Embattled Agencies

Brokers Lose ‘Franchise’ Fight

After their exclusive agency agreements were terminated, the agents argued a franchise law should protect them.
By: | August 4, 2014

A judicial panel for the Superior Court of New Jersey upheld a lower court decision that denied three insurance agents the right to challenge Allstate for individually terminating their exclusive agency agreements.

The three former independent agents, Mario DeLuca, Richard Sorge and Auburn Insurance Agency LLC, had argued that Allstate’s action violated the New Jersey Franchise Practices Act.

The court disagreed, finding that the carrier/broker relationship was regulated by the New Jersey Department of Banking & Insurance — and that applying the franchise act to the relationship “would interfere with the regulatory framework set out in New Jersey’s insurance code,” according to the May 13 judicial decision.

Allstate terminated the agents in early 2011, after they failed to meet expectations in some areas related to “profitability, growth, retention, customer satisfaction and customer service” beginning in 2007, according to the decision.

In 2008 through 2010, the agents were among the “worst performing” agencies for the insurer, it said.

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The carrier advised the plaintiffs beginning in 2007 that their performance “may put the agency relationship in jeopardy,” according to court documents. “Allstate’s warnings were patent, timely, and unmistakable,” the Superior Court of New Jersey Appellate Division judicial panel ruled.

One of the conflicts between the insurance and franchise laws related to termination of contracts, according to the opinion.

A franchisor is prohibited from terminating a franchise “unless he or she has violated the terms of a given franchise agreement,” whereas an insurance agent can be terminated immediately “for, among other reasons, ‘insolvency, abandonment, gross and willful misconduct, or failure to pay’ premiums.”

The court also found that the agents did not constitute franchises because there was no “community of interest” — which requires “tangible capital investments” such as a building or special equipment required for the franchise — or a “place of business,” — defined by the franchise law as a fixed location at which the franchisee displays and sells the franchisor’s goods and services.

New Jersey law restricts the sale of insurance only to insurers authorized to do business in that state, the court ruled. Thus, the brokers did not meet the “place of business” requirement.

The late Anne Freedman is former managing editor of Risk & Insurance. Comments or questions about this article can be addressed to [email protected]

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The R&I Editorial Team can be reached at [email protected]