Opinion ID: 1304571
Heading Depth: 1
Heading Rank: 2

Heading: the agents' liability

Text: The Director's commissions action is based solely on the theory of unjust enrichment. That theory provides for the flexible, equitable remedy of restitution whenever the court finds that `the defendant, upon the circumstances of the case, is obliged by the ties of natural justice and equity' to make compensation for benefits received. Murdock-Bryant, 146 Ariz. at 53, 703 P.2d at 1202 (quoting D. DOBBS, REMEDIES § 4.2, at 435 (1973)); accord City of Sierra Vista v. Cochise Enterprises, Inc., 144 Ariz. 375, 381, 697 P.2d 1125, 1131 (App. 1985); Pyeatte v. Pyeatte, 135 Ariz. 346, 352-53, 661 P.2d 196, 202-03 (App. 1982). Restitution is appropriate in this case, the Director argues, because the agents' commissions were generated by illegal sales of a worthless product. The agents have their commissions, paid out of premium payments made by the insureds, while the insureds have only worthless paper. The court of appeals rejected the Director's argument. The court reasoned that the policies are not `worthless,' because Common Market insureds enjoy fully enforceable rights, as creditors of Common Market, to recover claims they file with the receiver. 154 Ariz. at 55, 739 P.2d at 1372. Furthermore, the court added, the agents are entitled to their commissions because they sold the policies in good faith, [3] without previous notice that Common Market was an unauthorized insurance company. 154 Ariz. at 55, 739 P.2d at 1372. It is true, as the court of appeals pointed out, that under A.R.S. § 20-402(A), Common Market's status as an illegal insurer does not impair the validity of Common Market's policies. 154 Ariz. at 55, 739 P.2d at 1372. In theory, Common Market's policies are still effective and its insureds can enforce their rights as creditors in the liquidation proceedings. This theoretical right to recovery, however, does not defeat the insureds' right to restitution in this case. First, although Common Market's policies are technically valid, in reality they are worthless. Policy benefits remain unpaid; Common Market has not and cannot honor its policies. In this situation, § 20-402(A)'s guarantee is largely meaningless. Consequently, the insureds' right to stand in line with other creditors is no reason to curtail the insureds' right to seek restitution from their agents. Second, the insurance code is designed primarily to protect consumers, not insurers or their agents. 1980 Ariz. Sess. Laws, Ch. 230, § 1 (The objectives of the department of insurance are to ... protect the citizens of this state who purchase insurance....) (cited as a historical note to A.R.S. § 20-101 (Supp. 1986)). Section 20-402(A), for example, protects insureds by preventing unauthorized insurers from rescinding or voiding their policies. If the insurer is solvent, this statutory validation of the insured's policy should provide adequate protection against unauthorized and therefore illegal insurers. If insureds are unable to actually recover their claims pursuant to subsection (A), however, subsection (B) allows insureds to sue their agents for the full amount of any valid, unpaid claims. Significantly, subsection (B) allows recovery from the agent who sold the policy even if the sale was made in good faith and even though the policy is technically effective. The clear objective of the insurance code in general and § 20-402 in particular is to protect consumers from unauthorized insurers, even at the expense of agents who, in good faith, sold illegal policies. Requiring restitution in this case is consistent with this objective. In our view, the legislature that imposed personal liability for payment of claims on the agents who sold illegal policies could not have intended that those same agents be allowed to profit by retaining the sales commissions generated by the premiums paid for those illegal policies. Finally, common sense dictates that the insureds should be allowed to seek restitution of the commissions generated by their premiums. We recognize, of course, that an agent ordinarily earns his commission when a policy is sold and that the insurer's later insolvency usually does not operate retroactively to forfeit the agent's commission. See Arizona Insurance Guaranty Association v. Humphrey, 109 Ariz. 284, 286, 508 P.2d 1146, 1148 (1973). However, the case before us is not comparable to an agent's sale of a legal policy issued by an authorized insurer. Where, as here, the insureds purchased illegal policies and the insurer is both unauthorized and insolvent, it is disingenuous to argue that the insurer earned its premiums or that the agents earned the commissions paid from those premiums. Although the agents may have done everything necessary to earn their commissions from the insurer, those commissions were paid from premiums engendered by an illegal, unauthorized transaction. Given the insurer's insolvency, those premiums purchased no benefits for the insureds. As between the agents and the insureds, therefore, the commissions generated by the insureds' premiums were clearly unearned. It makes no difference that the agents may have sold the policies in good faith. Restitution is `imposed for the purpose of bringing about justice without reference to the intentions of the parties.' Murdock-Bryant, 146 Ariz. at 53, 703 P.2d at 1202 (quoting Artukovich & Sons v. Reliance Truck Co., 126 Ariz. 246, 248, 614 P.2d 327, 329 (1980)). The otherwise vague or arguable concept of justice is made clear here by a legislative policy to protect consumer interests over the interests of illegal insurers and their agents, innocent or not. We hold that as between the agents and the insureds, the agents are not entitled to retain commissions earned from premiums paid for an illegal and worthless product. To the extent that they retain such commissions, they have been unjustly enriched and are liable to make restitution to the insureds.
When the Director filed the unpaid claims action, A.R.S. § 20-402(B) provided: In the event of failure of any such unauthorized insurer to pay any claim or loss within the provisions of such insurance contract, any person who acted directly or indirectly as an agent for or otherwise represented or aided the insurer in the solicitation, negotiation, procurement or effectuation of such insurance contract or renewal thereof shall be liable to the insured for the full amount of the claim or loss in the manner provided by the provisions of such insurance contract. (emphasis added). As the court of appeals acknowledged, § 20-402(B) makes the agents liable to their insureds for the full amount of any unpaid claims. 154 Ariz. at 55, 739 P.2d at 1372. See generally 16A J. APPLEMAN, INSURANCE LAW AND PRACTICE § 8834, at 50-60 (1982).