Are captive insurance agencies, contractually bound to represent only a single carrier, independent contractors or employees of the carrier? Their contracts say they are independent contractors and thus not entitled to the protections the law provides employees. A recent class action lawsuit in California sought to upend that, with potential ramifications for the captive agency system throughout the country.
A group of agents representing Farmers Insurance filed suit in 2017, arguing that the carrier had violated California labor and unfair competition law since 2013. The agents claimed that Farmers requires “their captive agents to pay all the expenses of running the Farmers’ agencies, such as rent, office staff and office equipment and supplies.” The agents called Farmers’ representation that they are independent contractors “false and misleading” and “simply part of its scheme to misclassify its California captive agents as independent contractors when they are, in fact, employees under California law.” The court certified the suit as a class action in 2021.
The two sides have negotiated a settlement which received preliminary court approval in March 2022. It provides two buckets of funds totalling $75 million to reimburse agents for certain business expenses, and applies to anyone who acted as a Farmers agent in California between late 2013 and March 2022. One pot of money will pay agents without their having to make a claim; the other pot is for additional claims made by July 2022. Agents may opt out of the settlement and retain their right to sue the carrier.
In addition, the carrier forfeits the right to terminate an agency without cause with three months’ notice. It will now be able to terminate with six months’ notice based on an agency’s failure to meet professional standards or changes in market conditions. The non-solicitation provision in the agency contract is also being removed.
Under the terms of the settlement, the carrier admits no wrongdoing and the court will not determine that laws were violated. However, a large settlement in the country’s most populous state casts doubt on whether the captive agency system will remain viable. Nationwide Insurance announced in 2018 that it was moving to the independent agency distribution model. That transition concluded in mid-2020. The carrier said it made the change to give its producer force more flexibility. However, it is possible that independent contractor laws played some part in the decision.
The laws that determine whether a person is an independent contractor, rather than an employee, vary from state to state. Some states consider a person to be an employee if the employer has control over the person’s behavior or finances or if the person’s work is part of the employer’s usual course of business. Other states, including California, presume that the person is an independent contractor if there is an absence of employer control, if the person’s work is unusual to that of the employer, and whether the person customarily acts as an independent contractor for other businesses.
Captive agents have filed suits in other states over issues such as eligibility for employee benefits and unemployment insurance. However, those attempts to have courts rule that captive agents are employees or franchisees have been largely unsuccessful, according to attorney Dirk Beamer.
For now, the effects of the settlement may be limited to California. However, carriers may find it difficult to have separate systems for California and the rest of the country. “To the extent California is a major home for a big percentage of the captive agency force,” Beamer says, “you might imagine that it’s inefficient to manage two different systems, and therefore that might lead to some change system-wide.”
This settlement by itself will not eliminate the captive agency system. However, it has made the system’s future a little less certain.
