CRITICAL ISSUE REPORT
Allstate and State Farm are sued as they
try to change their relationship with their agents
By Phil Zinkewicz
Captive agency insurance companies have undergone many changes in the last few years. As recently as 20 years ago, companies such as Allstate and State Farm stood apart from independent agency companies and in direct competition with them. Today, boundary lines have been crossed and captive agency companies also employ the services of independent agents in some lines and in certain parts of the country. In short, captive agency companies are no longer at war with independent agency insurers.
However, there is a war going on within the captive agency insurance company industry. The captive agents themselves are taking on the companies they represent in the courts over issues that go to the very heart of the captive agent-company relationship and, so far, the outcome has been pretty nasty, with promises of more to come.
"More to come." That's an old newspaper expression. It means the story isn't over. It isn't finished. A lot more is going to take place. And, considering what has already taken place, the expression is an apt one. There will certainly be more to come as captive agents continue to grapple with new captive company dictates.
A while back, we reported on problems that Allstate was having with some of its captive agents. Roughly three years ago, Allstate, as part of its $600 million cost-cutting program, decided to offer its captive work force an "option" of either becoming independent contractors or not. Those who chose to go the independent route were promised incentives to offset the loss of benefits they enjoyed with the company and the loss of future pension contributions. Those who chose not to become independent contractors were just "released."
The Allstate action resulted in three lawsuits. One is coming from the agents who chose not to go the independent route. They are alleging that Allstate's action was illegal under the law and are charging age discrimination, among other allegations. The EEOC has also filed another lawsuit against Allstate on behalf of these agents. The third lawsuit comes from agents who accepted Allstate's dictum. Ron Mathison, former Allstate agent and director of agent affairs for the National Association of Professional Allstate Agents (NAPAA), says that the agents who became independent contractors basically were sold a "bill of goods." He says that Allstate promised the agents greater financial interest in the business, more autonomy and increased flexibility. Instead, according to Mathison, Allstate unilaterally increased production requirements, restricted sales of books of business to existing and future Allstate agents, has been paying less that full commission on forwarded customer calls, and mandated business practices that conflict with the agents' status as independent contractors. As yet, those lawsuits are unresolved. So, more to come.
Now, for the State Farm story.
Late last year, two State Farm agents were successful in a three-year lawsuit against the company--a lawsuit in which both agents charged they were wrongfully dismissed. The two agents are Richard Pyorre of Fort Bragg, California, and John Wier of Crescent City, California. The jury awarded the agents $6.35 million and $6.25 million, respectively, for emotional distress damage, loss of commissions and punitive damages. What is interesting is that the legal battle was begun by State Farm. After the agents were dismissed, State Farm filed a lawsuit against them for alleged disclosure of trade secrets. The agents' victory came about as the result of a counter suit.
Here's what happened, according to documents sent to us by Pyorre. In 1998, Pyorre received a memo from State Farm saying that he had to attend any one of a series of mandatory meetings regarding "ethics." This was the first time the company had ever mandated attendance at a meeting, so Pyorre wrote to the company asking why his attendance was necessary since this had never happened before and, anyway, it was listed as a self-study course. He received no answer, so he wrote several more letters and was finally told he had to attend at least one of the meetings. By this time, it was too late. He later received a letter saying that he was dismissed as a State Farm agent, effective February 1999, because he didn't attend any of the meetings.
One of the issues raised in the lawsuit was whether State Farm had the right to demand Pyorre's attendance at the meeting, since Pyorre was an independent contractor, not an employee of State Farm. In fact, Pyorre offered the court evidence that State Farm went to great pains back in 1991, with the Internal Revenue Service to have its agents granted independent contractor status. (Independent contractor status for State Farm agents would alleviate the company from having to pay pension benefits or certain taxes that go with hired employees.) In one of its SS-8 (employee status form) filings with the IRS, State Farm was asked whether attendance at meetings were mandatory. State Farm answered that all State Farm agents are "offered" training sessions after they became independent contractors. "Agents are invited to training sessions but attend at their discretion," said State Farm in answer to the IRS query. "State Farm does not impose consequences or penalize the independent contractor for not attending training sessions."
Nevertheless, despite State Farm's statement to the IRS, Pyorre was fired. In that fateful letter sent by State Farm to Pyorre, State Farm said: "In accordance with subparagraph A of Section III of the State Farm's Agent's Agreement, the State Farm Insurance Companies hereby terminate your Agent's Agreement, effective midnight February 28, 1999. As you know, State Farm has committed itself to promotion of ethical conduct in its dealings with consumers. You have repeatedly refused to participate in any of the Charting and Ethical Course classes offered in 1998. Your lack of personal commitment to this issue and your disregard of your obligation to act in the best interests of the Companies, the policyholders and the agents will not be accepted or tolerated."
Pyorre says that he finds it ironic that the course of study in question was on "ethics." Asks Pyorre: "How can State Farm conduct a course in ethics, when they did to me what they swore to the IRS they would never do to their independent contractors?"
Now for the other agent in the State Farm lawsuit. State Farm allegedly terminated Wier over a dispute involving a computer agreement, which allowed State Farm to move policyholder information out of agents' offices to a central hub in Arizona, requiring the agent to use a password to access the information. "Obviously, they were going to use it to cross-market," says William Tedards, the attorney for Pyorre and Wier. Wier refused to sign the agreement unless he could put underneath it a line saying that "he reserved rights under his main contract." As a result of Wier's refusal, State Farm fired him.
After they were fired, Pyorre and Wier took a full copy of all the policyholder information, initiated new independent agent-type contracts with a number of companies and then started contacting the policyholders and taking the business. In the lawsuit, State Farm claimed to own all policyholder information from terminated agents, claiming it as trade secrets. The court found in favor of Pyorre and Wier, hence the $12 million-plus judgment.
So, State Farm got spanked pretty hard in this case. Not only has it been hit with a huge jury award, but its contention that policyholder information is company trade secrets was shot down. Will State Farm appeal? When contacted for comment on this case and what State Farm planned to do in the future, a spokesman for State Farm would only say, "We are reviewing the case to see what options we might pursue."
More to come. *
The author
Phil Zinkewicz is an insurance journalist with some 25 years' experience covering the international insurance and reinsurance arenas. He was the insurance editor of the Journal of Commerce for a number of years, handling all their domestic and international supplements. In addition, he regularly writes for a number of London publications.