In 2018, Nationwide announced that it would change its sales distribution model from one of selling through exclusive insurance agents to selling through independent agencies, starting in the summer of 2020. In so doing, and in the years leading up to the change, they took actions that caused an agency in Virginia to sue.
At issue were special benefits to which Nationwide agents had been entitled. The agency contract was written to automatically cancel if the agency principal died, became disabled or retired. It also included a section labeled “Agency Security Compensation.” This provided two types of deferred compensation that the carrier would pay upon automatic cancellation:
- Deferred Compensation Incentive Credits (DCIC), which paid a benefit based on the number of years the principal had been an exclusive Nationwide agent
- Extended Earnings, which paid additional compensation equal to the agency’s final twelve months of insurance renewal service fees.
In 2016, the carrier unilaterally amended the agency contract so that the DCIC benefits would stop accruing at the end of the year. Agencies would still be entitled to credits they accrued before 2017.
The same month that it announced the switch to the independent agency distribution model, the company again changed the agency contract. This time, they implemented a phasing out of the Extended Earnings benefit. Starting August 1, 2019, the benefit would be decreased on a monthly basis. If an agency agreement was canceled before August 1, 2019, the agency would receive the full twelve months of earnings; eleven months if canceled in August, ten months if canceled in September, and so on until July 1, 2020, when the benefit would end. The carrier canceled all exclusive agency contracts effective July 1, 2020, the date of the changeover in distribution model.
In addition, the carrier required agents to choose among three options:
- Purchase their books of business (“policies and data,” as the court opinion described it)
- Allow the carrier to transfer the policies and data to the agency at no charge with the understanding that the agency would pay tax on the book’s value
- Do nothing and cease acting as the carrier’s agent
The agency in Virginia sued, claiming that the carrier breached its contract and “the covenant of good faith and fair dealing” by ending the DCIC benefit. They also claimed that the carrier was going to breach its contract and the covenant by phasing out the Extended Earnings benefit. Lastly, they argued that they already owned their book of business and the carrier had no right to charge them for it. The carrier asked the court to dismiss all three complaints.
The court did dismiss the first two complaints. It noted that the agency was not singled out for poor treatment – the changes affected every one of the carrier’s agents. Also, the benefits would have ended if the agent had decided to cancel the contract. “There could be no reasonable expectation of a continuation of the retirement package,” the judge wrote, “when the plaintiffs themselves could have decided at any time to terminate the Agency Agreement.”
However, the judge refused to dismiss the complaint about the book of business transfer. The agency contract did not define “book of business” and was ambiguous about the kind of customer information the carrier owned and whether that ownership was exclusive. Because resolving the question would require evidence outside the agency contract, he held that he could not dismiss the complaint based on the evidence at hand.
There is no further public record of this litigation, so presumably the two sides settled out of court.
Carriers have done things to upset their agents as long as there have been carriers and insurance agencies. However, if the contract between the two gives the carrier the right to do something, the agency may object but has thin ground to stand on. This is one reason why agents should review carrier contracts carefully before deciding to sign them. The agent may decide the benefits of signing outweigh the parts of the contract she doesn’t like, but at least she will be aware of what could happen. Like any other contract, an agreement with a carrier should be entered into carefully and with eyes wide open.