Georgia Supreme Court Stalls Motor Club Plans

September 2005

In a case involving sales of motor club memberships, Georgia's Supreme Court recently overturned a Court of Appeals decision, unanimously continuing a Georgia tradition of giving broad construction to the meaning of "insurance." See Love et al. v. Money Tree, Inc., 614 S.E.2d 47 (2005). A corollary issue also decided by the court is whether an arbitration provision contained in a loan transaction occurring simultaneously with the insurance purchase is enforceable under a Georgia law prohibiting arbitration agreements in insurance contracts.

by Tim Ryles, Ph.D.
Tim Ryles Consulting

This case involves Money Tree of Georgia, Inc., a firm licensed under the state's Industrial Loan Act to issue small loans, i.e., loans of $3,000 or less. Money Tree's owner and immediate family members also own another company, Interstate Motor Club, that offers membership in a motor club. Both companies share the same offices. Auto club memberships, along with certain types of credit insurance, are sold in conjunction with the making of consumer loans. Money Tree receives 60 percent of all auto club membership fees, Interstate Motor Club, 40 percent. In fiscal year 1998, Money Tree received $701,428 from the sale of motor club memberships.

Interstate Motor Club's contract states that members will "have peace of mind knowing that when the unexpected expenses of travel occur, they can call on their club for these outstanding aids and expense reimbursements" as benefits of membership. Benefits include:

• 50 percent of moving traffic violations up to $200

• Payment of up to $50 for a fine for invalid driver's license

• Up to $250 to defend a member in preliminary hearing and up to $500 trial defense for manslaughter personal defense fees, and up to $750 per incident for manslaughter by vehicle defense

• $100 traffic court defense

• Emergency road service up to $50

• Emergency ambulance service up to $75

• Emergency travel expense of up to $200 if travel is beyond 100 miles of home

In bold print, the motor club contract states: "This writing describes a motor club membership and is not a policy of insurance of any kind." On a separate page containing a binding arbitration provision, the following disclosure appears: "The membership is NOT INSURANCE of any kind and does not secure the loan or any collateral for said loan."

Plaintiffs brought suit against Money Tree including allegations that the motor club program constituted a policy of insurance and, consequently, the binding arbitration agreement was void. There were no allegations that Interstate Motor Club failed to meet its contractual obligations to members.

Money Tree's Argument and the Court's Response

Money Tree's defense relied heavily on three reasons forming the basis of victory in the Court of Appeals opinion: (1) that Georgia insurance regulators have never chosen to regulate motor clubs as insurance products; (2) that the club membership represents a mix of services and products distinguishing it from insurance; and (3) that the state legislature had not established a regulatory scheme for motor clubs.

In rejecting Money Tree's defense, Chief Justice Leah Ward Sears quoted Georgia's statutory definition of insurance at OCGA § 31-1-2 which defines insurance as "a contract which is an integral part of a plan for distributing individual losses whereby one undertakes to indemnify another or to pay a specified amount or benefits upon determinable contingencies." Several states have similar definitions of insurance. Chief Justice Sears's analysis of the motor club arrangement applying the definition noted that in return for membership fees on commissioned sales, Interstate Motor Club undertakes to pay a specified amount of money upon the occurrence of determinable contingencies. Additionally, "by enlisting numerous members, the club distributes individual losses among a large group of purchasers." Thus, in the court's view, consideration in the form of membership fees, commissions on sales, assumption of contingent risks by Interstate Motor Club, indemnification through benefit payments, and resource pooling to pay benefits satisfies the definition of insurance. By implication, if the motor club is insurance, then Interstate Motor Club may be an unauthorized insurer represented by an unlicensed agent (Money Tree) selling a product that has neither form nor rate approval in Georgia.

Key Points about the Decision

Because Something Is Not Regulated as Insurance Does Not Mean It's Not Insurance. Money Tree clearly demonstrated that Georgia's insurance regulators had never regulated motor clubs as insurance only to be told that failure of a regulator to regulate is not dispositive of whether a product falls within the agency's regulatory authority. Ultimately, the judiciary may independently determine if a given practice is or is not insurance, irrespective of what a regulatory agency does. This implies that courts may also reverse an affirmative decision of regulators to treat certain products as insurance should the courts determine otherwise.

What's in a Name Can't Allow Defeat by Form over Substance. As shown by the above citations to Money Tree's documents, the company proclaimed that the motor club is not insurance; however, the court determined that it is not the form but the substance of an arrangement that is key to determining whether something is insurance. This test was asserted by Georgia in 1935 as follows: "Whether or not a contract is one of insurance is determined by its purpose, effect, contents, and import, and not necessarily by the terminology used, and even though it contains declarations to the contrary." Benevolent Burial Ass'n v. Harrison, 181 S.E. 829 (1935). Insurance regulators will readily recognize that many bogus, unauthorized insurance plans usually contend that their products are not insurance and do not have to comply with insurance regulations.

Schemes To Circumvent Antiarbitration Clauses May Fail. Money Tree argued that the arbitration provision was part of the loan transaction, not of the motor club membership. If the court had bought this argument, the arbitration provision would be secure. Instead, the court held that even though Georgia's arbitration statute is not in the insurance code, it, nevertheless, is a law regulating the business of insurance. Accordingly, the federal arbitration act does not preempt Georgia's insurance regulatory scheme.

The Absence of Legislation Establishing a Regulatory Framework Is Not a Defense. Money Tree argued that since the state legislature had not established a regulatory framework for regulating motor clubs as insurance, it would be inappropriate to hold otherwise. Defense counsel also contended that establishing a regulatory scheme is a legislative, not an administrative prerogative. While the court did not directly address this issue, it probably had good reasons. The statute defines "insurance" and the Insurance Commissioner is delegated authority to implement that statute, along with laws prohibiting unauthorized insurers, unlicensed producers, and a panoply of other provisions governing insurers. In Georgia and elsewhere, it is not at all uncommon for regulators to adjudge an arrangement as "unauthorized insurance" in the day-to-day operations of an administrative agency. Making such a determination presupposes authority to determine what constitutes insurance. Indeed, for a model against which various arrangements can be measured, one need go no further than the many source materials used in the pre-licensing training of insurance agents. Georgia's pre-licensing course, for example, and other common sources describe the following distinguishing features of an insurance product:

1. It is a contract of utmost good faith.

2. It is aleatory, meaning that it is dependent on chance or uncertain outcome. Example: the uncertainty of needing emergency road service. Further, the exchange between insurer and insured is not commutative in nature; that is, they do not exchange equal amounts. An insured may get back in claims far more than is paid in premiums or, if no losses occur, a policyholder may pay premiums for life and never receive anything in return from the insurer.

3. It is conditional, meaning that an insured must satisfy certain conditions to gain benefits of the contract. Example: file a written claim for payment within a certain period.

4. It is unilateral in nature. The insured may cancel at any time.

5. The insured provides consideration (premium payments) in return for the insurer's promise to pay benefits.

What Kind of Insurance Is the Motor Club Arrangement? Some of the motor club benefits are closely linked to traditional vehicular emergency events; however, a substantial portion of the benefits cover court and legal costs more closely aligned with legal services. To the extent that legal services are covered, Georgia has an existing regulatory framework to regulate these risks. A cautionary word though: now that the Supreme Court has determined that motor clubs are insurance, officials might consider whether it is against public policy to cover risks that are criminal offenses.

Implications for Producers. Motor club contracts are sometimes sold by insurance agents as a supplemental revenue stream. The Georgia case is a message to these agents that they should not take a company's word at face value when a promoter tells them that a particular product is not insurance. Either through prelicensing courses, continuing education, or experience, most insurance agents have been introduced to the elements of insurance and should be able to identify red flags signaling whether a product at hand is insurance. Prudent agents will cover all bases, ask for detailed features of the plan, compare these features to regulatory models of insurance, and, at least, consult regulators as to the plan's regulatory status. There is a strong incentive for making this determination since penalties for representing an unauthorized insurer can be rather severe. Unfortunately, though, the fact that insurance departments don't regulate something is no guarantee it is not insurance.

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