A little known decision by an Oklahoma Appellate Court may affect employment contracts between insurers and their executives. In that decision, the court upheld a decision by the Oklahoma Insurance Commission that the employment contracts were void, since they had not been filed with or approved by the Commission as required by the Oklahoma Insurance Holding Company Act. Since the same type of law has been adopted in all or almost all states, the decision could serve as a precedent in any attempt to overturn an insurer’s employment contracts.
Facts. Two individuals — Paul Anderson and Ansil Ludwick — were employed by Victore Insurance Company as President and Executive Vice President, respectively; they were also directors of the Company. At a Board meeting in 1992, the directors voted to enter into three-year employment agreements with these two men. In 1994, the company terminated these two men’s employment. The two men then sought their salary for the remainder of the contract term.
Commission Decision. The hearing examiner at the Commission determined that the employment contracts were "management and service contracts" subject to the Oklahoma Holding Company Act. This provision required that all such contracts between an insurer and its affiliates be filed with the Commission 30 days prior to being entered into. The examiner then determined these contracts would not have received Commission approval, due to the financial status of the insurer at the time. As a result, the Commission determined the contracts to be void.
Court Decision. In Anderson v. State of Oklahoma, 964 P. 2d 937 (Ok.App.Ct. 1998), the Court upheld the Commission’s decision. In particular, the Court ruled as follows:
1. The parties had argued that they were not "affiliates" within the meaning of the Oklahoma Holding Company Act. That Act— like many other Holding Company Acts— defines an affiliate as a person who "controls" (or is controlled by) another person, and then defines "control" as follows:
The term "control"… means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract or otherwise, unless the power is the result of an official position with or corporate office held by the person. Control shall be presumed to exist if any person, directly or indirectly, owns, controls, holds with the power to vote, or holds proxies representing ten percent (10%) or more of the voting securities of any other person.
The Court ruled that the two men "controlled" the insurer, and were "controlled" by the Board of Directors, and therefore were affiliates. The Court found that the men did not hold power "solely due to their positions"; rather, they also held power through their contracts and their voting rights.
2. The Court also held that the employment contracts were "management agreements," and "service contracts," since the agreements employed the men to manage the insurer and to perform services for the insurer.
3. The Court then upheld the determination of the Commissioner that the contracts would not be approved if they had been filed, due to the precarious financial condition of the insurer.
4. Throughout much of its decision, the Court relied on the "broad discretion" of the Commission which was entitled to deference by the Court, and also referred to the limited role of the court in reviewing an agency’s decision.
The Court’s decision is one which many insurance company executives and counsel may find troubling. Since many insurers do not file employment contracts with their Insurance Departments for review under the Holding Company Act provisions, and since the Oklahoma law is similar (if not identical) to the Holding Company law as adopted in most states, the decision could serve as a basis to attempt to overturn employment contracts between insurers and their executives.
The decision is subject to attack, or may be distinguished, on several grounds:
1. Officers and directors of insurers are not usually thought to be "affiliates" of the insurer. While officers and directors may (or may not) have power to direct the management and policies of an insurer, in most cases they would fall within the exception for control through an "official position" or "corporate office." The Court’s reasoning on this issue gives little effect to this exception. The Court may have been influenced by the "voting rights" of the two men, but the decision does not explain the nature or strength of such rights.
2. Similarly, employment contracts are not ordinarily thought to be "management agreements" or "service contracts." While the scope of these terms is not defined in the Holding Company laws, ordinarily the terms are understood to refer to contracts with outside entities providing services to the insurer.
3. The Commissioner and the Court may have been influenced by the overly broad terms of the employment contracts. The insurer’s management labeled them as "sweetheart" contracts. The Commission’s examiner found (without much explanation in the Court’s opinion) that the contracts contained excessive charges and inequitable clauses, and did not have fair and adequate standards of performance.
4. The Commission and the Court were influenced by the impact of the contracts on the insurer. The Commission alleged that, if the contract terms were honored, the insurer would have less than its required minimum surplus. Presumably, this would not be the case for most insurers.
5. The Court’s opinion also deals with and relies on a separate provision of Oklahoma law which sets forth the standards for disapproval of management contracts. That type of provision may not exist or be applicable in other states.
For these reasons, insurers (and their executives) may find good reason to argue that their contracts are not subject to the precedent set in the Anderson decision.
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