Countersignature Requirements are Permissible: Resident Agent Countersignature Requirements are NOT Permissible

Background

During the last decade state statutes mandating resident agent countersignature requirements on insurance policies and surety bonds have been uniformly struck down as unconstitutional in court decisions across the United States, and all states having such statutory language have repealed that language as outdated with respect to modern business practices and as violative of federal constitutional law. Recent federal court decisions have made clear that, on constitutional grounds, licensed non-resident agents must be given the ability to conduct business on substantially equal terms with licensed resident agents. It is not the countersignature requirement itself that violates the law; it is any requirement that mandates only resident agents can countersign policies and bonds.

Accordingly, insurance policy and surety bond countersignature requirements are legal and proper, as long as they do not distinguish between licensed resident agents and licensed non-resident agents. What causes some unfortunate confusion on this matter is that there are new books and articles in the public domain that pronounce that the countersignature requirements in general have been repealed. This is simply inaccurate; it is the resident agent language of the countersignature laws that has been repealed.

NASBP Advocacy

The countersignature issue, however, continues to baffle state agencies and their architects and consultants that prepare bid packages, as evidenced in recent years by numerous resident agent countersignature requirements for bonds in bid packages for public projects. Notified by its members, NASBP has sent letters to various state attorneys general, state DOTs, state secretaries of state, and architects and engineers on state projects, informing them that their resident agent countersignature requirements in project bid packages are discriminatory and unconstitutional and urging them to amend their countersignature requirements to comport with current law.

When a bid package includes a countersignature requirement or when a state agency enforces a countersignature policy, this is a discriminatory practice that treats licensed nonresident agents unequally in the pursuit of insurance activity. The unpleasant upshot in such a situation is that, even if a bond producer complies with the countersignature requirement, if he/she does not have a licensed resident agent countersignature, the state agency that issued the bid package will improperly reject the bonds—and the bid—based on the fact that they are not countersigned by a licensed resident agent. NASBP is aware of a number of instances wherein businesses pursuing contract awards have been unduly hampered or delayed in their ability to conduct business due to the misguided rejection of bonds not bearing “resident agent” countersignatures.

Repeal of Resident Agent Countersignature Requirements

As noted above, resident agent countersignature requirements have been eliminated in the United States, through acts of state legislatures or through judicial decisions declaring them unconstitutional. (Please note that Guam is the sole exception. The law has likely not been challenged in Guam, and it is unlikely that it could withstand such a challenge.) Such courts have found statutes mandating that only resident agents can countersign policies and bonds to discriminate unlawfully against licensed non-resident agents, violating their rights under the Privileges and Immunities Clause and the Equal Protection Clause of the U.S. Constitution.

The Demise of the Resident Agent Countersignature Requirement in Florida

A well-known case on this matter is Council of Insurance Agents and Brokers v. Tom Gallagher, 287 F. Supp. 2d 1302 (N.D. Fla. 2003), by which the U.S. District Court in Florida struck down a Florida statute that impermissibly favored resident agents. In this case the plaintiff trade association challenged Florida statutes that precluded an insurance agent who is licensed by the state of Florida but resides outside the state from placing coverage in the state without the participation of—and payment of a substantial share of the premium to—a licensed agent who resides in the state. The only discernible purpose of the resident agent countersignature requirement is to protect the financial interests of agents who reside in Florida. The court determined that there was no rational basis for a distinction between Florida-licensed resident agents and Florida-licensed non-resident agents and, granting summary judgment in favor of the plaintiff, declared unconstitutional those portions of the statutes at issue that discriminated against Florida-licensed nonresident agents.

The district court observed that the “countersignature” statutes provided that, when insurance is placed, an agent who is a “resident of this state” must participate in and be paid at least a specified share of any commission. Thus, any policy must be “countersigned” by a Florida resident agent, who must be paid a certain percentage of the total commission.

The district court stated the general policy behind its decision to invalidate agent residency requirements:

This is one nation with one economy. Each individual state retains it own sovereignty and its own ability to govern within its borders. A state thus may require that persons seeking to engage in any particular form of economic activity—acting as an insurance agent, for example—demonstrate their competence and meet appropriate prerequisites to licensure. But no state may build a fence at the border to keep out residents of other states or to keep them from competing for business within the state. Thus nonresidents who meet the same standards that a state imposes on its own residents ordinarily may not be barred from plying their trade within the state.

The district court cited the principles articulated by the U.S. Supreme Court in Supreme Court of New Hampshire v. Piper, 470 U.S. 274 (1985), in which the Supreme Court struck down the residency requirement imposed by New Hampshire as a condition to obtaining a license to practice law in New Hampshire. The district court further observed that the “clear teaching of Piper is that the state cannot ordinarily condition a professional license on residency within the state. The principle is fully applicable to insurance agents.” The district court further explained as follows:

 The Commissioner’s analogy between insurance agents and attorneys is both apt and fatal to the Commissioner in this case. The analogy is apt because practicing law, like placing insurance, is a proper subject for state regulation; indeed, both are areas in which a state properly can and clearly should require an appropriate showing of relevant expertise. The analogy is fatal because the state cannot require an insurance agent who makes the appropriate showing of relevant expertise to be a resident of the state as prerequisite to licensure, just as a state cannot require residency for admission to the state bar. Piper squarely so held with respect to attorneys, and the same principle obviously applies to insurance agents.

The district court declared that sections 624.425, 626.741, and 626.927 of the Florida Statutes “violate the Privileges and Immunities Clause and Equal Protection Clause of the United States Constitution to the extent that they deny to Florida-licensed nonresident insurance agents the same rights and privileges that they afford to Florida-licensed resident agents.”

The district court’s decision was issued on September 30, 2003; and on November 12, 2003, the Florida Director of Insurance issued Information Bulletin DFS-03-004 discussing the opinion. Among other things, the bulletin stated as follows:

 Property, casualty and surety policies written through Florida-licensed nonresident agents are no longer required by law to be countersigned by a Florida resident insurance agent. Policies must be signed by the insurer and by a properly licensed resident or nonresident agent.

In 2004, in accordance with the district court’s decision, the Florida legislature removed from section 624.425 of the Florida Statues the term “a resident of this state,” thereby removing the resident agent countersignature requirement. This action by the Florida legislature was in keeping with the state legislative trend to repeal resident agent countersignature requirements as outdated and violative of federal constitutional law.

This spotlight on the history of the repeal of the resident agent countersignature law in Florida will hopefully give NASBP members, associates, and affiliates a better understanding of the policy and legal reasons behind the repeal of all resident agent countersignature laws and regulations. Remember, countersignature requirements specifying countersignatures from licensed agents are valid and enforceable; only when the requirement includes a residency component does it run afoul of the law.

The author of this article is Martha Perkins, General Counsel at NASBP. Martha Perkins can be reached at mperkins@nasbp.org or (202) 686-3700.

This article is provided to NASBP members, affiliates, and associates solely for educational and informational purposes. It is not to be considered the rendering of legal advice in specific cases or to create a lawyer-client relationship. Readers are responsible for obtaining legal advice from their own counsels, and should not act upon any information contained in this article without such advice.