United Farmers Agents Ass'n, Inc. v. Farmers Grp., Inc.

32 Cal.App.5th 478

244 Cal.Rptr.3d 27

UNITED FARMERS AGENTS ASSOCIATION, INC., Plaintiff and Appellant,

v.FARMERS GROUP, INC. et al., Defendants and Respondents.

B282541

Court of Appeal, Second District, Division 8, California.

Filed February 22, 2019

Mahoney & Soll, Paul M. Mahoney and Richard A. Soll, Claremont, for Plaintiff and Appellant.

Hinshaw & Culbertson, Royal F. Oakes, Michael A.S. Newman ; Greines, Martin, Stein & Richland and Robert A. Olson, Los Angeles, for Defendants and Respondents Farmers Insurance Exchange, Truck Insurance Exchange, Fire Insurance Exchange, Mid-Century Insurance Company, and Farmers New World Life Insurance Company.

Tharpe & Howell, Christopher S. Maile, Eric B. Kunkel and William A. Brenner, Sherman Oaks, for Defendant and Respondent Farmers Group, Inc.

BIGELOW, P. J.

Plaintiff United Farmers Agents Association, Inc. (UFAA) is a trade association whose members are insurance agents. It brought this declaratory relief action against Farmers Insurance Exchange, Truck Insurance Exchange, Fire Insurance Exchange, Mid-Century Insurance Company, and Farmers New World Life Insurance Company (the Companies) as well as Farmers Group, Inc. (FGI). After a bench trial, the court found UFAA lacked standing to pursue its claims and failed to demonstrate it was entitled to declaratory relief. The court entered judgment in favor of the defendants, and UFAA appealed. We affirm.

FACTUAL AND PROCEDURAL BACKGROUND

The Parties

The Companies are a group of insurers that mutually contract to sell insurance products through independent-contractor insurance agents.¹ FGI provides the Companies non-claim related administrative and management services. It is the attorney-in-fact of Farmers Insurance Exchange, and the parent company of the attorneys-in-fact of Fire Insurance Exchange and Truck Insurance Exchange.

UFAA is a nonprofit professional trade association whose members are insurance agents that sell the Companies’ insurance products. It has approximately 1,900 members, 600 of whom are located in California.

Agent Appointment Agreements

In order to sell the Companies’ insurance products, an agent must enter into a form "Agent Appointment Agreement," which defines the terms and conditions of the agent’s relationship to the Companies. This case concerns several contractual terms common to Agent Appointment Agreements signed prior to 2009 (the Agreements), some of which date back to the 1970s.

Under the Agreements, agents must extend the right of first refusal to the Companies to bind insurance coverage on behalf of applicants solicited and procured by the agents. In exchange, the Companies pay commissions and provide agents advertising assistance, educational and training programs, and necessary manuals, forms, and policyholder records.

The Agreements require agents "provide the facilities necessary to furnish insurance services to all policyholders of the Companies including ... servicing all policyholders of the Companies in such a manner as to advance the interests of the policyholders, the Agent, and the Companies." The Agreements further state that an agent "shall, as an independent contractor, exercise sole right to determine the time, place and manner in which the objectives of this Agreement are carried out, provided only that the Agent conform to normal good business practice, and to all State and Federal laws governing the conduct of the Companies and their Agents."

The Agreements allow any party to terminate the contract by giving three months’ written notice (the no-cause termination provision). However, if a party breaches the Agreement, the other party may terminate the Agreement on 30 days’ written notice. The Companies may also terminate the Agreement immediately if the agent embezzles funds, switches insurance to another carrier, abandons the agency, is convicted of a felony, or makes willful misrepresentations material to the operation of the agency.

If the Agreement is terminated by any party, the agent generally is entitled to "contract value," which amounts to approximately one year’s worth of commissions. In exchange, the agent must agree not to solicit, accept, or service his or her customers for a period of one year.

Complaint

On December 17, 2012, UFAA filed a complaint alleging the Companies and FGI (collectively, Farmers)² engage in numerous practices that violate the terms of the Agreements.³ In relief, UFAA sought four declarations from the court: (1) the Agreements’ no-cause termination provisions are unconscionable; (2) the Agreements preclude Farmers’s use of performance programs and imposition of discipline based on an agent’s failure to meet performance standards; (3) the Agreements preclude Farmers from taking adverse action against agents based on the "location, nature, hours, and types of offices maintained" by the agents; and (4) the Agreements preclude Farmers from sharing customer information acquired by agents with competitors, such as 21st Century Insurance (21st Century).

Trial

The court conducted a bench trial over the course of three weeks. We summarize the relevant evidence related to each claim.

Unconscionability of the No-Cause Termination Provisions

On the unconscionability issue, the court heard testimony from numerous Farmers representatives⁴ that it was Farmers’s policy to read an Agreement to an agent line-by-line before the agent signed the Agreement. The Agreements were presented on a take-it-or-leave-it basis, meaning the agents were not allowed to change any language.

Several agents testified that, before signing the Agreements, Farmers representatives made additional representations about the termination provisions. Multiple agents, for example, said they were told Farmers would only terminate an agency if the agent engaged in one of the behaviors expressly prohibited by the Agreements. Another agent said she was told Farmers would never terminate an Agreement under the no-cause termination provision because it would constitute discrimination. Others said they were simply told Farmers does not enforce the no-cause termination provision.

In response, Farmers presented testimony from representatives who were present while hundreds of agents signed their Agreements. The representatives said they had never witnessed an agent being told an agency would be terminated only for reasons specifically listed in the Agreements. Farmers also introduced testimony from three agents who said they did not discuss the no-cause termination provisions with a Farmers representative prior to signing their Agreements.

Performance Standards

Numerous agents testified that they had meetings with Farmers representatives to discuss their poor sales of new policies and retention of existing policies. After the meetings, each agent received a letter with the following language: "[Y]ou have been experiencing a loss of policies in force, insufficient new business production and/or low policy retention are significant factors contributing to this loss of policies. ... [¶] ... Based on the overall business results generated by your agency, please be advised that continuation of your Agent Appointment Agreement depends on your ability to immediately achieve a significant improvement in your agency’s business results." Some of the agents’ Agreements were eventually terminated.

Farmers did not dispute that it considers an agent’s performance when deciding whether to terminate an Agreement. Numerous Farmers representatives testified that, in determining whether to terminate an Agreement, they consider whether the agent has achieved an "acceptable business result." In making that determination, they look at the agent’s "overall business results," including sales of new policies, retention of existing policies, and profitability. They do not, however, impose any specific production requirements or sales quotas.

Office Locations

UFAA presented testimony from two agents whose Agreements were terminated, at least in part, because they were operating their agencies out of personal residences. A Farmers district manager also testified that an agent in his district had been terminated for operating an agency out of her home, and another had been terminated for using a shipping store as an office address. He explained that Farmers prefers agents work out of commercial office buildings, in part because it does not want clients "to be walking through somebody’s living room to meet with their agent."

The director of FGI’s home office agencies testified that Farmers does not have a policy regarding the type of office space an agent must use, but it does require that the space be professional and adequate for servicing policyholders. The director explained that, because an agent must accept premium payments from any Farmers policyholder, it is important that the agent’s office is identifiable as a location where Farmers business is conducted.

The head of commercial sales for FGI testified that Farmers does not condone agents working out of personal residences, but it may be acceptable depending on the circumstances and whether the agent is meeting the needs of customers. He explained that he has seen situations where agents have built additions onto their homes to use as private offices, which allowed the agents to conduct business with their customers in a professional environment.

Farmers’s expert testified that it is normal for exclusive agency insurance carriers, like Farmers, to require their agents conform to good business practices. In the expert’s opinion, it is not a good business practice, and it is not in the best interests of the customers or the insurance companies, for a customer to have to go into a personal residence to do business with the agent.

Sharing of Customer Information

The court heard testimony that 21st Century is owned by some of the Companies and managed by FGI. Unlike the Companies, 21st Century is a direct writer of insurance, meaning it markets directly to consumers for the acquisition...