AGENTS' LEGAL ISSUES

IS IT A LAW OR IS IT A MYTH?

Don't get tripped up on common misconceptions

By Randall Kleinman, JD, CPCU, CLU

Agents' Legal Issues provides a brief, general overview of a complex area of law, and neither the author nor Rough Notes intends it to be taken as legal advice for any specific legal problem. For a specific legal problem, consult legal counsel that understands the law of insurance and insurance agencies, and provide all the details.

There are many things in the law that people misunderstand. Some of these things are so commonly misunderstood that they take on a life of their own. Some are insurance-oriented, while others are not.

You can think of legal myths as being very like "urban myths"--the legal equivalent of alligators roaming the New York sewer system. There are myths about the law that are just as prevalent. Some have more than a grain of truth in them, and that can make them even more difficult to understand.

We'll take a look at some non-insurance legal myths first, and then turn to some insurance-related legal myths.

The local guardian. My first experience with a legal myth involved a case, many years ago, where an elderly man needed to have a guardian appointed for himself and his estate (which was worth a lot of money). A number of people all assured me that the guardian had to be a resident of the state in question. Everywhere I turned, it seemed that someone was telling me that. (Such a rule would have made it difficult for the man's relatives--who lived out of state--to serve as guardians and made it much more likely that in-state friends of the man would be appointed.) It wasn't true under that state's law, but a lot of people were absolutely sure that it was. Being "common knowledge" didn't make it true.

The common law wife. Perhaps the most common legal myth in the past was the "common law wife." It was quite common 50 years ago for a man to refer to a woman as his common law wife if he had lived with her for a certain period of time, and if he considered their bond to be near-permanent. Of course, few of these couples knew what the law actually said about common-law marriages--while such marriages were allowed in some states under particular circumstances, the great majority of people claiming a common-law marriage did not fall under those legal provisions.

Possession is nine-tenths of the law. This old saying has a lot of appeal--it just sounds authoritative. On the other hand, it isn't completely consistent with another old saying--finders keepers. Both of these sayings harken back to a time when we had fewer ways of proving ownership. But now, with certificates of title for cars, and deeds for property, and other ways of proving ownership, mere possession is less powerful than it used to be.

All the lawyers are buddies with the judges. Other common myths involve the workings of the court. One of them is that all the lawyers know all the judges. That is likely to be true in smaller towns; but in big cities, where there are hundreds or even thousands of active judges, no lawyer can be buddies with more than a tiny portion of them.

I need a lawyer who "knows" the judge. Connected with the previous myth is the myth that certain lawyers have an "in" with certain judges. It is true that good lawyers tend to develop good reputations which judges may know. However, most judges will bend over backwards to avoid favoring one side over another just because they are acquainted with a lawyer.

Don't get a public defender. There is a common myth among criminals that court-appointed public defenders aren't as good as highly paid private criminal lawyers; however, the opposite is often true--the public defenders usually work for their ideals of justice, while the compensated lawyers may sometimes be less motivated and more jaded.

Make a "federal case" out of it. People sometimes think that if they "get their case in federal court," they'll get better treatment. In fact, long ago this was of such concern that a federal law was specifically created to allow for people to take any case to federal court as long as the plaintiffs and defendants were from different states, and the amount was large enough. It is true that federal courts hear fewer cases, and the cases are sometimes larger in dollar amounts. But there is no indication that state court judges fail to handle most cases properly--in fact, every state allows for appeals to higher state courts if you aren't satisfied with how the original judge handled the matter. Long, long ago, many state court judges were not lawyers, while federal judges were of higher quality. But nowadays, things are not so clear.

First guy to sue has the advantage? People often worry that they will be seen as the bad guy if they are forced to be the defendant in a court case. Such people want to jump the gun on the other party by filing suit first. However, the typical judge has seen thousands of cases and knows that defendants are winners just as often as plaintiffs.

I have a right to have my case heard by a judge and jury. Well, no. Not any more. In the old days, a lawyer had to file a case if the client wanted a judge to decide it. Nowadays, in most jurisdictions, the lawyer has an affirmative duty to make sure the case has some possibility of being a winner. In essence, the lawyer is forced to play judge to the extent of ascertaining that the result won't obviously go against his/her client. And then, even if the case is viable, it gets to the trial stage only if it can pass a variety of pre-trial obstacles which are all designed to resolve cases that can be resolved in other ways. Even if they get to the trial stage, many types of cases are not eligible for trial by a jury but must be heard instead by a judge alone.

Why can't they just use plain English? Perhaps the biggest myth of all is is that "plain language" would do away with the need for laws and lawyers. The idea here is that simple words like "car" would make everyone's life easier--instead of complex terms like "four-wheeled trailerless non-commercial passenger vehicle." This concept has so much innate appeal that a number of states now require plain language. However, if you've ever read a plain-language policy, you've probably noticed that it is no shorter (and perhaps is even longer) than an old-fashioned, complex-wording policy. That's because everything has to be defined, with exceptions and extensions and modifications to the basic concept dealt with. There's really no way around the necessity to say it all if you want it all understood. Plain language is an improvement in some cases, but it risks deluding non-lawyers who think they will now understand plain-language policies at a glance.

What other kinds of legal myths can impact the world of insurance? There are several.

My carrier tells me that it's ok ... One myth involves whether you can rely on the carrier. Many agents are sure that if the carrier says it's so, then it's so. No one seems to stop to think about whether the carrier's representatives are sworn judges; rather, it's a sense of certainty that carriers are always right about such things. Well, carriers aren't always right--I recall one notable case many years ago where a carrier decided to stop doing business in a particular state but failed to check what the statutory restrictions were on how to stop doing business. After a quick letter from me, the carrier in question very quickly backtracked in its position.

Most carriers do have lawyers on staff who research the law for them quite thoroughly. However, by the time the lawyers' legal opinions make it through the various levels of the carrier's management, the message that may get out to agents might just be a little different than what the lawyer originally said.

So always be ready to question your carrier about the source of its position on a legal topic. If the carrier's position involves your sticking your neck out, then you have an exposure that needs more handling than just "my carrier thinks it's ok."

The carrier says it's been approved by the department. A classic case of this involved the agent who relied on a carrier who assured him a particular insurance product had been approved by the state. Unfortunately, the carrier in question had itself not been approved by the state, and the carrier's representative was simply lying to the agent. The carrier, of course, was shut down eventually by the state, the representative disappeared, and the agent was stuck with lawsuits and disciplinary problems as a result of blindly believing that "the carrier knows."

Living trusts save millions in estate taxes? Another problem area involves the living trust. If you've sold any life insurance to wealthy clients, then you may have dealt with living trusts; and if you are an affluent person, you may have considered using a living trust yourself. For years, some people hawking living trusts have broadly implied that living trusts will allow you to avoid estate taxes. They do so by saying that living trusts "may allow you to avoid the heavy costs of probate." Most people assume that the heavy costs of probate are estate taxes, but in fact they are not. Costs of probate refers to court costs connected with the procedure of probating an estate; and while they may sometimes be good to avoid, they are often not that heavy. But thousands of people think that living trusts are the "trick" to avoiding estate taxes, and it can be difficult to this impression. Of course, in some cases, a living trust can be very useful--but it won't let you avoid estate taxes. There are, indeed, ways to avoid estate taxes for some people, but you should go to an expert for advice on that rather than hoping that one simple document will solve all of your problems.

Is it a contract or not? Contracts are an area where many "myth" problems arise. Some people think that only written contracts are valid--thus putting them at risk when they make verbal promises that a court may see as a contract. Others think that a verbal contract can be made, but only if a handshake is part of it. That isn't true, either. Still others think that a "letter agreement" isn't a contract, whereas in many cases it will be interpreted as one. And the worst misconception is based on the idea that a court will consider all of the circumstances surrounding the entering into a contract to judge whether it was fair; in fact, courts often use the "four corners" rule. This rule says that a judge will view only the contract provision within the four corners of the document and will not consider any of the many outside circumstances that might cause a person to view the contract quite differently.

Hey, I'm safe--I have E & O! Aren't I? Where insurance is concerned, a very common misconception is that errors and omissions insurance covers just about everything you may do as an agent. In fact, some of the exclusions cover common problems. If they are common, why are they excluded? The theory of insurance teaches us that insurers will exclude claims if they are 1) too frequent or severe to be handled as a standard coverage item, 2) too susceptible to fraud by the insured, 3) likely to be severe and well within the ability of the insured to avoid in most cases.

Does the insurance company always lose? Another myth is that "the insurance company always loses." The concept is that an insurance company (or agency) is seen as a "deep pocket" and thus will always be milked by the court to satisfy the other side's monetary needs. In fact, though, if you look through a lot of insurance cases, you will see that most courts rule in favor of insurance companies, when the law is on their side. There are certainly some notable exceptions, but the number of exceptions is not as large as you might think.

Finally, there is the most important myth of all: one goes to court for justice. America has the best system of justice in the world. It doesn't always give justice to all parties in the lawsuit, since mistakes can be made (and opinions can differ as to what is "justice" in a given case). But it does provide a method of handling disputes that is non-violent, and it provides a way to end disputes. Ninety-nine percent of cases are handled by judges or juries who dispense justice; and in the remaining one percent, at least there is a way to end one's troubles. In the final analysis, getting on with life can be the best verdict of all!

The Author
Randall Kleinman, JD, CPCU, CLU, ARE, has written the Agents' Legal Issues column since 1994. A graduate of Stanford Law School, he is the former president of one of the nation's largest CPCU chapters. He currently serves as vice president of Marketing/Online Services and is corporate counsel for an insurance-related technology company.