Interpretive Opinion No. 71 / 50F

State of California Department of Corporations

Brian R. Van Camp, Commissioner
In reply refer to: File No. _____

This interpretive opinion is issued by the Commissioner of Corporations pursuant to section 31510 of the franchise investment law. It is applicable only to the transaction identified in the request therefor, and may not be relied upon in connection with any other transaction.

Mr. Robert P. Gates
Attorney at Law
Hanson, Bridgett, Marcus & Jenkins
Citizens Building
One Kearny Street
San Francisco, CA 94108

Dear Mr. Gates:

The request for an interpretive opinion contained in your letter dated July 29, 1971, as supplemented by your letter dated August 5, 1971, has been considered by the Commissioner. Your letters raise the question whether either of the agreements between Unique Insurance Service, Inc., a California corporation, dba Agency Service Bureau ("ASB") and various licensed insurance brokers and agents, are franchises within the meaning of Section 31005 and subject to the provisions of the Franchise Investment Law. On the assumption stated below, this question is answered in the negative.

You have represented that ASB was incorporated on November 20, 1968, and is presently a fire and casualty licensee, licensed under the California Insurance Code as an insurance agent and insurance broker. Three of its present five shareholders are also licensed insurance agents and brokers. A fourth shareholder is named on the broker/agent's license of ASB, and the fifth shareholder holds an individual fire and casualty license as an insurance agent.

You have further represented that ASB was formed for the purpose of aiding small, individual insurance agents and brokers in placing their fire and casualty insurance policies with carriers who prefer to do business with agents and brokers of a large size.

ASB enters into two different agreements. Under the first form of agreement ( "member agreement" ), a broker/agent referred to therein and hereinbelow as "member", is appointed a "subproducer" by an insurance carrier as its agent through ASB. He then places all his insurance under ASB's broker/agent's license with that insurance carrier and shares his commissions with ASD, usually one-half to the member and one-haif to ASB. ASB keeps a record of the policies of members.

Under the second form of agreement ("broker agreement" ) , the broker/agent referred to therein and hereinbelow as "broker", retains the entire amount of his commissions and ASB retains any contingency fees. The broker agreements will be available to broker/agents who currently have annual gross billings in excess of $100,000 and "preferred risk" customers. The broker will be named as a "principal" on ASB's broker/agent's license and will sell insurance as a representative of ASB. The broker agreement also contains an offer to the broker of some shares of ASB's common stock. The broker agreement will be entered into in consideration of cash and the cancellation of the member agreement of the broker, if the broker is presently a. member.

Both agreements require the members or brokers to place all fire and casualty insurance business with ASB. In addition, the member agreements provide that the members will not engage in the general insurance business with any broker, agent, or insurance company other than ASB.

Section 31005 of the Franchise Investment Law defines "franchise" to mean a contract or agreement, either expressed or implied, whether oral or written, between two or more persons by which a franchisee is granted the right to engage in the business of offering, selling or distributing goods or services under a marketing plan or system prescribed in substantial part by a franchisor, the operation of the franchisee's business pursuant to such plan or system is substantially associated with the franchisor's trademark, service mark, trade name, logotype, advertising or other commercial symbol designating the franchisor or its affiliate; and the franchisee is required to pay, directly or indirectly, a franchise fee.

Under the circumstances represented by you as reflected above, it does not appear that either the members or the brokers offer, sell, or distribute insurance under a marketing plan or system prescribed in substantial part by ASB, as required by Subdivision (a) of Section 31005. In our opinion, such a plan or system is not provided by the requirement contained both in the member agreement and the broker agreement that all advertisements, letterheads, correspondence, and billings shall be approved by ASB and shall include the notation "Using Services of AGENCY SERVICE BUREAU", especially since you have represented that this notation is required under the Insurance Code to disclose to customers the fact that the insurance is being placed under the license of ASB and that ASB is responsible to the customers.

Accordingly, it. is our opinion that, under the circumstances represented by you as reflected above, the member agreements and the broker agreements are not "franchises" within the definition of Section 31005, and are not subject to the provisions of the Franchise Investment Law. This opinion is predicated on the assumption that, except as represented by you, no directions, recommendations, or suggestions will be issued by ASB to members or brokers with respect to the sale of insurance under ASB 's broker/agent's license.

Since we have expressed the opinion that, under the circumstances and on the assumption stated above, the agreements in question are not franchises because of the lack of a marketing plan or system, we need not consider the arguments presented by you in support of your contention that such plan or system is not substantially associated with ASB's trade name or other commercial symbol, as required by Subdivision (b) of Section 31005, and, that certain payments being received by ASB under these agreements, do not constitute a "franchise fee" within the meaning of Subdivision (c) of that Section. We also need not resolve the question whether the brokers and members are engaged in the business of offering or selling or distributing goods or services but refer in this context to Section 1802.2, Civil Code, as indicating that in some circumstances, the sale of insurance is considered as the sale of services.

We have noted and mentioned above the provisions in paragraph 2 of the broker agreement for the offer of shares of stock by ASB to the broker, and we have also noted the clause in said paragraph which contains language substantially in accordance with Section 25102 (a) of the Corporate Securities Law of 1968. We call your attention to the requirement of that Section that an offer thereunder (and not a sale) containing this language, is exempted from the qualification requirements of Section 25110 only if it does not involve any public offering, and moreover only if no part of the purchase price is paid or received and none of the securities are issued until the sale of such securities has been qualified under the Corporate Securities Law of 1968. You have not requested and lacking necessary factual information, we are not expressing an opinion concerning the availability of the exemption.

Please understand also that we express no opinion as regards conformance of the proposed arrangements to laws or regulations administered by the California Department of insurance. It is recommended that in this regard you address your inquiry directly to that Department.

Dated: San Francisco California
September 8, 1971

By order of
Commissioner of Corporations

Assistant Commissioner
Office of Policy