The following opinion is presented on-line for informational use only and does not replace the official version. (Mich Dept of Attorney General Web Site - www.ag.state.mi.us)



STATE OF MICHIGAN

FRANK J. KELLEY, ATTORNEY GENERAL


Opinion No. 6630

April 25, 1990

CORPORATIONS:

Piercing the corporate veil where a corporation is used to defeat the policy established by a statute

INSURANCE:

Insurance agencies established for the purpose of selling only a single group policy of credit life insurance

MOTOR VEHICLE SALES FINANCE ACT:

Payment of credit life insurance commissions to insurance agencies connected or related to automobile dealerships

If the Insurance Commissioner finds that an insurance agency has been established for the purpose of selling only a single group policy of credit life insurance to a single automobile dealer and is not devoting a substantial portion of time to the active solicitation of insurance nor acting in good faith as an insurance agent, the Commissioner may, after notice and an opportunity for a hearing, suspend or revoke the license of such an agency for failure to meet or maintain the standards required for initial licensing.

Section 31(c) of the Motor Vehicle Sales Finance Act prohibits the payment, whether directly or indirectly, of any portion of a credit life insurance premium based upon the sale of an automobile to the automobile dealer, or to any of the dealership's officers, directors, employees, or agents; it does not, however, prohibit an insurer from paying a portion of such a premium to an insurance agency solely because the insurance agency is owned or operated by the spouse or other close relative of the automobile dealer unless it can be shown that the automobile dealer in fact controls or manages the insurance agency.

The Commissioner of Insurance may, in appropriate circumstances, "pierce the corporate veil"'D' and refuse to grant or renew an insurance license to a corporation if the Commissioner determines, by a preponderance of the evidence, that the corporation is being used to evade or defeat the purpose of Section 31(c) of the Motor Vehicle Sales Finance Act.

Dhiraj H. Shah

Acting Commissioner, Insurance Bureau

Department of Licensing and Regulation

Ottawa Building North

P.O. Box 30220

Lansing, MI 48909

I am writing in response to your recent memorandum reinstating an opinion request originally submitted by former Insurance Commissioner Nancy A. Baerwaldt in a March 5, 1982 memorandum and subsequently withdrawn by her successor. Former Commissioner Baerwaldt asked two questions regarding the legality of so-called "dealer related agencies,"'D' i.e., insurance agencies that are connected or related to an automobile dealership.

In her March 5, 1982 memorandum, former Commissioner Baerwaldt noted that:

Section 31(c) of the Motor Vehicle Sales Finance Act ... prohibits insurers from paying automobile dealers--other than for the benefit of the installment buyer--any portion of any insurance premium involved in the retail installment sale of a motor vehicle. ...

To circumvent the prohibition contained in Section 31(c), it is a common practice for car dealers to establish dealer related agencies. The dealer related agency is formed for the purpose of selling a group credit life insurance policy to the car dealer. The dealer related agency typically is paid 30 to 50% of the premiums paid by consumers. The money received by the dealer related agency directly or indirectly benefits the car dealer. For example, a family member of the car dealer is often an officer of the dealer related agency and receives most, if not all, of the money earned by the dealer related agency. ...

I am further informed that these so-called "dealer related agencies"'D' are generally established for the purpose of "selling"'D' only a single group policy of credit life insurance to a single automobile dealership. The dealer then issues certificates to those persons who purchase automobiles from the dealer and who elect to purchase credit life insurance on the vehicle. The only insured party under such a policy is the automobile dealer.

I am advised that several insurance companies will approach an automobile dealer, either directly or through a general agent, and offer to sell such a policy to the dealer. The company that prevails, or the general agent working for that company, will then establish the corporate insurance agency--the ""dealer related agency."' D' The general agent, or an officer of the insurance company, usually becomes the "active agent"'D' of this corporate agency. The insurance company typically will ask the automobile dealer who should be listed as the officers of the insurance agency. Normally, dealers will select their spouse, a parent, a brother or sister, other close relatives, or simply a trusted friend or business associate. These individuals are not insurance agents. They sell no insurance. The single group policy of credit life insurance is, at least in theory, sold by the newly established insurance agency to the automobile dealer. The only ongoing activity of the new insurance agency, however, is to receive the commissions paid by the insurance company on the policy.

In light of these facts, former Commissioner Baerwaldt sought my opinion on two questions related to the payment of such commissions to these "dealer related agencies."' D' Prior to addressing the former Commissioner's specific questions, however, it is appropriate to first address the threshold question of whether such "dealer related agencies"'D' are themselves lawful under the provisions of the Insurance Code of 1956, MCL 500.100 et seq.; MSA 24.1100 et seq.

Section 1204(2) of the Insurance Code of 1956, MCL 500.1204(4); MSA 24.11204(4), establishes the qualifications necessary for licensure of an insurance agent in Michigan, providing in pertinent part that:

After examination, investigation, and interrogatories, the commissioner shall license an applicant if the commissioner determines that the applicant is an employee of, or is authorized in writing to represent, an insurer which is authorized to transact insurance in this state, and the applicant possesses reasonable understanding of the provisions, terms, and conditions of the insurance the applicant will be licensed to solicit, possesses reasonable understanding of the insurance laws of this state, intends in good faith to act as an agent, is honest and trustworthy, possesses a good business reputation, and possesses good moral character to act as an agent. ... [Emphasis added.]

Pursuant to the rule-making authority vested in the Commissioner by section 210 of the Code, MCL 500.210; MSA 24.1210, the Insurance Commissioner has adopted 1983 AACS, R 501.4(1), which further elaborates upon the requirement that the applicant intend in good faith to act as an insurance agent. Rule 501.4(1) provides:

To qualify for licensure, a person, firm, or corporation shall devote a substantial portion of time to the active solicitation of insurance and shall comply with insurance law. Such amount of time shall be determined by the commissioner of insurance. [Emphasis added.]

Having been duly promulgated, Rule 501.4(1) is entitled to enforcement. OAG, 1985-1986, No 6270, p 9 (January 31, 1985). Clearly, the enforcement of that rule requires the Commissioner to consider whether a person, firm, or corporation whose sole activity is to issue a single group policy of credit life insurance to an automobile dealership is devoting "a substantial portion of time to the active solicitation of insurance"'D' within the meaning of Rule 501.4(1), or "intends in good faith to act as an agent"'D' within the meaning of section 1204(4) of the Code.

Section 1242(2) of the Code, MCL 500.1242(2); MSA 24.11242(2), provides that:

The commissioner, after notice and opportunity for a hearing, may suspend or revoke the license of an agent, solicitor, insurance counselor or adjuster who fails to maintain the standards required for initial licensing or who violates any provision of this act.

It is my opinion, therefore, that if the Commissioner finds that an insurance agency has been established for the purpose of selling only a single group policy of credit life insurance to a single automobile dealer and is not devoting a substantial portion of time to the active solicitation of insurance nor acting in good faith as an insurance agent, the Commissioner may, after notice and an opportunity for a hearing, suspend or revoke the license of such an agency for failure to meet or maintain the standards required for initial licensing.

Having addressed this threshold issue, I now turn to the specific questions raised by former Commissioner Baerwaldt in her March 5, 1982 memorandum.

The first question raised by the former Commissioner was whether, under the circumstances described above, the payment of premiums by an insurance company to a dealer related agency would violate section 31(c) of the Motor Vehicle Sales Finance Act.

The Motor Vehicle Sales Finance Act (MVSFA), Sec. 31(c), MCL 492.131(c); MSA 23.628(31)(c), provides in pertinent part that:

No insurance company, agent or broker shall pay or cause to be paid, directly or indirectly, to any installment seller, nor shall any installment seller receive from any such insurance company, agent or broker, any portion of any insurance premium involved in the retail installment sale of a motor vehicle other than for the benefit of the installment buyer, and all such payments shall be held by the installment seller in trust for the benefit of the installment buyer and shall be paid to such installment buyer within 30 days, unless used in procuring comparable insurance or credited to matured unpaid installments under the contract as provided in section 16, subdivision (f) of this act.

The underlying basis for this prohibition is the Legislature's desire to eliminate insurance buying practices that ultimately discourage competition, practices sometimes called "reverse competition."' D' Because the credit life insurance policy is essentially selected by the automobile dealer, but is paid for by the purchaser of the vehicle, the payment of premiums or commissions to the automobile dealer would tend to induce the dealer to select the most expensive policy rather than the least expensive one, in order to maximize the amount of the commissions he or she would receive. See, e.g., OAG, 1981-1982, No 5975, p 362, 363-364 (September 10, 1981). Section 31(c) attempts to prevent this from occurring by prohibiting the installment seller from receiving any portion of the premiums on such sales, removing the seller's incentive to select the more expensive insurance.

Section 31(c) not only prohibits an insurance company from using such premiums to pay sales commissions to installment sellers, but also prohibits the insurer from even reimbursing the installment seller for the dealer's actual costs incurred in connection with the sale of such insurance to the installment buyer. OAG, 1967-1968, No 4572, p 14 (February 3, 1967). Violation of section 31(c) by an installment seller is a misdemeanor. MVSFA, Sec. 37(b), MCL 492.137(b); MSA 23.628(37)(b). In addition, charges and costs assessed in violation of this provision are declared void and any such amounts already paid to the installment seller are forfeited and must instead be applied to the principal of the contract on the buyer's behalf. MVSFA, Sec. 31(d), MCL 492.131(d); MSA 23.628(31)(d).

Section 31(c) is consistent with provisions of the Insurance Code of 1956, which prohibit an insurance agent from rewarding or remunerating any person for procuring or inducing business, furnishing leads or prospects, or otherwise acting as an agent, MCL 500.1207(3); MSA 24.11207(3), and which prohibit insurers and insurance agents from paying rebates and other illegal inducements. MCL 500.2066; MSA 24.12066.

In analyzing the scope of MVSFA, Sec. 31(c), it is instructive to examine the definitional section of the Act. MVSFA, Sec.2(4), MCL 492.102(4); MSA 23.628(2)(4), defines "installment seller,"'D' in pertinent part, as:

a person engaged in the business of selling, offering for sale, or hiring or leasing motor vehicles under installment sale contracts or a legal successor in interest to that person. ... [Emphasis added.]

The term "person,"'D' in turn, is defined in MVSFA, Sec. 2(2), MCL 492.102(2); MSA 23.628(2)(2), as:

an individual, partnership, association, business corporation, financial institution, nonprofit corporation, common law trust, joint stock company, or any other group of individuals however organized, and the officers, directors, employees, and agents of those persons. [Emphasis added.]

Thus the term "installment seller,"'D' as used in section 31(c), expressly includes not only the automobile dealership, but also the dealership's individual officers, directors, employees, and agents. All of these persons are prohibited from receiving either direct or indirect payments of any portion of a credit life insurance policy issued in connection with the sale of a vehicle at that dealership.

A more difficult problem is posed by practice of automobile dealers in designating a spouse or other close relative as an agent, officer, or employee of the dealer related insurance agency.

The right of spouses to control their own earnings and to make contracts relating thereto is well settled. For example, in Rupert v Van Buren County, 296 Mich 240; 295 NW 630 (1941), the Michigan Supreme Court held that a prosecuting attorney may appoint his wife as a stenographer in his office. The Court noted that the financial interests of a married woman are separate from those of her husband. 296 Mich, at 242-244. A similar result was reached in OAG, 1983-1984, No 6151, p 110 (May 12, 1983), which considered whether a legislator had a conflict of interest as a consequence of his wife's interest in a business. The opinion concluded that "[g]enerally, a spouse's separate interests do not create a conflict of interest."' D' OAG, No 6151, at 111. See also, OAG, 1933-1934, p 316 (August 26, 1933), and OAG, 1975-1976, No 4869, p 95 (June 4, 1975). Thus, the mere fact that commissions paid to an insurance agency are received by the spouse of the automobile dealer who originated the transaction does not, in and of itself, establish a violation of section 31(c).

However, as is suggested by former Commissioner Baerwaldt's memorandum, it is certainly possible that automobile dealers might use their spouses as a front to circumvent the prohibition contained in section 31(c). If such circumvention can be demonstrated, it may establish that section 31(c) has been violated. Such a determination would, of course, be a question of fact which must be determined by you as the Insurance Commissioner on a case-by-case basis.

It is my opinion, therefore, that MVSFA, Sec. 31(c), prohibits the payment, whether directly or indirectly, of any portion of a credit life insurance premium based upon the sale of an automobile to the automobile dealer, or to any of the dealership's officers, directors, employees, or agents. It is my further opinion, however, that MVSFA, Sec. 31(c), does not prohibit an insurer from paying a portion of such a premium to an insurance agency solely because the insurance agency is owned or operated by the spouse or other close relative of the automobile dealer unless it can be shown that the automobile dealer in fact controls or manages the insurance agency.

Former Commissioner Baerwaldt's second question requested guidance regarding situations where an automobile dealer may attempt to use separate corporations as a means of avoiding the restrictions of MVSFA, Sec. 31(c). Specifically, she asked:

Would it be appropriate for the Commissioner to pierce the corporate veil of the dealer related agency, recognize that the party in interest with respect to the application is the car dealer, and refuse to grant or renew a license where it is probable that the dealer related agency will lead to a violation of Section 31(c) of the Act?

The general rule governing the piercing of the corporate veil or disregarding of the corporate entity is summarized in 18 Am Jur 2d, Corporations, Sec. 48, p 847, as follows:

Each case involving disregard of the corporate entity must rest upon its special facts. Generally, no one factor or circumstance is conclusive in determining whether or not to disregard a corporate entity; usually, a combination of factors is present in a particular case and is relied upon to resolve the issue.

Michigan's appellate courts have adopted the same position. As the Michigan Court of Appeals stated in Om-El Export Co, Inc v Newcor, Inc, 154 Mich App 471, 479-480; 398 NW2d 440 (1986):

[T]here is no simple or easy rule for determining when a corporate entity may be disregarded. Papo v Aglo Restaurants of San Jose, Inc, 149 Mich App 285, 301; 386 NW2d 177 (1986). Such a decision must be made in light of "'[t]he entire spectrum of relevant fact[s]"'D' underlying a particular case, Klager v Robert Meyer Co, 415 Mich 402, 411; 329 NW2d 721 (1982)... .

See also, Kline v Kline, 104 Mich App 700, 703; 305 NW2d 297 (1981), and Brown Bros Equipment Co v State Highway Comm, 51 Mich App 448, 452; 215 NW2d 591 (1974).

While each case turns on its own facts and therefore must be considered individually, the courts will disregard the corporate entity if a corporation is used to evade a statute or to defeat its purpose. Paul v University Motor Sales Co, 283 Mich 587, 602; 278 NW 714 (1938). See also, Washington Agency, Inc v Comm'r of Insurance, 309 Mich 683; 16 NW2d 121 (1944).

With regard to whether you may refuse to grant or renew a license, the Insurance Code, Sec. 1242(3), MCL 500.1242(3); MSA 24.11242(3), provides:

After notice and opportunity for a hearing, the commissioner may refuse to grant or renew a license to act as an agent, solicitor, adjuster or insurance counselor if he determines by a preponderance of the evidence, that it is probable that the business or primary occupation of the applicant will give rise to coercion, indirect rebating of commissions or other practices in the sale of insurance which are prohibited by law.

Accordingly, as Commissioner of Insurance, you have been vested by the Legislature with the authority to refuse to grant or renew a license to act as an insurance agent if, after a hearing, you determine that it is probable that licensure will give rise to coercion, indirect rebating of commissions, or other unlawful practices in the sale of insurance. This statute calls upon you, as Insurance Commissioner, to exercise your judgment and discretion based upon the evidence. If you determine that licensure of a so-called "dealer related agency"'D' will result in a violation of MVSFA, Sec. 31(c), you are authorized to refuse to grant or renew the license. See, Washington Agency, Inc v Comm'r of Insurance, supra.

It is my opinion, therefore, that the Commissioner of Insurance may, in appropriate circumstances, "pierce the corporate veil"'D' and refuse to grant or renew an insurance license to a corporation if the Commissioner determines, by a preponderance of the evidence, that the corporation is being used to evade or defeat the purpose of MVSFA, Sec. 31(c).

Frank J. Kelley

Attorney General