 258. The bill was in the self-interest of agents since it is generally easier and more profitable for agents to concentrate on property and casualty sales and to de-emphasize life sales. T. 234, 1167.

28. As part of her duties on AFAAMN's 1995 legislative committee, McClure worked with agents from other companies, and wrote and talked to the legislators from her district. T. 1053-54; Ex. 133, McClure p. 37.

29. During the 1995 session, Representative Tomassoni offered an amendment to Representative Davids' bill. The amendment would have included exclusive agents in the quota bill. Ex. 124, p. 116. Respondents opposed the Tomassoni amendment. T. 503, 699. Respondents' Minnesota Government Affairs counsel, Vicky Rizzolo and Bill Dooley, distributed an e-mail message to all Minnesota agents explaining the Respondents' position on the bill. It stated that the company was opposed to the legislative effort as interference with the contractual rights and obligations of insurance companies and agents. Ex. 33, p. 9.

30. The House Financial Institutions and Insurance Committee ultimately rejected the Tomassoni amendment. Ex. 124, p. 162. The bill prohibiting quotas for independent agents passed, however. T. 744. Representative Davids then stated that he would introduce a separate bill to address exclusive agents, to be considered in 1996. Ex. 124, p. 124.

Pre 1996 Legislative Session

31. In the fall of 1995, Representative Davids met with Kemp, McClure and other agents regarding the passage in 1996 of a quota bill for exclusive agents. T. 363-64, 877. The 1996 quota bill was similar to the 1995 quota bill but applied to exclusive rather than independent agents. T. 362-64.

32. In November or December 1995, Kemp and McClure, as representatives of AFAAMN's legislative committee, discussed the 1995 quota bill with lobbyist Dominic Sposeto ("Sposeto"), and obtained his agreement to represent AFAAMN in the 1996 session concerning the bill to protect exclusive agents. T. 752-53, 1051; Ex. 133, Sposeto pp. 36-39. Sposeto had been the main lobbyist for the Minnesota Independent Insurance Agents on the 1995 quota bill. T. 740-41. He was also a lobbyist for MALU, of which Ms. McClure was an officer. T. 768-69.

33. Kemp and McClure, as representatives of AFAAMN's legislative committee, worked with Sposeto on the bill before and during the 1996 session. T. 747; Ex. 133, Sposeto pp. 36-39. Sposeto identified himself as, and was, AFAAMN's representative, not the representative of individual agents. T. 705, 750. Sposeto was compensated by AFAAMN for his services. T. 301, Ex. 152. Sposeto agreed to a $1,500 fee for the session and the AFAAMN paid him by check. T. 750, Exs. 2, 152.

34. In late December of 1995, Sposeto met with American Family lobbyists Vicky Rizzolo, Bill Dooley and Doug Franzen. T. 753. They discussed a forum in which the company could discuss a quota bill for exclusive agents, without recognizing the Association. T. 754. Because Sposeto also represented the MALU, they discussed using the auspices of MALU to enter a dialogue with the company on this issue. T. 754-55. Sposeto indicated that he was working on drafts for an exclusive agents' quota bill. T. 756.

35. After the meeting with Sposeto, Rizzolo spoke with regional vice-president David Krueger, who requested that she provide a written explanation of the meeting. T. 423; 707. In early January, Rizzolo prepared a memorandum to her supervisor, Mark Afable, and copied Chris Spencer, associate general counsel for Respondents, and Krueger. Ex. 51. The memo stated that Kemp and McClure had hired Sposeto as a lobbyist and explained the agents' arguments for the proposed Quota bill. Ex. 51; T. 423; 706-707.

36. On January 8, 1996, Mr. Kemp and his district manager, Al Baumgartner, met for lunch for an annual review of Kemp's performance. Baumgartner told Kemp that Respondent's management was upset about the quota bill. Kemp told him that it was not likely to pass because he (Kemp) would not be able to pursue and handle his duties as national Association president and lobby in Minnesota at the same time. T. 858-59.

Terminations of Kemp and McClure

37. American Family did not investigate the information presented in Rizzolo's memorandum, but instead relied on its content. T. 423-24; Ex. 133, Hammer pp. 121, 155-156. The failure to investigate the information in Rizzolo's memorandum was contrary to American Family's usual policies. Ex. 133, Hammer p. 14. American Family normally allowed an agent an opportunity to rehabilitate or explain themselves. Ex. 133, Krueger pp. 75-77; Exs. 143, 145. At the time they were considering whether to terminate Kemp and McClure, Krueger and Hammer were not aware that Sposeto represented AFAAMN, and not Kemp and McClure individually. T. 423-24, 444; Ex. 133, Hammer, p. 188. Mr. Hammer hoped that by firing Kemp and McClure, the Quota bill could be stopped. T. 526.

38. On January 5, 1996, Hammer and Krueger met to discuss the contents of Rizzolo's memorandum. Ex. 133, Hammer p. 116. Krueger and Hammer believed that Kemp and McClure were in effect negotiating their contracts in the legislature. T. 544; 569-70. The manner of the agents' legislative approach concerned Hammer and Krueger. T. 545. At the meeting, Hammer thought that the retention of Sposeto was grounds for termination, but they decided to think about the situation over the weekend. Ex. 133, Hammer pp. 116-117.

39. The following Monday, both Hammer and Krueger agreed that Kemp and McClure should be terminated. Ex. 133, Hammer p. 117. The contract between American Family and its agents requires the agent:

To maintain a good reputation in the Agent's community and to direct Agent's efforts toward advancing the interests and business of the Company to the best of the Agent's ability, to refrain from any practices competitive with or prejudicial to the Company and to abide by and comply with all applicable insurance laws and regulations.

Ex. 165, p. 4; T. 835. Under the contract, violation of this section is grounds for termination without notice. Ex. 165, p. 6.

40. Before Hammer and Krueger took any action, they checked with the national headquarters in Madison, Wisconsin, and spoke with Chris Spencer in Respondent's legal department. Ex. 133, Hammer p. 117. On January 9, 1996, Hammer and Krueger, after consultation with Spencer, decided that Respondents had legal grounds to terminate Kemp and McClure. Ex. 133, Hammer p. 117. They decided that the terminations of Kemp and McClure should happen simultaneously. Ex. 133, Hammer p. 118; T. 499.

41. The agents' district managers, Derwin Dugger and Al Baumgartner, were advised of the decision to terminate Kemp and McClure on January 9, 1996, after the decision had been made. T. 414, 624; Ex. 133, Hammer p. 118. They were told that the terminations were due to the agents contracting with a lobbyist to support legislation that was deemed non-beneficial to the company. T. 625. Both Dugger and Baumgartner wanted Kemp and McClure to be given a warning letter and an opportunity to rehabilitate their conduct before they were terminated, as was normally done. T. 414, 625; Ex. 133, Hammer p. 119. Baumgartner and Dugger requested giving the agents a warning or taking more time with this decision. T. 414-15; 522-25. Hammer and Krueger decided not to give a warning, but to terminate Kemp and McClure immediately. T. 563; Ex. 133, Hammer p. 119.

42. The Respondents' Agency Services Division was instructed to turn off Kemp and McClure's computers on the day of the terminations. Ex. 133, Hammer pp. 134-135. Respondents had past experiences with terminated agents changing policies through their computers. T. 499-500. The Agency Services Division shut down Kemp and McClure's computers the morning of January 11, 1996. T. 499. The terminations were planned for approximately the same time to advise the agents of the computer shutdown. T. 528-29.

43. It was agreed that Krueger and Baumgartner would terminate Kemp and that Hammer and Dugger would terminate McClure. T. 499. American Family took the unusual step of having senior personnel accompany the agents' district managers to terminate Kemp and McClure. T. 499-500, 635-37. Ex. 133, Hammer pp. 18-20.

44. Efforts were made to coordinate the terminations of Kemp and McClure to limit the possibility that they would be able to access customer lists to complete with American Family, T. 1116-17, Ex. 187, and to limit information provided to them regarding the reason for their termination. Ex. 133, Hammer p. 118.

Terminations

45. Hammer and Dugger went to McClure's office the morning of January 11, 1996. Because she was not at her office, they went to her home, after calling for permission to visit. T. 546; 636. Dugger did not tell McClure on the telephone that Hammer was with him or the nature of the visit. T. 527, 1030; Ex. 133, Hammer pp. 140-141. Hammer called Krueger, who was in the Twin Cities, to tell Krueger that they were going to McClure's home and would read her the termination letter there. Ex. 133, Hammer pp. 140-141. McClure's son answered the door. As Hammer and Dugger waited in the entryway, McClure took her son into another room. T. 546; 638.

46. Hammer then read McClure the termination letter. Ex. 133, Hammer p. 141. The letter stated the following:

January 11, 1996

Mary McClure

Dear Mary:

Your Agents Agreement with American Family Insurance Company is being terminated immediately for conduct prejudicial to the company. You have 10 days to turn over your files and other materials, as required by your Agreement, to your District Manager.

A letter from Agency Services will be following explaining these and other obligations under your Agency Agreement.

David N. Krueger

NW Regional Vice President

cc: Larry Haas

Gary Hammer

Derwin Dugger

Ex. 138. McClure said okay and took the termination letter. Then Dugger and Hammer left. T. 528, 1032; Ex. 133, Hammer p. 141.

47. Respondents' legal department drafted the letters that Kemp and McClure received on January 11, 1996. T. 564. The letter stated that they were being terminated for "conduct prejudicial to the company", a reference to a clause contained in the agent contract. Exs. 137; 138.

48. At the same time, Hammer and Dugger were terminating McClure at her home, Krueger and Baumgartner were at Kemp's office to terminate him. T. 501; Ex. 133, Krueger pp. 126-127.

49. Krueger and Baumgartner entered Kemp's office, told him they were there to terminate him and read the termination letter. T. 501, Ex. 133, Krueger p. 126.

50. Kemp's termination letter stated the following:

January 11, 1996

Gary Kemp

1700 Livingston Avenue, Suite 235

West St. Paul, MN 55118-5908

Dear Gary:

A letter from Agency Services will be following explaining these and other obligations under your Agency Agreement.

David N. Krueger

NW Regional Vice President

cc: Larry Haas

Gary Hammer

AL Baumgartner

Ex. 7.

51. Mr. Kemp asked why he was being terminated and Mr. Krueger said it was in the letter. When Kemp replied that it wasn't, Krueger told him that that was all he was going to get. After giving the termination letter to Kemp, Krueger and Baumgartner left Kemp's office. T. 883; Ex. 133, Krueger p. 126.

52. The termination letters given Kemp and McClure differed from the termination letters normally given to American Family agents who are terminated. Ex. 133, Krueger pp. 143-145. The termination letters given to Kemp and McClure were terse and lacked any information as to the reason for their termination. Ex. 7; T. 524-25.

53. Within a day or two, the agents received a letter dated January 12, 1996, from Respondents' Agency Services Division, which explained their rights to a termination review, either with American Family, or a hearing before a board of review appointed by the Commissioner of Commerce. The letter also explained the agents' other benefits and responsibilities under their contracts. T. 564; 1039; Ex. 180.

54. Mr. Kemp had sufficient seniority with American Family to qualify for extended earnings or retirement benefits from the company upon termination in the approximate amount of $260,000. T. 991. Ms. McClure was not eligible for any extended earnings. T. 515.

Post Termination Activity

55. Less than one hour after the terminations of Kemp and McClure, Baumgartner sent an E-mail to the Minnesota agents of American Family. T. 890; Ex. 174.

56. The E-mail stated the following:

Subject: Termination

At 9:00am this morning, Thursday, Agent Gary Kemp of D53 and Agent Mary McClure of Derwin Dugger's district in Mankato were terminated.

There will be legal ramifications from these terminations, so at this time no further information regarding the terminations can be disclosed.

Ex. 174.

57. Sending such an E-mail was not the usual practice of American Family after the termination of one of its agents. T. 890.

58. Shortly after the terminations of Kemp and McClure, Dugger met with McClure's staff in Mankato. Dugger informed the staff that McClure had been terminated that morning, and that her agency was being closed. Dugger told McClure's staff this information before McClure had an opportunity to talk to her staff. T. 639-40.

59. That same day Mr. Dugger met with the agents in his district to tell them that McClure had been terminated, and to distribute her book of business. T. 648.

60. American Family's normal practice after terminating its agents was not to discuss the terminations with anyone except the terminated agent. However, after Kemp and McClure were terminated, American Family communicated the decision to the media.

61. Shortly after Kemp and McClure were terminated, American Family sent letters to all of Kemp and McClure's clients, some 4,000 customers in all. Exs. 8, 9, T. 95-98.

62. The letters sent to all of Kemp and McClure's former clients, on the American Family letterhead, stated:

January, 1996

Dear Policyholder:

(Mary McClure/Gary Kemp), who is named as agent on your insurance policy with this company, no longer represents the American Family Insurance Group.

I feel there are a few facts about the American Family Insurance Group that you perhaps are not fully aware of.

As a policyholder of American Family, you are insured by the fourth largest mutual insurance company in the United States. We are rated "A Plus Excellent" by Best, the insurance rating authority, and our total assets are over One Billion dollars.

You may have been a policyholder with our American Family Insurance Group for five, ten, fifteen, twenty or more years. You have established a fine reputation with us that is as valuable as the reputation you have made with your banker. This, of course, is a very valuable asset.

YOU MAY BE RECEIVING A POLICY WITH ANOTHER COMPANY FROM YOUR FORMER AGENT. YOU DO NOT HAVE TO ACCEPT OR PAY FOR THAT POLICY. WE HOPE YOU WILL REMAIN AN AMERICAN FAMILY INSURED AS WE CERTAINLY APPRECIATE YOUR BUSINESS.

You deserve the very best for your premium dollar. I feel that the American Family Insurance Group can best serve you. We have a full-service office in (City), and if you have any questions or problems concerning your insurance needs, please feel free to contact (Agent's Name). You may phone him at (Phone Number). Please retain this letter with your policies for future reference.

Sincerely,

Larry Haas

N.W. Agency Services

Exs. 8, 9.

63. As was customary, neither letter contained an explanation of why Kemp and McClure were no longer with American Family. Exs. 8, 9. Several of Kemp and McClure's clients felt that the language of the letter implied some wrongdoing on the agents' part. T. 163, 183, 195, 270-72.

64. The letters sent to Kemp and McClure's former clients differed in important respects from the letters sent to other agents who were terminated or left American Family. Ex. 133, Hammer pp. 104-05; 171-172.

65. Insurance agent Tim Wise ("Wise") left American Family voluntarily, and intended to compete with American Family. Ex. 24.

66. Wise's American Family clients were sent the typical letter from American Family, informing them that he was no longer with the company. Ex. 24.

67. The letter sent to Wise's former clients stated:

Dear Policyholder:

Mr. Tim Wise, who is named as an agent on your insurance policy with this company, no longer represents the American Family Insurance Group.

I feel there are a few facts about the American Family Insurance Group that you are not fully aware of.

You may have been a policyholder with American Family Insurance Group for five, ten, fifteen, twenty, or more years. You have established a fine reputation with us that is as valuable as the reputation you have made with your banker. This, of course, is a very valuable asset.

WE HOPE YOU WILL REMAIN AN AMERICAN FAMILY INSURED AS WE CERTAINLY APPRECIATE YOUR BUSINESS.

You deserve the very best for your premium dollar. I feel that the American Family Insurance Group can best serve you. We will be servicing your insurance needs from our Regional Office located in Eden Prairie.

Please call Tressa at (Phone Number), or Gayleen.

Sincerely,

Larry Haas

N.W. Agency Services Manager

Ex. 24.

68. A second letter sent to Kemp and McClure's former clients informed the former clients that a new American Family agent had been assigned to him.

69. The second letter sent to Kemp and McClure's former clients stated:

Dear Policyholder:

Our records indicate your American Family agent has recently been changed and your policies assigned to another agent. We want to help you with the transition and continue to provide you with the best possible service. To do this, we want to make sure you have your new agent's correct name and address. Your new agent is:

(Name and Address)

Please call on your American Family agent for any insurance questions or needs. Thank you for your valued business.

Sincerely,

Larry Haas

N.W. Agency Services Manager

Ex. 142.

Impact of Terminations on AFAAMN

70. Before and after the time period when Kemp and McClure were terminated by American Family, some members of other agents' associations in other states were also terminated. T. 226. Many agents, both of American Family and other insurance companies, feared that they too would be terminated for being members of an agents association which contacted state legislators. T. 219-227, 303-05, 311-16, 393-98, 794-95.

71. American Family agent and AFAAMN officer Bruce Isom was shocked when he learned that Kemp and McClure had been terminated. T. 219. He feared that he might be terminated next because he had testified at the legislature in 1995 and was the president of AFAAMN. T. 219. As a result of Kemp and McClure's termination, Isom did not testify, or even go to the legislature in 1996. T. 219. Isom also had conversations with many agents, both from American Family and other insurance companies, who were afraid they would be terminated. T. 220.

72. American Family agent Harriet Stahl was fearful that she would be terminated if she were to go to the legislature or speak to a legislator. T. 304-05. Stahl resigned as treasurer of the AFAAMN Board in December 1995, prior to the terminations. T. 298-99.

73. American Family agent Julie Weigel resigned from AFAAMN's Board of Directors at the end of 1995. T. 311-12. Weigel's district manager, Mel Hartman, had warned her to get out of AFAAMN because there were going to be problems. T. 312. Weigel felt intimidated and was fearful that she would be terminated by American Family after the terminations of Kemp and McClure. T. 312-15.

74. Agent Ronald Lawrence resigned from the Board of AFAAMN in January of 1996, after the terminations and after his district manager told him that it was probably not in his best interest to be on the Board. T. 282-4.

75. Jon Krog, as president of AFAAMN at the time of Kemp and McClure's terminations, heard from many agents who feared termination by American Family. T. 396-99. The agents felt intimidated by Kemp and McClure's terminations, and were afraid that American Family might terminate them. T. 396-99, Ex. 154. Krog also heard from agents in other states who told him that Kemp and McClure's terminations in Minnesota had a chilling effect on agents and agents association activities all over the country. T. 400, 764.

76. Wisconsin American Family agent Mark LeMahieur resigned his position as legislative chairperson for the Wisconsin Life Underwriters Association after the terminations. T. 795. He was specifically advised in 1992 by his supervisor to quit the American Family Agents Association. Ex. 157, p. 3.

77. The membership in the Agents Associations in various states and in Minnesota began to decline after Kemp and McClure were terminated. T. 226-27, 314-15; 901-02. In Minnesota the membership declined by half. T. 394. The memberships declined because the agents feared being terminated. T. 227, 314-15, 395.

Legislative Reaction

78. In response to the Kemp and McClure terminations, the legislature amended Minn. Stat. § 72A.20, subd. 20, to prohibit the termination of agents because they advocated positions at the legislature. Ex. 124 at 83-84, 115; T. 759. The legislators specifically referred to the Kemp and McClure terminations. Ex. 124 pp. 103,106. During the legislative debate on the bill the Department of Commerce urged legislators to indicate that they were "clarifying" the statute by adding contacts with the legislature rather than creating new law. The Department cited its investigation of American Family relating to the McClure and Kemp terminations. Ex. 2, p. 1.

79. The legislature also passed the quota bill for exclusive agents, which had been pursued by Kemp and McClure and it was codified at Minn. Stat. § 60A.179. Ex. 124 p. 227. Although American Family opposed the bill, it took no affirmative action at the Capitol because legislators were upset about the terminations. T. 718, 759-60.

80. The Commissioner of Commerce and the Minnesota Legislature both rely upon information from individual insurance agents licensed by the state of Minnesota and their organizations, in regulating the insurance business in this state. T. 17-24; T. 52-56; T. 59-60; T. 325; T. 328; T. 354-55.

81. On occasion, agents have been concerned that appearing at the legislature could result in adverse action by their insurance company. T. 61-65; T. 339; T. 366-67; T. 370-71; T. 397-98.

82. On February 14, 1997, American Family N.W. Regional Vice-President Peter B. Walton sent the following E-mail to all Minnesota agents:

To: All Minnesota Agents

This message relates to contacts by American Family agents with the Minnesota State government.

I understand that some agents may be confused about the company's policy concerning communications with the legislature. American Family encourages all agents and employees to participate in the political process and to help educate lawmakers and other policymakers on insurance issues. A healthy environment for the business of insurance is important to the success of our company and the well-being of all of our agents, employees and policyholders. I would encourage each of you to take an active and informed role in the important issues facing the insurance industry today.

Minnesota statute provides that "An insurance company may not terminate or otherwise penalize an insurance agent solely because the agent contacted any government department or agency regarding a problem that the agent may be having with an insurance company." This statute was amended last year to include the Minnesota legislature.

The meaning and scope of this statute is the subject of ongoing litigation. American Family will comply with the law as finally enforced and interpreted by the Department of Commerce and the Courts. American Family will not terminate or otherwise penalize any agent for any contacts he or she may have with the government. Any change in this policy will be prospective and agents will receive advance notice of the company's policy.

I hope that this message clarifies the company's position on this issue. If you do have further questions, please do not hesitate to contact me, your State Director or your District Manager.

Ex. 150.

The Department's Investigation

83. In late January of 1996, the Minnesota Department of Commerce received a written complaint from American Family agents Mary McClure and Gary Kemp regarding their termination. T. 78; Ex. 182. As a result of the complaint, the Commissioner commenced an investigation. T. 78, 1083.

84. As part of the investigation, Department of Commerce Investigation Supervisor Michael S. Letourneau ("Letourneau") wrote to Regional Vice President David Krueger on January 25, 1996, requesting documents and information pertaining to the terminations of Kemp and McClure. The information was to be provided within 10 days. Ex. 37; T. 78-79. The letter from Letourneau requested copies of all letters, memos, reports and other correspondence relating in any way to the terminations of Kemp and McClure as well as an explanation of the basis of the terminations. Ex. 37. Ten days is the normal time limit for responding to investigative requests. T. 158.

85. Vicky Rizzolo, Government Affairs Counsel for American Family, called Letourneau seeking a copy of the agents' complaint on January 31, 1996. T. 80. The complaint was not included with Letourneau's letter although the letter indicated it was enclosed. T. 1125, Ex. 37. Rizzolo advised Letourneau she would reply as soon as she received the complaint. T. 1125. Letourneau faxed a copy of the joint complaint to Rizzolo. T. 80. On February 9, 1996, Letourneau received a letter in response from Rizzolo. T. 80; Ex. 38. The response letter stated as follows:

This is in response to your recent inquiry concerning the above matter. Your letter dated January 25, 1996 and the complaint of Mary McClure and Gary Kemp dated January 20, 1996 were received in our office on January 31, 1996.

American Family markets a full line of personal and business insurance products in Minnesota through a network of approximately four hundred exclusive insurance agents located throughout the state. The company contracts individually with each of these agents. I will mail a Specimen Copy of the American Family Agent Agreement to you under separate cover. The Agreement may be terminated by either party by giving written notice to the other party. The Agreement also specifically requires that the agent refrain from any practices prejudicial to the company. On January 11, 1996 Mary McClure and Gary Kemp were provided with written notice of the termination of their American Family Agent Agreements. Copies of these termination notices are enclosed.

The American Family Agent Agreements of Mary McClure and Gary Kemp were terminated by the company based on conduct by the agents considered by management to be highly prejudicial to the interests of the company and its policyholders. The company's decision to terminate the Agreements was based on a serious breach of the Agreement by both agents. While many factors entered into the company's decision to terminate these contracts, the company did not base the action on any contacts that Mary McClure and Gary Kemp may have made with the Department of Commerce as prohibited by Minnesota Statute Section 72A.20 subdivision 20.

Regarding your inquiry concerning the payment of renewal commissions upon termination of the contracts, the company did agree to pay renewal commissions to Mary McClure and Gary Kemp through January 31, 1996. The condition that the agents "cooperate" with the company is merely a standard reference to the agents' contractual obligation to return certain company property, including documentation, equipment and the like, to the company upon termination of the Agreement.

Since the company does expect to be involved in civil litigation with both Mary McClure and Gary Kemp, the company is concerned with the confidentiality of some of the information relating to these contract terminations. The company would, however, be more than happy to meet with you and other representatives of the Department to discuss this matter further and answer any additional questions you may have. The company does maintain that the terminations of Mary McClure and Gary Kemp are fully justified by the provisions of their contracts with American Family and in accordance with all applicable state laws and regulations.

Ex. 38.

86. After receiving the letter from Ms. Rizzolo, Mr. Letourneau left a message for Ms. Rizzolo advising her that she had not complied with the Department's request. T. 83.

87. On February 16, 1996, Douglas Franzen, an attorney and contract lobbyist for American Family, wrote to Scott Borchert, Director of Enforcement, and Letourneau's supervisor. Ex. 39. T. 83-84. The letter from Mr. Franzen to Mr. Borchert sets out seven reasons for the terminations of Kemp and McClure. Ex. 39. T. 83-84. The reasons for the terminations included retaining a lobbyist to introduce legislation that would limit the Respondent's ability to market certain products in Minnesota, taking a leadership role in state and national associations involved in activities designed to circumvent company policies, and soliciting proxies to unseat four board members of American Family. Ex. 39, p. 2.

88. In the February 16, 1996 letter, Franzen also wrote, "with regard to requests #2 and #3 contained in your letter dated January 25, 1996, it is our understanding that all non-privileged 'letters, memos, reports, and correspondence' relating to the termination of the contracts (or decisionmaking related thereto) and agreements, contracts, or settlement letters sent to Ms. McClure or Mr. Kemp subsequent to contract termination are in your possession." Ex. 39, p. 2.

89. On February 27, 1996, Mr. Letourneau wrote to Mr. Franzen to indicate that American Family had not adequately responded to the Department's investigative request, and repeated the original request for information and documents, again within ten days. T. 85, Ex. 40. Letourneau's letter specifically stated:

Despite numerous phone communications between the Department and American Family Insurance, the only documents that were provided are a boilerplate "Agent Agreement" contract and the termination notices delivered to Mary McClure and Gary Kemp.

Your February 16, 1996 letter states that "all non-privileged" responsive documents have been provided to the Department. I assume that your reference to privileged documents refers to a recognized evidentiary privilege that would justify withholding the document of a civil judicial proceedings. Accordingly, the Department requests that you prepare a privilege log identifying the following information for each document that you claim is privileged: the author of the document, all recipients of the document, the date of the document, a description of the content of the document, and the legal basis for your claim of privilege. Any relevant document not included in the privilege log should promptly be provided to the Department.

Ex. 40, p. 1.

90. On March 8, 1996, Mr. Letourneau received a call from Mr. Franzen. T. 86-88, Ex. 139. During the telephone call, Franzen indicated that more documents would now be produced, but that he (Franzen) would not be able to comply with the ten-day limit with regard to the full explanation for the terminations. Ex. 139; T. 88. Franzen requested an extension of the ten-day limit to produce the requested documentation. Letourneau did not grant Franzen an extension. T. 88.

91. Later in the day of March 8, 1996, Letourneau received approximately 300 pages of documentation from American Family. T. 89, 146-52, 157. The documents produced included copies of agents association publications, agency contracts between Kemp, McClure and American Family, correspondence between Kemp or McClure and their district managers, and correspondence between Kemp, McClure and the company requesting a review of their terminations. T. 149-52; Exs. 143-148. The letter also asserted a privilege for two documents and created a privilege log for them. T. 89; Ex. 41.

92. On March 14, 1996, Letourneau received another letter from Franzen. T. 90; Ex. 42. It set out American Family's reasons for terminating Kemp and McClure which were summarized as follows:

. . .

Taking a leadership role in state and national associations and organizations involved in activities designed to circumvent legitimate and necessary company policies and procedures.

. . .

Encouraging, organizing and inciting other American Family agents to participate in activities damaging to the company and its policyholders.

. . .

Soliciting and collecting proxies in connection with an effort to unseat four members of the company's board of directors, including the chairman of the board and the president of the company.

. . .

Retaining a lobbyist to introduce legislation that would severely limit the company's ability to market certain financial protection products in the state.

Ex. 42.

93. Following their terminations, both Kemp and McClure appealed the terminations to American Family rather than to a panel appointed by the Commissioner. American Family upheld their terminations. Exs. 144-148.

94. The written termination review issued by Al Meyer, Respondent's vice president of marketing, recommended that the terminations be approved. The recommendation cites two facts, namely, that McClure and Kemp requested a lobbyist to introduce a bill to prohibit insurance companies from setting production quotas on their agents and that this legislation would be prejudicial to American Family. Ex. 141. In a January 12, 1996 newspaper article, an American Family spokesman was quoted as saying that the terminations were due to the agents' attempt to introduce a bill preventing quotas. Ex. 61.

95. The Notice of and Order for Hearing was filed August 8, 1996, including a Statement of Charges, and was served upon the Respondents by certified mail.

Based upon the foregoing Findings of Fact, the Administrative Law Judge makes the following:

CONCLUSIONS OF LAW

1. The Commissioner of Commerce and the Administrative Law Judge have jurisdiction in this matter pursuant to Minn. Stat. §§ 60A.03, 60A.052 and 14.50.

2. The Department of Commerce has fulfilled all relevant substantive and procedural requirements of law and rule.

3. The Department of Commerce has given proper notice in this matter as required by Minn. Stat. §§ 14.58 and 60A.052, subd. 2.

4. The Department bears the burden of proof in this matter, and must establish all facts by a preponderance of the evidence. Minn. Rules 1400.7300, subp. 5 (1995).

5. Minn. Stat. § 72A.20, subd. 20, (1994) provides that no insurance company may "terminate or otherwise penalize an insurance agent solely because the agent contacted any government department or agency regarding a problem the agent or an insured may be having with an insurance company."

6. American Family agents Kemp and McClure were terminated solely for contacting the legislature both in person, and through their agent, lobbyist Dominic Sposeto, to pursue what has been termed the "quota bill," eventually codified as Minn. Stat. § 60A.170 (1996).

7. The "quota bill" was an answer to a problem the exclusive agents had with their insurance companies.

8. The legislature is not a government department within the meaning of Minn. Stat. § 72A.20, subd. 20 (1994).

9. The Respondents did not violate Minn. Stat. § 72A.20, subd. 20 (1994), by terminating agents Kemp and McClure.

10. Given the separate duties and responsibilities of insurance agents and companies, communication between insurance agents and the legislature is necessary to ensure a functioning regulatory system.

11. The Respondent's actions terminating Kemp and McClure due to their legislative activities had a chilling effect on communication between insurance agents and the legislature.

12. Minn. Stat. § 72A.20, subd. 18(b), prohibits insurance companies from "engaging in fraudulent, coercive, or dishonest practices in connection with the insurance business," which the statute classifies as an unfair and deceptive act or practice.

13. The Department has not established that the Respondents violated Minn. Stat. § 72A, subd. 18(b).

14. Minn. Stat. § 72A.20, subd. 2, forbids the making, publishing disseminating, circulating, or placing before the public in any way, "any assertion, representation, or statement with respect to the business of insurance or with respect to any person in the conduct of the person's insurance business, which is untrue, deceptive, or misleading," which the statute classifies as an unfair method of competition and an unfair and deceptive act or practice.

15. The Department has not established that the letters sent out to Kemp and McClure's former clients following their terminations violated Minn. Stat. § 72A.20, subd. 2.

16. Minn. Stat. § 72A.20, subd. 4, prohibits "any agreement to commit, or by any concerted action committing, any act of boycott, coercion, or intimidation, resulting or tending to result in unreasonable restraint of, or monopoly in, the business of insurance", which the statute classifies as an unfair method of competition and an unfair and deceptive act or practice.

17. The Respondents intended the terminations of Kemp and McClure to have a chilling effect on the activity of its agents at the legislature and in the agents' association.

18. Respondents' agents were intimidated.

19. The Department has not established that the Respondents violated Minn. Stat. § 72A.20, subd. 4.

20. The Commissioner and Legislature rely on input from agents, organized and individually, to regulate the business of insurance in Minnesota. Respondents' boycott of AFAAMN and its coercion of individual agents to distance themselves from the association impairs this regulatory goal.

21. Minn. Stat. § 60A.177, subd. 2, requires that upon termination initiated by the company, the terminated agent must be informed, in the written notice of termination, of his or her right to request a hearing before a board of review convened by the Commissioner.

22. Minn. Stat. § 60A.177, subd. 1, requires an insurer to establish a termination review process for use at the option of the agent.

23. The termination letters hand-delivered by Kemp and McClure did not inform them of their right to a hearing or a review process. A letter received shortly thereafter did.

24. The Respondents violated Minn. Stat. § 60A.177, subd. 2.

25. Those subject to the Commissioner's regulation must "comply with requests for information, documents, or other requests from the department within the time specified in the request or, if no time is specified, within 30 days of the mailing of the request by the department." pursuant to Minn. Stat. § 45.027, subd. 1a.

26. Respondents failed to comply fully within the time specified with requests from the Commissioner.

27. The Respondents violated Minn. Stat. § 45.027, subd. 1a.

28. Under Minn. Stat. § 45.027, subd. 7(3), a licensee may be disciplined if the Commissioner finds that the licensee has provided false, misleading, or incomplete information to the Commissioner and if the order is in the public interest.

29. The Department has not established that the information provided by the Respondents was false, misleading, or incomplete, and therefore a violation of Minn. Stat. § 45.027, subd. 7(3) was not shown.

30. Any of the Findings of Fact which are more properly termed Conclusions are hereby adopted as such.

31. The Memorandum which follows sets out the reasons for the above Conclusions and is incorporated into these Conclusions.

Based upon the foregoing Conclusions, the Administrative Law Judge makes the following:

RECOMMENDATION

IT IS RESPECTFULLY RECOMMENDED that the Commissioner of Commerce take disciplinary action against the Respondents consistent with the foregoing Conclusions.

Dated this

30th

day of

June

1997.

GEORGE A. BECK

Administrative Law Judge

Reported: Kirby A. Kennedy & Associates

219 Edina Executive Plaza

5200 Willson Road

Minneapolis, MN 55424

Transcript Prepared.

NOTICE

Under to Minn. Stat. § 14.62, subd. 1, the agency is required to serve its final decision upon each party and the Administrative Law Judge by first class mail or as otherwise provided by law.

MEMORANDUM

At the time that the American Family Insurance Companies terminated its contracts with agents Gary Kemp and Mary McClure in January of 1996, Minnesota law provided that no insurance company could "terminate or otherwise penalize an insurance agent solely because the agent contacted any government department or agency regarding a problem the agent or an insured may be having with an insurance company." Minn. Stat. § 72A.20, subd. 20 (1994). The Department argues that the Respondents are subject to disciplinary action because the terminations violated this statute. There is no dispute that under the terms of their contracts, each agent could be terminated without cause if appropriate notice was given. For certain violations of the contract, such as "practices prejudicial to the company," termination was possible without notice. Nonetheless, the Respondents must abide by the insurance regulatory statutes of the State of Minnesota. The Respondents advance several arguments to support their position that they did not violate the statute.

"Contacts Regarding a Problem"

The Respondents first argue that they have not violated the statute because the statute does not protect all contacts which an agent might make with government, but only those contacts "regarding a problem that the agent or an insured may be having with an insurance company." The Respondents suggest that the statute should be interpreted as a whistleblower statute which would mean that the agent would have to report a violation of law on the part of the company in order to be protected by the statute from termination. Under Minn. Stat. § 181.932, for example, an employer is prohibited from discharging an employee because the employer reports a violation of any federal or state law to a governmental body or law enforcement official. The Respondents contend that public policy arguments or what they believe to be mere self-interested lobbying by the agents were not intended to be protected by the statute. American Family suggests that any contention that the lobbying effort by the agents was consumer advocacy designed to ensure that agents were not required to sell life insurance which was unsuitable for clients, is not supported by the record.

However, apart from a reference during a legislative proceeding by a sponsor of the legislation, which characterized it as a whistleblower statute, there is little in the language of the statute to suggest that it was intended to be a whistleblower statute like, e.g., Minn. Stat. § 181.932. While whistleblower statutes shield employees who report illegal conduct by employers, the language of Minn. Stat. § 72A.20, subd. 20 is substantially different. The statute refers to a "problem" rather than illegal conduct. It appears that the legislative intent was to ensure a free flow of information from insurance agents to government since it is often the agent who fully understands the nature of the problem and is in a position to report it to government. The record indicates convincingly that legislators and regulators regard information from insurance agents as essential to fulfill their functions.

Reading whistleblower case law into this statute would narrow it considerably from what was intended by the Legislature. Protection from adverse employment action for reporting "a problem the agent or an insured may be having with an insurance company" might well include violations of statute or rule, but also would certainly include other problems such as a failure to fairly adjust a claim. The broad scope of this statute is consistent with the independent obligations of insurance agents under the statute to government and to insured persons. This statute ensures that an agent can fulfill those obligations without fear of an adverse employment action.

The parties disagree about the agents' motivation for seeking the quota bill legislation for exclusive agents. The Respondents believe it was a matter of self interest for the agents. However, while that may have been a factor, it seems clear that there were reasonable public policy arguments which could be made in support of the bill. Requiring agents to sell a certain amount of life insurance might well result in a sale of life insurance to an individual customer that is not suitable. Nonetheless, even if the agents' only motivation for supporting the bill was a fear of termination due to violation of company-imposed quotas, such a concern would fit within the broad language of the statute as a problem the agent was having with his insurance company. Illegality does not need to be involved in order to prove a violation.

"Solely"

American Family also argues that its termination of the insurance agents in question does not fall within this statute since they were not terminated "solely" due to the contact with government. Respondents argue that the Legislature intended to limit the statute to those cases where the only motivating cause of the termination was that the agent contacted the government. They contrast this statute with discrimination statutes or case law which require only a "motivating factor" in order to find illegal discrimination. The Respondents argue that the legislative contact was only one factor in a series of events which led to the terminations. They characterize Kemp and McClure as agents with attitude problems who lampooned management or urged agents to "march to Madison" to unseat incumbent management and encouraged agents to leave the company for a competing carrier. They characterize the legislative lobbying as simply "the straw that broke the camel's back."

The Department asserts that through the use of the word "solely", the Legislature was attempting to make sure that it was not protecting agents who were properly terminated for misconduct. It would not be appropriate for an agent about to be terminated for financial misconduct, for example, to make a report to the Department or Legislature and then claim protection under the statute. In this case, there is no allegation of any misconduct on the part of the agents. Additionally, a review of the prior incidents pointed to by the Respondents as justifying adverse action against the agents, compels the conclusion that the incidents were not particularly serious. (Findings of Fact Nos. 18-23). American Family did not view any of the prior actions as requiring disciplinary action. Ms. McClure's speech to American Family members of MALU in September of 1995 was quickly and satisfactorily resolved. Mr. Hammer's complaints concerning the agents' magazine happened over a year earlier. The record does not indicate that either Kemp or McClure had any specific individual responsibility for the agent "hot line" or the "march to Madison". Nonetheless, it appears that agents who are policyholders have a right to attend the annual meeting as do any policyholders. As the Department points out, the alleged past incidents relate to matters of speech rather than financial misconduct or a similar problem justifying termination.

American Family argues that it was not upset just by the agents' contact with the Legislature, but rather by the manner of that contact. While it concedes that the agents had a right to deliver any message they wanted to the Legislature, it believes that it has the right to insist on time, place and manner restrictions on how that message is delivered. It suggests that it would not have been as upset if Kemp and McClure had acted through the Coalition instead of AFAAMN. Respondents believe that this caused confusion in the minds of legislators as to whether or not the company was supporting this legislation since the American Family name was involved. The testimony of legislators, however, is to the contrary. The Respondents also argue that the decision to hire the same lobbyist used by MALU created a conflict of interest that was prejudicial to American Family. American Family asks why it should have to sponsor Kemp and McClure's approach to the Legislature by continuing to pay them the money that allowed them to fund lobbyists. It suggests that the agents were doing everything in their power to embarrass and to hurt the company.

The language of the statute does not authorize American Family to regulate the nature of the contacts made by its agents with the government. Nor does the record support the Respondents' assertion that the agents were attempting to embarrass and hurt the company. In fact, the agents had reason to believe that their activities were consistent with what had been done in the past at the Legislature and tolerated by American Family. American Family agents had testified at the Legislature in the past and had been involved in hiring a lobbyist to advance legislation. The record does not indicate any confusion on the part of legislators concerning the use of the American Family name. The Respondents' contention that they should not have to sponsor the agents' approach to the Legislature is contravened by the language of the statute which protects agent communication with government by prohibiting termination or other adverse action. The legislative judgment is that it is appropriate to infringe upon "at will" employment to some extent in order to promote communication between the agents and those who are in a position to correct the problems that they uncover.

The record clearly supports a conclusion that the agents would not have been terminated "but for" their legislative conduct in December of 1995 and January of 1996. But beyond this, the record also indicates that a reasonable interpretation is that the legislative contacts were the sole reason within the meaning of the statute. American Family's internal review of the terminations indicate a single reason, namely, hiring a lobbyist. Exs. 140, 141. The Respondents' contact with the media after the terminations cited a single reason, namely, involvement in the effort to introduce the quota bill. Exs. 72, 73, 76. District Managers Dugger and Baumgartner were each told that the reason for firing Kemp and McClure was the fact that they hired a lobbyist at the Legislature. T. 625, 981. State Director Hammer agreed that the difference between Kemp and Bruce Isom, the agent who testified earlier at the Legislature, is that Kemp hired a lobbyist. T. 540. The other reason cited by the Respondents are comparatively insignificant. It is fair to conclude that the legislative activity of Kemp and McClure was the sole reason for termination.

"Government Department"

A good deal of the argument and research in this case was directed towards the question of whether or not the Legislature was intended to be included within the phrase "any government department or agency" contained in Minn. Stat. § 72A.20, subd. 20 (1994). The Department of Commerce argues that it is included and points to the Minnesota Constitution at Article III, § 1, which provides:

The powers of government shall be divided into three distinct departments: legislative, executive, and judicial.

The Department notes that Minn. Stat. § 645.08(1) states that "Words and phrases are construed according to . . . , their common and approved usage; but technical words and phrases and such others as have acquired special meaning . . . are construed according to their special meaning or their definition." The Department, therefore, argues that the technical term "department" is defined in the Constitution and that that definition should be employed in construing Minn. Stat. § 72A.20, subd. 20 (1994).

The Respondents acknowledge that at the time the Constitution was drafted, in 1857, it was common to use the word "department" synonymously with the word "branch". They suggest, however, that that usage has little to do with legislative intent in 1989 when Minn. Stat. § 72A.20, subd. 20 was first adopted. American Family argues that the legislative understanding of the word "department" in 1989 is more probative of intent than the understanding of the same word in the last century. The Respondents also acknowledge that a technical meaning of a term will control over common usage under Minn. Stat. § 645.08(1), but point out that there must be some evidence that the Legislature intended a technical meaning before this rule of priority can be applied. A technical definition will prevail over common usage only if this is the "manifest" legislative intent. City of St. Louis Park v. King, 75 N.W.2d 487, 492 (Minn. 1956).

In this case, the 1989 Legislature did not define the term "department" and under the usual statutory rule of construction the common usage of the term should control. The "plain, obvious, and rational meaning of a statute should always be preferred to any curious, narrow, hidden sense that nothing but the exigency of a hard case and the ingenuity and study of an acute intellect would discover." Lynch v. Alworth-Stevens Company, 294 F. 190 (8th Cir. 1923), aff'd, 267 U.S. 394 (1925). Additionally, under Minn. Stat. § 645.16, the plain language of a legislative enactment is controlling if it is clear and unambiguous. The Minnesota Court of Appeals recently stated:

The fundamental rule of statutory construction is that a court should look first to the specific statutory language and be guided by its natural and most obvious meaning. Nadeau v. Austin Mutual Insurance, 350 N.W.2d 368, 373 (Minn. 1984) (statutes should be construed according to their plain and ordinary meaning). See also, section 645.16 (1992) (when the words are clear and free from all ambiguity, the letter of the law shall not be disregarded).

Heaslip v. Freeman, 511 N.W.2d 21, 22 (Minn. Ct. App. 1994). One indicator of the plain meaning is the dictionary definition. The 1989 edition of the Oxford English Dictionary (2nd edition) defines "department" as "one of the separate divisions or branches of state or municipal administration", and notes that in the United States the word is used to describe the principal executive divisions of the federal government.

Another indication of the plain meaning is how the term is used elsewhere in legislative enactments. The insurance regulatory statutes in Minnesota use the word "department" to refer to the Department of Commerce. Minn. Stat. § 46.046, subd. 3 specifically defines "department" to mean the Department of Commerce of the State of Minnesota. No Minnesota insurance statute uses "department" to refer to an entity outside the executive branch. Likewise, other statutes enacted by the Legislature use the word "department" to refer to an agency in the executive branch. The same statutes also refer to the Legislature, which has not considered itself to be a department or agency. See, e.g., Minn. Stat. § 3.195 (Report to Legislature "required of a department or agency"). Generally, when a statute speaks to the legislative, executive or judicial branch of government, it uses the word "branches". E.g., Minn. Stat. § 10.47 (members of "legislative, judicial and executive branches" shall report misconduct). In fact, interpreting the word "department" throughout the statutes to include the Legislature would lead to absurd results.

The legislative history of the 1989 statute indicates that the legislative intent was to restrict it to contacts with executive branch agencies. The House bill as it was first introduced referred to "any government branch or agency". Ex. 124, p. 4. The Senate bill contained the language "any government department or agency". The conference committee ultimately adopted the Senate version. The Senate bill originally referred to only the commerce department. Ex. 124, p. 8. It was amended to include "any government department or agency". Senator Luther commented as follows:

[W]e did draft this bill, introduced the bill, to make it absolutely clear in Minnesota that an insurance agent can contact the commerce department, or for that matter, any department in state government, without risking any problems such as termination and any disciplinary action. I would suggest, therefore, Mr. Chairman, that on lines 11 and 12 that we probably broaden it and strike the words "the department", and just broaden it to, "any government department or agency." Because I don't think that we want a situation where an agent that contacts a government agency should have any retaliation against the agency.

Ex. 124, p. 8. A review of the legislative history seems to indicate that the Legislature rejected a broader bill that would include all government branches and selected a more narrow bill limited to administrative agencies or departments within the executive branch.

The Department does point out that at the first committee meeting of the bill in the house, the chair of the house insurance committee did state that he had had a call from an insurance agent who was afraid to come to the hearing and implied that the bill would remedy this situation if passed. It appears that these remarks were addressed to the original house bill which referred to any government "branch". However, it is clear that the house language referring to "branch" was ultimately rejected in the conference committee.

Additionally, although not strictly relevant to this proceeding, the Legislature's 1969 amendment of this statute is instructive. That amendment specifically included the Legislature. The amendment adds the language: "For purposes of this section, 'government department or agency' includes the executive, legislative, and judicial branches of government as stated in Article III of the Constitution." The legislative history of the 1996 amendment makes it clear that the legislators were very much aware of the American Family dispute and described the amendment as a "clarification" in hopes of avoiding the usual rule of construction that an amendment indicates that the Legislature intends to enact a change. A retroactive application of the 1996 statute would raise due process concerns, and if aimed specifically at one party such as American Family, would be an unconstitutional bill of attainder. It is a fundamental of due process that a statute with punitive consequences must be specific enough so that those regulated can clearly understand what constitutes a violation of the law. Interpreting the 1989 statute as the Department suggests would run afoul of this requirement. It is not reasonable to assume that insurance companies would be aware of the constitutional definition of department or reasonably believe that it applied to Minn. Stat. § 72A.20, subd. 20 (1994).

Accordingly, the Administrative Law Judge is persuaded that the Respondents' conduct did not violate the 1989 statute since the legislative intent at that time was to include only contacts with executive branch agencies. The plain meaning of government department or agency in 1989 excluded the legislature. That is not to say that the Respondents' conduct was appropriate or that it was not harmful to the regulatory system. The conduct clearly violated the 1996 statute.

"Coercion"

The Department argues that the Respondents engaged in coercive practices in the insurance business contrary to Minn. Stat. § 72A.20, subd. 18(b) by coercing its agents to not engage in behavior similar to that of Kemp and McClure. The Department points to the manner of the terminations, the lack of opportunity for rehabilitation, and the publication of the terminations to other agents and the media as evidence that American Family was trying to make an example of the agents. The Department suggests that insurance agents are licensed independently from the company they work for so that they can fulfill the special duties placed upon them by the Legislature which benefit the insurance consuming public. It argues that coercion of agents which disrupt this relationship violates the statute.

American Family does not contest the fact that it hoped other agents would get a message from the terminations and not engage in the same conduct. They acknowledge the agents' right to talk to their legislators and testify at the Legislature. They contend, however, that under the 1989 statute an insurance company had the right to act in a situation in which agents hire a lobbyist and take such a visible role, when their company is opposed to a particular piece of legislation. The Respondents assert that the coercion allegation simply restates the main allegation of violation of Minn. Stat. § 72.20, subd. 20 (1994). They point out that the principal-agent relationship is inherently "coercive" and argue that conduct cannot become a violation of law unless there is some element of unlawfulness. In other areas of the law, lawful activity usually cannot constitute duress or coercion. Coercion requires some wrongful or unlawful act. Pillsbury Co. v. National Union Fire Insurance, 425 N.W.2d 244, 251 (Minn. Ct. App. 1988); First State Bank of Hugo v. Federal Reserve Bank of Minneapolis, 174 Minn. 535, 537, 219 N.W. 908, 909 (1928). The Respondents also point out that finding the behavior in question to violate this statute raises a due process consideration. Generally, a statute is unconstitutionally vague if it fails to give a person of ordinary intelligence a reasonable opportunity to know what is prohibited. Thompson v. City of Minneapolis, 300 N.W.2d 763, 768 (Minn. 1980).

Perhaps most importantly, however, it is not clear that the behavior described violates the statutory language. The statute includes the prohibition on coercion with the prohibition of "fraudulent, coercive or dishonest" practices which are found to be unfair and deceptive acts or practices. This subdivision is included in a number of prohibitions directed towards insurance companies which seem to protect people such as policyholders and beneficiaries. The Department has advanced no authority from Minnesota or other states for bringing company treatment of agents within the umbrella of unfair method of competition or an unfair and deceptive act or practice. Words like "fraudulent" or "dishonest" do imply unlawfulness. This section would be violated if, for example, an insurance company pressured agents to act illegally or unfairly in their dealings with consumers or pressured agents to sell unsuitable products. There is nothing in the record to indicate fraudulent, coercive or dishonest practices of that nature toward the agents or toward the public. Additionally, it does appear that the alleged violation of Minn. Stat. § 72.20, subd. 18(b) and Minn. Stat. § 72A.20, subd. 4 involves the same facts as the main alleged (and more specific) violation in this case, namely, termination for contacting the government. The Department has not carried its burden of persuasion to show that the Respondents engaged in coercion within the meaning of the statute.

Boycott or Intimidation

The Department also asserts that the Respondents engaged in a violation of Minn. Stat. § 72A.20, subd. 4 which prohibits "any act of boycott, coercion, or intimidation, resulting in or tending to result in unreasonable restraint of" the business of insurance. Such action is again classified as an unfair method of competition and an unfair and deceptive act of practice. The Department believes that American Family boycotted and intimidated its agents from joining or continuing to be part of AFAAMN. It argues that actions on the part of an insurance company that silenced the voice of its agents violate this provision and, again, impairs the regulatory framework for insurance in the State of Minnesota. The Department asserts that if American Family's agents are too frightened to report potential wrongdoing, American Family does net a competitive advantage in violation of the statute.

There are many examples in the record of the Respondents' hostility towards AFAAMN and its efforts to discourage membership in the organization. The Respondents assert that such actions are not unlawful as they would be if American Family fell under the National Labor Relations Act which protects employees in their associational rights. Again, the Department has not produced any case law precedent for the application of a statute of this nature to a situation where an insurance company discourages membership in an association of its agents. The facts in the record do not support a conclusion that the Respondents were engaged in a conspiracy to terminate or intimidate activists in the agents' association. Rather, the record indicates a general disapproval of some of the association's activities with complaints and warnings occasionally made to individual agent members of the association. While such activity may, in fact, be contrary to the public interest in vigorous regulation of the insurance industry, the Department has not carried its burden of persuasion to show that this otherwise lawful activity is properly characterized as "an act of boycott, coercion or intimidation, resulting to tending to result in unreasonable restraint of, or monopoly in, the business of insurance".

Misleading Representations

Minn. Stat. § 72A.20, subd. 2 forbids placing before the public in any way "any assertion, representation, or statement with respect to the business of insurance or with respect to any person in the conduct of the person's insurance business, which is untrue, deceptive, or misleading". The Department points to the boldface language in the letter sent to customers of Kemp and McClure which stated, in part:

YOU MAY BE RECEIVING A POLICY WITH ANOTHER COMPANY FROM YOUR FORMER AGENT. YOU DO NOT HAVE TO ACCEPT OR PAY FOR THAT POLICY . . .

The Department sees a clear implication by American Family that Kemp and McClure might attempt to enroll their former clients in insurance policies without their consent, which would be illegal. The record indicates that the letters to Kemp and McClure were different in significant ways from those sent to other agents. The question here is whether or not the letters were misleading or constituted false advertising.

American Family's explanation for the language of the letter was that it was concerned that the agents would aggressively compete for the business of American Family customers. In fact, both agents opened independent insurance agencies. Mr. Kemp was unable to solicit for American Family customers by virtue of his contract with American Family. Ms. McClure, who had no accumulated retirement benefits, was not prohibited from doing so.

Although the language in capital letters in the letter was inartfully phrased, it cannot be concluded that it was misleading within the meaning of the statute. The language might more appropriately have stated that the insured might be receiving a solicitation for another company from the former agent. Most of the adverse reaction by customers of Kemp and McClure seems not to have resulted from an implication of the agents illegally providing a policy but rather to have resulted from their shock at the agents no longer being with American Family and the lack of explanation as to why that was the case. It is customary, however, for the company not to go into great detail about reasons for the departure of an agent since it could be subjected to liability for doing so. The statute in question appears aimed at prohibiting misleading statements to consumers about insurance. The Administrative Law Judge is not persuaded that the statements made in the letters to the customers of Kemp and McClure are untrue, deceptive or misleading within the meaning of this statute.

Notice of Rights

A terminated insurance agent must be informed, in the written notice of termination, of his or her right to request a hearing before a board of review convened by the Commissioner. Minn. Stat. § 60A.177, subd. 2. The statute also requires an insurer to establish a termination review process for use at the option of the agent. If the written notice does not contain this information, the statute is violated. Agents Kemp and McClure were terminated by means of a hand-delivered letter. The letters, however, did not advise them of their right to a hearing under the statute.

The Respondents point out that even though the termination letters did not advise the agents of their statutory rights, letters were mailed the next day, January 12, 1996, which advised the agents of their right to a board of review as well as a right of internal review (Exs. 113, 114). Kemp and McClure did exercise one of the remedies, namely, an internal review with American Family. The Respondents argue that because the statute simply states that the written notice of termination shall advise the agent of the review rights it does not necessarily follow that the notice has to be provided on the day of termination. However, the statute is quite specific that the right to request a hearing must be included in the written notice of termination. This the Respondents failed to do, even though the notice was provided shortly thereafter. It must be presumed that the legislative intent was to let agents know, at the same time they were terminated, of their right of review. The Respondents' manner of handling the terminations in this case, although arguably only a technical violation resulting in no actual prejudice to the agents, should not be condoned since the statute would be unenforceable if the Commissioner were required to make judgments on each occasion as to how much time could elapse between a termination and the notice of rights before a violation of the statute occurred.

Cooperation

The Department also asserts that American Family failed to cooperate with the Commissioner's investigation and submitted false or misleading information. The statute requires an insurance company to "comply with requests for information, documents or other requests from the Department within the time specified in the request . . . ." Minn. Stat. § 45.027, subd. 1a. The Department argues that the Respondents failed to comply with this statute by failing to comply with the deadline set by the Department, initially declining to comply, and alleging a privilege for documents that were clearly not subject to its protection. The Respondents argue that although it may have narrowly interpreted the Department's initial request, the Company complied when it became clear that more information was sought. They point out that the Company did comply within ten days of receiving a fax of the complaint from the Department on January 31, 1996.

It seems clear that, as the Department asserts, the Company's initial response was intentionally terse and indicated only that the agents were terminated for conduct thought to be highly prejudicial to the interests of the Company. (Finding of Fact No. 85). The initial request clearly called for more information and explanation. (Findings of Fact Nos. 84, 89). American Family cited its concern with the possibility of civil litigation as a reason to maintain confidentiality. Again, the Company was less than candid in stating that all non-privileged documents had been provided when a large amount of relevant material had not yet been produced. Even allowing for the usual give-and-take between regulator and regulated which might normally accompany a request for information, it cannot be concluded that the Respondents reasonably complied with the request for information based upon this record.

The allegation of a violation of Minn. Stat. § 45.027, subd. 7(3) has not been sustained, however, since the record does not justify a conclusion that the information supplied was false, misleading or incomplete. The submission of additional information or explanation did not render the initial submissions false or misleading. Rather, the Respondents' shortcoming related to a failure to cooperate with the Department's investigation.

Summary

The conclusions above specifically reflect that the Respondents knowingly set about to intimidate their agents by terminating agents Kemp and McClure for their legislative activities. The agents were not offered an opportunity to explain their conduct or to change their actions. The terminations were precipitous and based upon the mistaken premise that Kemp and McClure had individually hired a lobbyist. Nonetheless, they were not rescinded. The terminations were publicized to other agents and the media. These actions clearly inhibited contact between agents and the Legislature to the detriment of the regulation of insurance in the State of Minnesota.

Respondents suffered adverse consequences including adverse publicity, an unfavorable legislative reaction towards the company, passage of the "quota bill" for exclusive agents, passage of the amendment prohibiting terminating agents for legislative contacts, this regulatory proceeding and related civil litigation. American Family has since indicated to its agents that it will comply with the 1996 legislation and acknowledged the agents' right to contact the Legislature. The Respondents' conduct should not be tolerated and it was not. It would not be a fair interpretation, however, to conclude that a violation of the 1989 statute occurred. The Department has proved that the Respondents fell short in providing the required notice to the agents at the time of their termination and in failing to cooperate with the Department's investigation.

GAB