Will American Family Insurance no longer be allowed to classify its captive agents as independent contractors? A judge’s decision is expected this summer.
A jury in a U.S. District Court for the Northern District of Ohio agreed with the plaintiffs in a class action suit brought against American Family Insurance Co. (AmFam), alleging the insurer misclassified its independent agents as independent contractors. After a two week trial, the jury returned a unanimous verdict upholding the plaintiffs’ contention that the agents worked as employees, not contractors, according to an article in the Milwaukee Journal Sentinel.
The plaintiffs now await a ruling from U.S. District Judge Donald Nugent, who certified the class action suit four years ago, reports Cleveland.com. Since two of the original plaintiffs in the lawsuit are based in Ohio, the case is being heard in that state despite AmFam being headquartered in Madison, Wisconsin.
If the judge agrees with the jury’s verdict, AmFam stands to pay a penalty that could reach as high as $1 billion for failure to provide independent agents with retirement benefits as mandated under the federal Employee Retirement Income Security Act (ERISA). The judge’s decision is expected sometime in June or July.
An attorney representing the plaintiffs in the class action suit contends that the agents should have been classified as employees because they were “captive” agents, meaning they were only permitted to sell AmFam policies. “The jury apparently agreed that AmFam cannot have it both ways,” Attorney Erin Dickinson told the Milwaukee Journal Sentinel. “A company cannot just call its agents ‘independent contractors’ to avoid following the federal law protecting retirement benefits and then insist on controlling how those agents do their work.”
Law firm Wexler Wallace LLP, which was involved during the lawsuit’s discovery phase, noted in a summary on its website that AmFam’s control of its agents extended beyond limiting permissible policies for sale.
“American Family’s control include, but are not limited to, maintaining ownership over their books of business, requiring them to sell only American Family insurance (excluding even products which American Family does not offer), requiring them to follow American Family’s policies and procedures, and controlling the day-to-day operations of every aspect of the agent-employee’s business, like business hours, computer and telephone systems and who the agent-employee can hire and fire,” Wexler Wallace wrote.
A private mutual company, AmFam is the nation’s 13th largest insurer, offering auto, home, life, and property coverage. The company sells policies in 19 states through a network of agents. The class action lawsuit covers more than 6,900 current and former agents across the U.S., with about 700 in Wisconsin, who could receive retirement benefits if the judge seconds the jury’s verdict.
An AmFam spokesperson told the Milwaukee Journal-Sentinel the insurer stands by its decision to classify its independent agents as independent contractors and intends to make its case before the judge. Ken Muth of AmFam also disputed the $1 billion figure. “We have no idea where that $1 billion figure is coming from, but it is grossly overstated and premature, considering the judge has not issued a verdict,” he said.
Muth further stated AmFam currently provides its independent agents with retirement benefits through what it terms “an extension of earnings” plan. “We have offered extension of earnings for many years, carry the liability for it on our books and have never missed a payment,” he said.
If the judge upholds the jury’s decision, Dickinson said she does not anticipate other Wisconsin-based insurers being impacted by the ruling. Nevertheless, the case highlights the evolving nature of the carrier-agent relationship.
Agents now expect carriers to serve as their partner in helping them build their business. Providing agents with the tools needed to efficiently service their clients, especially during the application and underwriting stage, ranks high on their list of must-haves. A survey conducted last year by Channel Harvest and Insurance Journal revealed what independent agents look for in a carrier. In essence, agents desire a streamlined underwriting process, responsive customer service, and competitive pricing. Agents also favor carriers that partner with them on all aspects of business development, including social media outreach.
As the AmFam case indicates, independent agents seek more control over their agencies, and that means not being locked into one carrier. Having the freedom to offer their clients coverage from more than one insurer enables them to find the best policy for each individual. Independent agents want to be just that — independent — so they can provide great customer service for every client. Whether or not the courts would agree is yet to be seen.