Captive insurance agencies sometimes form affiliated independent agencies to take advantage of the best of both worlds. This can eventually hurt the captive agency’s relationship with its carrier. One carrier cut off extended commission payments to a Maine agency over this, triggering lawsuits.
The carrier appointed the agency in 1988 when the principal was operating as a sole proprietorship. In the following decade, the principal’s wife obtained a Maine insurance agent’s license and began operating out of his office.
In 2000 or 2001, the carrier started permitting its captive agencies to sell other insurers’ products “when doing so would increase the total book of Defendant’s business.” This agency took advantage of that and had the carrier’s approval as late as 2009.
In 2002, the couple formed a limited liability company (LLC) under a new name “to facilitate relationships with insurers in addition to Defendant, and to offer types of insurance not offered by Defendant.” The couple served as the sole members of the LLC and its officers. Seven years later, they incorporated the captive agency under a third name, again with the couple serving as officers. The carrier appointed the corporation as its agent that same year.
Under the terms of the contract between the two:
- The carrier owned the expirations
- The carrier had right of first refusal on all the property-casualty business the agency sought to place
- The agency had to protect the carrier’s proprietary and confidential information and the private information of the policyholders
- The agency could not solicit the carrier’s policyholders within a 50-mile radius of the agency’s office for two years after termination
In addition, the agency could receive “extended earnings” (commissions on certain policies) for up to eight years after termination if it did not solicit the carrier’s policyholders during that time.
Meanwhile, the line between the two agencies (captive and independent) was blurry. They shared:
- A payroll account
- Office space and supplies
- Staff
- Phone and fax numbers
- Email addresses
By 2014, the carrier was having doubts about whether the agencies were really separate, and they sent the agency a warning letter. Over the next year, the agency principal made changes to address the concerns. However, by September 2015 he was ill with cancer and notified the carrier that he was resigning the agency’s appointment. The day before the resignation took effect, he instructed the agency’s customer service representative to send a letter to the carrier’s customers on the independent agency’s letterhead offering to serve them through other carriers. Some customers took them up on the offer.
In November, the carrier sent another warning letter and told the agency its extended earnings were in jeopardy. They subsequently halted payments of the earnings in January, and the agency sued for breach of contract. The carrier countersued the agency, also for breach of contract. The principal’s widow later sold the agency but continued the lawsuit.
The judge ruled that:
- The non-compete provisions in the contract were reasonable.
- The agency chose to forfeit the extended earnings when it replaced some of the carrier’s policies.
- The distractions the couple endured during the husband’s cancer battle did not excuse their breach of contract.
- The facts were unclear as to whether the 2001 change permitting placements with other carriers changed the contract in practice. Accordingly, the judge refused to declare the agency in breach of contract on that claim or because of the letter sent to customers.
This case illustrates the dangers of captive and independent agencies operating out of the same space and sharing resources. It was easy for the independent to remarket the captive carrier’s business. The carrier did confuse things by permitting some placements with other carriers, but the contract was clear on what the agency had to do to receive extended earnings. The agency’s failure to comply with those provisions cost it years of commissions. Independent agencies that are affiliated with captives must take clear steps to separate their operations. Otherwise, they could lose revenue the way this agency did.
