By Mark Colbert
Expert Consultant, Life Insurance Company Fraud
Who owns a life insurance agent's customer list and files? Some agents end up in litigation with their insurance company over this issue.
Insurers represented by captive or career agents generally assume that they own all the business that these agents write. They regard these agents as employees. Many agents believe, however, that they own their block of business because they brought the clients to the company.
Arguments can be made that in some situations, the company owns this business. For example, home service agents generally inherit a book of business, a debit, from their company. When a home service agent terminates, a strong argument can be made that the business on the agent's debit belongs to the company. But what about business written by a home service agent on the agent's family and friends?
Economic forces and structural changes within the insurance industry in the United States in the 1970s and 1980s are driving new potentially abusive practices that have also engendered new and different types of bad faith litigation in the '90s. This article will introduce and discuss some of of the more important forces and changes and resulting bad faith claims, other than duty to defend and claim denial cases, which are also quite prevalent.
Aside from home service, another example are "orphan" clients-those without agents-that an insurance company turns over to one of its representatives for servicing. Here again, the agent did not bring the business to the company. Suppose that an agent originally received one small orphan policy, and subsequently wrote many large estate planning and business policies on this insured's family and business. Whose customers are these?
In most circumstances, agents should be the owners of their customer list. A 1991 case supports this view. In Burke v. Hawkeye Nat. Life Ins. Co., 474 N. W2d 110 (Iowa 1991), the Iowa Supreme Court ruled that distribution by the insurance company of agent's customer list to other agents was improper by industry standards and resulted in intentional interference with the agent's business relationships.
Agents, such as this one, sometimes sue their companies for the value of their blocks of business. In one such case, the defendant company unintentionally provided a value. This company, when notifying an agent that a client's policy was in arrears, informed the agent of the present value of future commissions that could arise from the policy. The company thus attempted to motivate the agent to contact the delinquent policyowner.
The value assigned was an exact multiple of the premium, taken to one decimal place. This multiple depended upon the plan and the age of the insured. It took into account not only future commissions on the policy in arrears but also commissions on future business likely to arise from that policyowner. For example, term premiums had a high multiple because of the opportunity for first-year commissions on conversion to a permanent plan. The application of these multiples to the plaintiff agent's in-force premiums produced a value based on a method of calculation originating from the company.
Agency contracts sometimes provide that agents may forfeit their vested renewals if they replace business written under the contract. Replacement of only one policy can trigger forfeiture under some contracts. These renewal forfeiture provisions arise from the insurance company's conviction that it owns the customers.
What if agents have clients who would benefit from replacement? Replacement can benefit a policyowner if the company is not passing on to the policyowner the benefit of current mortality experience or current interest levels, or if the insured could qualify for a better mortality classification.
There can be other reasons for replacement, such as the policyowner's desire to switch to a variable product. Agents are placed in an ethical dilemma, torn between professional loyalty to their clients and the possibility of suffering a severe financial loss that could impair their ability to service their clientele. Most replacements, however, do not benefit the policyowner. The onus is on the agent and the replacing company to justify the payment, once again, of first-year commissions and expenses, and for the other problems associated with a replacement. One argument in favor of renewal forfeiture provisions is that they discourage mass replacement, which is very rarely beneficial to policyowners.
The courts have frequently failed to uphold post-termination restrictions, called "covenants not to compete," that are excessively binding. In Streiff v. American Family Mutual Insurance Company, 348 N.W2d 505 (Wis. 1984), the Wisconsin Supreme Court examined the restrictive provisions in agent Dennis C. Streiff's agency contract. Mr. Streiff's contract provided that he could not solicit his former policyowners for a one-year period after termination, and that, in order to receive post-termination earnings, he could not act as agent for another insurer that wrote the kinds of insurance written by American Family in any state in which the company operated as a licensed insurer. The court found that these contractual restraints were unreasonable as to activity, duration and territory.
The codes of ethics of the National Association of Insurance and Financial Advisors and of the Million Dollar Round Table and the new Code of Professional Responsibility of the Society of Financial Service Professionals all spell out the obligations of members to their clients. Agency contracts should not interfere with a professional agent's client relationships.
At issue is whether the agent is to be regarded as purely a company employee, like a sales clerk in a department store, or as a professional who has developed a clientele over the years. The gradual emancipation of the career agent that is taking place should increase the recognition of the life insurance agent as a professional.