Q: We read in the press that a court in California ruled that Staples Inc. was acting as an unlicensed insurance agent when it sold insurance on packages shipped from its stores through UPS and improperly made a commission on the insurance charges. When can a supplier lawfully charge for shipping and handling, or for insurance?

A: Since there are virtually no federal statutes or regulations governing insurance companies, only state laws apply to the sale of insurance, and they vary from state to state. Nor are there any federal laws governing how much suppliers may charge for their products except certain antitrust laws and deceptive practices laws under the Federal Trade Commission Act. However, an analysis of the California decision may shed some light on the subject that may be helpful in determining what to look for in other states.

Staples offered a package shipping service to its customers through its agreement to serve as an authorized shipping outlet for UPS. Staples paid UPS 35 per $100 of coverage over $100, but charged its customers 70 per $100 purchased as an administrative expense, for services such as processing of potential claims and other related services. Staples shipping order stated that the declared value charges for other carriers may be found in UPS Service Guide and at Staples Center. It also informed customers that it may place a surcharge on the insurance coverage, but it did not inform them that it included a 100% markup.
 
A Staples customer filed a class action suit claiming that Staples solicits and executes insurance contracts and keeps 50% of the premiums as commission although it is unlicensed to sell insurance. The plaintiff alleged that this constitutes an unfair business practice, charging excessive and unconscionable charges and engaging in deceptive practices. Staples defense was that the principal purpose of each agreement was to ship packages, not to shift or assume liability, as would be the case with a contract of insurance. Furthermore, it argued that each customer had the option of not buying insurance and to deal with another shipping service.
 
The California Court of Appeals held that Staples was subject to the Department of Insurance's Insurance Code, reversing the lower court's ruling to the contrary. It held that the California Code exempts UPS and Staples from the Insurance Code only if they deliver insurance coverage to customers without receiving a commission. The court concluded that although UPS does not pay Staples for its role in the transaction, at the very least UPS allows Staples indirectly to impose an additional percentage service fee as part of the gross premium charged to the shipper-insured, and thus is a commission within the meaning of the Insurance Code, which constitutes an unfair business practice.
 
However, the court upheld the lower court's ruling that the 100% markup on insurance coverage was not so unconscionable as to shock the conscience as a matter of law. The plaintiff relied upon a tax court's ruling in 1999 that UPS' charge of 35 per $100 was significantly in excess of the actual cost for such insurance on the open market. Nor did Staples shipping order form constitute a deceptive marketing practice. Consequently, the case was returned to the lower court for further proceedings on the sole issue of Staples violation of the Insurance Code.
 
The only federal statute found to authorize the sale of insurance by a carrier is the regulation governing household goods. Several suits against parcel express carriers have alleged violations of state insurance laws prohibiting the unlicensed sale of insurance, but there does not yet appear to be a binding precedent on the subject. It should be noted, however, that UPS has agreed to settle all of the 20 class action suits filed against it alleging a violation of state laws prohibiting the sale of insurance by unlicensed entities.
 
Every supplier and purchaser would be well advised to review their terms of sale containing provisions for purchasing insurance, shipping and handling charges, service charges, etc. to determine whether they meet state laws and regulations governing business transactions. Every state has consumer protection laws containing stiff fines and penalties for fraudulent and deceptive practices, unfair business practices, and so forth. A corporation's pricing policies for these incidental charges will be judged under these state laws.