On October 28, 2015, the Division of Insurance entered an order revoking all insurance producer’s license of Gary Wayne Fravel of South Hamilton, Massachusetts. In addition, the Division Hearing Officer prohibited him from directly or indirectly transacting any insurance business or acquiring, in any capacity whatsoever, any insurance business in the Commonwealth of Massachusetts, also fined him $17,000, the maximum civil penalty that the Division could legally assess against him for his insurance law violations.
Fravel had been licensed by the Division since 1991, and had done business in Massachusetts under the name Fravel Insurance Agency, Fravel & Associates Insurance Agency Fravel & Associates Insurance, and Fravel Insurance at 183 Highland Street, South Hamilton, Massachusetts.
Five years between filing of complaint by Division and final decision fining Fravel and revoking his license
The Division filed its complaint to revoke Fravel’s producer license and for orders requiring him to dispose of any insurance-related interests, prohibiting him from conducting any insurance business, and imposing fines against him on December 8, 2010. That complaint charged that Fravel collected insurance premiums from customers but failed to transmit those payments to insurance companies or their agents, thus violating G.L. c. 175, §176, as well as G.L c.175, §162R (a)(4), improperly withholding, misappropriating or converting any monies or properties received in the course of doing business; and related violations arising from converting insurance premiums.
At the time that the Division filed its complaint against Fravel in December 2010, however, Fravel had already filed a bankruptcy petition in the United States Bankruptcy Court. Under the Bankruptcy Code the filing of such a petition automatically enjoins and restrains as a matter of federal law, “the commencement…of a[n}…administrative …action or proceeding” against him.
While there are exceptions that allow insurance license revocations to proceed if the Division obtained permission from the bankruptcy court, the Division’s Hearing Officer, in her discretion decided to stay the license revocation hearing because a pending adversary proceeding in the bankruptcy court related to allegations in the Division’s complaint against Fravel.
This stay of proceedings at the Division lasted until July 9, 2015. During the period of the stay the bankruptcy court conducted a trial of the adversary proceeding between Fravel and a managing general agency, Breed’s Hill Insurance. This agency objected to Fravel’s debt to the agency being discharged because of his fraud and breach of fiduciary duty.
Under the Bankruptcy Code, the debtor who incurred a debt by fraud of by breaching a fiduciary duty cannot be discharged. The federal law on this point, however, is quite stringent in its requirements.
In bankruptcy court, Breed’s Hill’s adversary proceeding alleged that Mr.Fravel a/k/a Fravel & Associates Insurance a/k/a Fravel Insurance, as its agent, “fraudulently converted funds received as insurance premiums (the “Debt”) to his own use and therefore, the Debt should be excluded from bankruptcy protection” and that Breed’s Hill should be awarded “punitive damages, damages, costs and attorney’s fees.”
Specifically, Breed’s Hill alleged that the Debtor, in violation of Mass. Gen. Laws ch. 175, § 176, collected insurance premiums and appropriated them for his own use, rather than “hold[ing] those premiums in fiduciary trust and turn[ing] them over to Plaintiff . . . .”
Fravel had placed insurance with Breed’s Hill, and that under the provisions of G.L. c. 175, § 176, he had received premiums from insureds as an agent who owed Breed’s Hill a fiduciary duty, and his failure to pay the premiums collected constituted fraud under this same statute as the statute states:
An insurance agent or broker…who receives any money or substitute for money as a premium for such a policy or contract from the insured or holder thereof, shall be deemed to hold such premium in trust for the company. If he fails to pay the same over to the company after written demand made upon him therefor, such failure shall be prima facie evidence… of larceny. (Emphasis added).
Thirty page bankruptcy court decision grants Fravel discharge of Breed’s Hill claim for converted premiums
The bankruptcy court conducted a trial on Breed’s Hill adversary complaint in August 2012. In January 2013, she entered a thirty page decision allowing Fravel his discharge of the debt owed Breed’s Hill for premiums collected.
Although the bankruptcy court judge noted that Breed’s Hill had obtained an execution in state court against Fravel for premiums owed and although Breed’s Hill had produced evidence establishing in bankruptcy court that Fravel had collected premiums and not remitted them to Breed’s Hill, she found the debt dischargeable.
Her decision reaffirmed what the bankruptcy court has previously found as a weakness built into G.L. c. 175, § 176, as a statute purporting to establish a trust for insurance premiums received by producers for the benefit of insurance companies and general agents.
As opposed to other state laws of a similar nature, the Massachusetts statute does not impose an obligation to hold premiums in a segregated account separate from the producer’s business accounts. Federal bankruptcy law does not recognize the Massachusetts statute “deeming” that insurance premiums are held in trust as a true trust because the statute does not require the producer to segregate premiums received into an actual trust account.
Division acts to revoke and fine following bankruptcy court decision
In July 2015, the Division Hearing Officer lifted her stay of the Division’s complaint against Fravel. Although, during the pendency of his bankruptcy proceeding Fravel maintained his producer license, in June 2015, just before the Division revived its complaint against him he allowed it to lapse. Although Fravel’s license may have lapsed under G.L. c. 175, §162R (e) the Division retained authority to enforce against him the provisions of the licensing statute 175, §§162H through 162X and G.L. c. 176D, the provisions of which grant the Division to impose fines for unfair and deceptive practices in the business of insurance.
Fravel did not appear to contest the Division’s accusations. Based on the submissions by the Division, the Hearing Officer found that:
- Fravel had an agency agreement with Breed’s Hill pursuant to which he could obtain insurance for his customers under the Breed’s Hill programs and, at Fravel’s request, Breed’s Hill issued insurance policies to three Fravel customers over a two year period, from approximately June 24, 2005 to May 29, 2007.
- A couple, the Butlers, who owned two apartment buildings and a three-family house in Lynn, had issued, between 2005 and 2007, 12 checks and a $2500 credit card transfer to Fravel Associates to pay premium for the policies issued by Breed’s Hill.
- Fravel did not transfer the Butlers’ premium payments to Breed’s Hill.
- In May 2008, Breed’s Hill filed a lawsuit against Fravel to recover premiums due for the policies it issued to Fravel’s customers and recovered a judgment and execution against Fravel.
- In June 2008, Fravel obtained liability insurance for the Geriatric Resource Center (“GRC”) from the Western World Insurance Company, through Connecticut Underwriters. The policy had a premium of $1,555.
- The day the policy was placed, GRC sent a check payable to Fravel in the amount of $12, 102.20 to cover the entire premium for the policy. GRC also signed, apparently without understanding the document, a premium finance application.
- In July, 2008, Fravel submitted GRC’s application to Prime Rate Premium Finance (“Prime Rate”) to finance $9,012.20 of the premium for the same GRC policy.
- After receiving a call from Prime Rate in December 2008, GRC subsequently learned that the policy had been cancelled on September 18, 2008 for nonpayment of premium. The cancellation notice had been sent to Fravel who never notified the insured.
- The GRC asked Fravel to refund the premium it had paid for the period after the policy was cancelled but received no return premium from him.
- On August 2, 2010, an insured Susan Kontos complained to the Division that on June 25, 2010 she sent Fravel a check for $803.38 to pay the premium for a commercial liability policy written by the Scottsdale Insurance Company through Connecticut Underwriters. Although the check cleared her bank on June 29, on July 16 she received a notice of cancellation for nonpayment of premium.
- Kontos telephoned Fravel but received no response. Fravel did not transfer the premium payment to the insurer, even after he was notified that Ms. Kontos had received the notice of cancellation.
Hearing officer orders maximum fines, license revocation and loss of right to transact insurance business in Massachusetts
The Hearing Officer proceeded with the Division’s complaint against Fravel and entered a default for his failure to appear upon notice. She made detailed findings based on the evidence and ruled that:
Fravel’s submission of a premium finance application for a policy that had been paid in full, his failure to notify his customer of a notice of policy cancellation, and his failure to transfer premium to a company after a customer informed him of a pending cancellation constitute dishonest practices and demonstrate incompetence, untrustworthiness or financial irresponsibility in the conduct of business in the commonwealth.
She also ruled that:
The litigation with Breed’s Hill supports a conclusion that Fravel also failed to honor his obligations to other licensees. I find that failure, too, demonstrates incompetence, untrustworthiness or financial irresponsibility in the conduct of business in the commonwealth. The record fully supports disciplinary action under G.L. c. 175, §§162R (a)(8).
The Hearing Officer revoked Fravel’s producer license concluding that: “Fravel’s multiple failures to transmit premium payments to insurers and his misrepresentations about customer payments are serious violations that fully support revocation of his producer license.”
Additionally, the Hearing Officer prohibited Fravel from transacting any insurance business, directly or indirectly, in Massachusetts, and requiring him to dispose of any interest he may have in any insurance business in Massachusetts.
Finally, the Hearing Office found that each of Fravel’s failures to transfer premiums to insurers, his misrepresentations to a premium finance company, and his failure to transmit cancellation information to a customer constituted seventeen separate violations of G.L. c. 176D. For each of these violations the Hearing Office imposed the maximum fine of $1,000.
The final order required Fravel to pay the total fine imposed of $17,000 within 30-days of the entry of the order on October y unfair and deceptive acts. For these violations of s operating without liability insurance. For that reason, I impose the maximum fine of $1,000 for each of seventeen violations.
The Division of Insurance decision and bankruptcy court decisions
The official decision, Docket No. E2010-13, is available here: Division of Insurance v. Gary Wayne Fravel.
The bankruptcy court decision, Case 10-01192 is available here: Breed’s Hill Insurance Agency v. Gary W. Fravel.