Whether a contract is an insurance policy or an agreement between an insurance carrier and one of its agents, it may contain a provision that limits what one party can do when there is a dispute. A Georgia exclusive agent ran into this situation when a carrier’s actions increased his taxes.
The agent had been with the carrier for more than 25 years. The carrier’s agency agreement gave the carrier exclusive rights to the agency’s business in exchange for “major deferred compensation” to be paid either upon termination of the contract or the agent’s retirement. Either party had the right to cancel at any time, with or without cause.
In 2018, the carrier announced that it would terminate all exclusive agency contracts in July 2020 and replace them with independent agency contracts. Since the carrier had owned the policy expirations under the exclusive contract, the independent agency contract required agents to purchase those rights. Payment was to be accomplished through deductions from the deferred compensation due under the prior contract.
The new contract also stated that “all controversies and disputes between the parties [are] subject to mandatory binding arbitration.” Under this provision, all disputes were to be adjudicated on an individual agent basis; class actions were prohibited. To emphasize the point, a separate paragraph stated in all capital letters that the parties understood and agreed that they were forfeiting the right to join a class action filed by them or on behalf of them or to have a dispute heard by a court or jury. However, it did permit the parties to apply to a court for a restraining order or injunctions against enforcement of the contract.
In May 2020, the agent signed the new contract but added the words “under duress” next to his signature. He also signed a separate contract known as the Asset Transfer Agreement (ATA.) This agreement gave the carrier the sole right to determine the purchase price the agency had to pay for its policies. It also prohibited the agent from using any other figure in its income tax returns. Under this agreement, the carrier valued the agent’s book at $145,176.00.
Despite having signed the contracts in May, the agent sued the carrier in September. He asked the court to declare the ATA void and unenforceable, requested an injunction stopping the carrier from enforcing it, and asked to have the contract rescinded. The carrier responded by asking the court to compel the agent to go through arbitration. The court ordered arbitration to proceed.
In August 2022 the arbitrator upheld the agent’s right to seek an injunction before or during arbitration proceedings of other issues. The agent then amended the lawsuit, charging that the supposed transfer of assets was only a scheme to “confiscat[e] a substantial portion of the deferred compensation due under the exclusive contracts.” Further, he charged that the scheme caused the carrier to report “falsified income” on 1099-NEC forms to the Internal Revenue Service. He asked for damages to compensate for the taxes owed on the falsified income. The carrier asked the court to dismiss the suit.
The judge did not do that, but he did rule that the agent did not yet have evidence to support the request for an injunction. He held that the court could not properly judge the request for an injunction “(u)nless and until an arbitration panel decides the underlying dispute in Plaintiffs’ favor …” The agent was stuck living with the arbitration provision in the contract.
This agent’s objection was to the book of business purchase terms; it is unclear how aware he was of the mandatory arbitration provision. Exclusive and independent agents should be on the lookout for provisions like this in carrier contracts. Because this contract made the carrier the sole determiner of the asset purchase price, the contract appears to be one-sided in the carrier’s favor. However, even a contract with lopsided terms can escape a lawsuit if it requires arbitration of disputes. Agents should be fully aware of the implications before they sign contracts like this.