Former franchisees challenge Brooke agent dealings

Overland Park, Kan.-based insurance agency franchisor Brooke Corp. has been hit with a number of lawsuits that raise questions about its business dealings with agents who bought into its nationwide operation, which now boasts some 800 locations.

Brooke Corp. itself puts the number of lawsuits at 12, which it maintains is not a big number, and notes that some are "old news" dating back to 2000. The company also says the allegations are false, which would appear to be backed up by an investigation by the Louisiana Insurance Department that found no evidence of wrongdoing by Brooke. (See sidebar).

But some upset Brooke franchisees are speaking out.

A Florida case
Arthur C. Mann, president of IGWT Insurance Services in Tampa, Fla., filed a lawsuit against Brooke in U.S. District Court claiming that Brooke misrepresented facts and manipulated funds.

The lawsuit alleges five counts, including fraudulent misrepresentation (Brooke Franchise and Heritage), negligent misrepresentation (Brooke Franchise and Heritage), breach of contract (one each against Brooke Franchis-ing and Heritage) and violation of the RICO Act (Brooke Franchise and Brooke Credit).

Mann purchased two Brooke franchise agencies in Brandon and Tampa, Fla., in 2005. Mann agreed to operate as a Brooke franchisee for five years in exchange for services to be provided by Brooke. The lawsuit alleges that Brooke intentionally misrepresented the yearly agency commissions and failed to fulfill its contractual obligations, among other problems.

According to Brooke spokesperson Cynthia Weber Scherb, general counsel, the Mann lawsuit was filed last January, has been stayed by the court and sent to mediation, which has been scheduled for November in Overland, Kan.

"We believe that the allegations in the lawsuit are untrue, and we intend to defend vigorously," she said. "If the parties are unable to resolve their differences in mediation, the court has ordered that the parties proceed to arbitration, and the case will remain stayed pending that arbitration."

Attorney Brett C. Coonrod, who represents Mann, said his client agreed to go to mediation.

"This, however, does not mean his claims are any less valid and a decision in his favor will be just as binding on Brooke as would a decision of the U.S District Court," Coonrod said.

Coonrod maintains that Mann's claims are similar to other Brooke franchisees that he has represented. "I believe that there are fundamental problems with Brooke's accounting processes and its business model insofar as that model relates to the treatment of its agents," he said.

The franchise system
Brooke Franchise Corp. and its finance arm, Brooke Credit Corp., help agents wanting to buy a franchise obtain access to credit to make the acquisition, cover set-up costs and expand operations. They also are able to provide the franchisees with access to a slate of national carriers by aggregating the franchisees' premium volume.

Generally, franchisees pay $165,000 to join the Brooke system. There are also additional fees and commission sharing. If Brooke funds the start-up for the agent, its loan is normally amortized over 12 to 15 years at prime plus 3.5 percent interest plus a 3 percent origination fee.

Brooke's cash management program makes sure that if it lends money, it gets paid back. While Brooke's franchisees retain ownership over their books of business, all premiums and commissions are placed in a third-party trust account. Loan and premium payments are made first before the agencies can have any of the funds.

Agent says his life is 'ruined'
Joel Jennings of Metropolis, Ill., is another agent who feels he got burned by Brooke and has filed suit. Jennings complains that Brooke has "ruined" his life.

That's a departure from the original enthusiasm he exhibited when he bought into the franchise about four years ago and was interviewed by Insurance Journal. At that time he said that Brooke was an answer to his prayers and offered strength and the recognition of national companies that he needed to expand his business.

"Your agency is strengthened considerably when you go with Brooke," Jennings said in the interview. "Now we have several national carriers we could not touch before. Now I've got products to sell that allow me to go out and compete in a way I could never do before."

Jennings said back in 2004 that perpetuation was a principal reason he decided to join Brooke.

"I was working on how I could perpetuate my business and simplify my life at the same time," he said then. "I was packing a lot of pressure managing and being financially responsible for everything that goes on around here."

Jennings is singing another tune now.

"I am 71 years old and my retirement savings is gone," Jennings said. Jennings alleges that he was duped by Brooke's fees, loan payments and failed promises of help in a variety of areas.

Filing for bankruptcy
Rhonda Lobell, a Gonzales, La., insurance consultant and educator, is also miffed at Brooke. She is filing for bankruptcy, which she blames on her involvement with Brooke.

Lobell said she bought into the franchise business with great hopes of expanding her book of business but soon found out that instead of making more money, she was losing money. She said that in spite of producing separate receipts showing that premium money was deposited, she did not receive commission checks from Brooke.

Lobell contends that Brooke thrives on the franchise fees, commission fees and consulting fees it charges. She believes that Brooke would just as soon see its franchisees fail, rather than succeed, because of the profit it makes when they do.

Lobelle claims that at least 148 agents have contacted her Web site with complaints about their experience with Brooke.

A Sept. 27, 2007 story on Insurance Journal's Web site about Mann's lawsuit elicited comments from several anonymous readers who identified themselves only as disgruntled former Brooke franchisees.

Allegations disputed
Brooke Corp.'s general counsel disputes all of the allegations.

"We are troubled to hear that anonymous writers are spreading false information about our company. Nevertheless, we are pleased to 'go on the record' and encourage all interested persons to carefully review our SEC filings, UFOC filings and the recent examination report issued by the Louisiana Department of Insurance," said Scherb.

Scherb added that the firm also believes "that the number of lawsuits we've had with franchisees has been very low, and that we've been successful in resolving them at little or no cost to the company."

Kyle Garst, Brooke Corporation chairman and chief executive officer, also said "that 12 franchise related lawsuits or arbitrations (both closed and active) ... go back to 2000 and include six old closed lawsuits/arbitrations that we won or settled long ago."

Garst said that of the six current cases disclosed, two have agreed to arbitration and one has agreed to mediation. In some of the cases, Brooke initiated legal proceedings against a franchisee.

"I hope this better demonstrates why we believe our franchise litigation exposure is minimal," he said.

Still growing
Despite the complaints of a few, Brooke keeps growing. It just announced a deal to acquire 60 insurance agency locations from entities associated with Chicago-based J and P Holdings Inc.

The agencies currently sell auto insurance under the trade names of Lone Star Auto, Insurance Xpress, Car Insurance Store, Hallberg Insurance Agency and Hallberg Xpress in Colorado, Illinois, Kansas, Missouri and Texas. The acquired agencies will be converted into Brooke franchises or merged into existing Brooke franchise locations.

In an announcement released Oct. 1, Brooke noted it expects to achieve a 1,000 location benchmark in the next few months. As a result, the company said it plans a "reduction in the basic rate of monthly franchise fees paid by franchisees as the result of these economies of scale," provided by the growth in locations.

Major Internet disruption would cost $250 billion in economic damages

New report urges CEOs to take action now to ensure continuity of their businesses should a meltdown occur

A major disruption to the Internet would not only be detrimental to businesses, public institutions and citizens, but also would cost the global economy an estimated $250 billion, according to a report released by the Business Roundtable, an association of U.S. chief executives.

"America's CEOs have diligently prepared to address and respond to physical attacks that threaten the safety of our employees, economy and quality of life," said Ed Rust, CEO of State Farm and co-chairman of Business Roundtable. "Our report suggests that, similar to physical threats, the risks of attack through the Internet intended on impacting our businesses, economy and national security present new challenges and must be addressed."

The report, "Growing Business Dependence on the Internet: New Risks Require CEO Action," cites the potential and widespread effects a cyber disruption could have on society and urges CEOs to take necessary action to ensure continuity of their businesses.

Among the report's key findings is that an Internet disruption would affect nearly every U.S. business, directly or indirectly, and the efforts to respond will create stress points that will hinder recovery.

In addition to the extensive effects, the report suggests a lack of awareness from business leaders on their reliance on the Internet, thus increasing vulnerability in the case of an interruption, malfunction or disruption. The World Economic Forum estimates a 10 percent to 20 percent probability that a breakdown of the critical information infrastructure (CII) will occur within the next 10 years -- thus requiring immediate attention from business leaders.

The report recommends the nation's business leaders should begin:

• Assessing companies' Internet dependencies, based on their business operations;


• Proactively addressing Internet dependence and interdependence risks in corporate continuity and recovery plans;


• Engaging with industry partners, government and other CEOs to ensure alerts as well as response and recovery plans are in order;


• Sharing information on Internet disruptions with existing industry-operated information sharing and analysis centers (ISACs); and


• Ensuring executive level engagement with government to set and communicate expectations about early warning and threat notifications.

"By addressing the challenges we have identified in this report, the nation's business leaders can ensure their employees and customers are protected and safe, and that the economy still thrives," added Rust.

The full report can be found at: www.businessroundtable.org/
pdf/Security/
BR_Internet_Business_Dependence_Report_09252007.pdf

Supreme Court to hear case pitting federal v. state product liability laws

The Supreme Court said late last month that it will decide a case that centers on whether federal regulation of pharmaceuticals preempts state law.

The case involves a product liability lawsuit against Pfizer's Warner-Lambert unit.

A group of Michigan plaintiffs led by Kimberly Kent in April 2000 sued Warner-Lambert Co. over alleged injuries caused by its Rezulin diabetes drug. Rezulin was ordered off the market in March 2000 by the Food and Drug Administration after it was linked to nearly 400 deaths and hundreds of cases of liver failure.

A federal district court dismissed the suit in 2005, citing a Michigan law that shields FDA-approved pharmaceuticals from liability lawsuits. The case was brought under Michigan law but was moved to federal court because other states were also involved.

An exception in Michigan's law that allowed the suits to proceed if a pharmaceutical company misrepresents information presented to the FDA was pre-empted by federal laws governing the regulation of pharmaceuticals, the district court said.

The 2nd U.S. Circuit Court of Appeals, based in New York, reinstated the suit. The appeals court disagreed that the exception in Michigan's law for cases involving fraud against the FDA was pre-empted by federal law.

That decision conflicted with other appeals court rulings in previous cases. Such conflicts in the federal apepals courts are one criteria the justices consider when deciding to take a case.

The case is Warner-Lambert v. Kent, 06-1498. Oral arguments haven't yet been scheduled. The case will likely be decided before the court's term ends in June.

Copyright 2007 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

House-passed flood insurance bill provides optional windstorm coverage

The U.S. House of Representatives has passed a measure updating the nation's flood insurance program that will give homeowners the option of purchasing windstorm coverage as part of their flood policy.

The legislation also reauthorizes the National Flood Insurance Program for five years through 2013, improves flood mapping, eliminates some rate subsidies, and adds business interruption coverage as an option.

H.R. 3121, the Flood Insurance Reform and Modernization Act of 2007, sponsored by Rep. Maxine Waters, D-Calif., passed by a vote of 263 to 146.

In an effort to make the NFIP more actuarially sound, the bill phases out subsidized rates on commercial properties, vacation homes, and second homes built before 1974. Multifamily rental properties are excluded from the phase-out of the subsidy.

Additional optional policy coverage is added, allowing business owners to purchase business interruption coverage at actuarial rates. Additionally, optional coverage at actuarial rates for basement improvements and replacement cost of contents is added. For the first time since 1994, the bill updates maximum insurance coverage limits for residential and nonresidential properties.

The bill requires the Federal Emergency Management Agency to review the nation's flood maps and makes the updating of maps an ongoing process.

Provisions protecting policyholders include clarification of disclosures about flood insurance availability and plain language information on flood insurance policies. Landlords must notify tenants of contents coverage availability. Further, the bill makes flood insurance effective immediately upon purchase of a home.

To encourage participation in the NFIP, the bill provides for a new community outreach program, and provides for a study of how to increase participation by low-income families. In order to help ensure that those homeowners who should have flood insurance do have flood insurance, the bill increases the fines on lenders who do not enforce the mandatory flood insurance policy purchase requirement for those who live in a floodplain and hold a federally-backed mortgage.

H.R. 1852 also requires FEMA to report to Congress annually on the financial status of the NFIP, increases the amount FEMA can raise policy rates in any given year from 10 percent to 15 percent, and authorizes funding for additional staff at FEMA to carry out the requirements of this bill.

The House measure includes a provision authored by Rep. Gene Taylor of Mississippi to provide for an optional multiple peril policy -- to allow property owners to purchase wind and flood coverage in a single policy. The industry has opposed this expansion of coverage.

Industry says no to windstorm
Insurance agents welcomed news of the House approval.

The Independent Insurance Agents and Brokers of America said it is especially pleased with the provisions that increase maximum coverage limits and include optional business interruption coverage and additional living expenses.

"An increase in the maximum coverage limits will better allow both individuals and commercial businesses to insure against the damages that massive flooding can cause, and we're grateful that this increase was included," said John Prible, Big "I" assistant vice president for federal government affairs. "We are also grateful that the House included the optional additional living expenses and business interruption. The security and stability that these optional purchases would provide to consumers is crucial to individuals and to small business people across America."

Agents and insurers were less enthusiastic about Taylor's windstorm provision, however.

The Big "I" said only that it has "some concerns with the inclusion of such coverage in the NFIP." The group said it would work to "ensure that windstorm coverage is affordable and available to Big "I" consumers without unduly displacing the private marketplace."

The National Association of Professional Insurance Agents said the windstorm coverage should be eliminated from the legislation when the Senate considers it.

"Adding wind coverage to the National Flood Insurance Program (NFIP) is a bad idea that we oppose," said PIA Senior Vice President Patricia A. Borowski. "It would result in uncertainty as to whether losses caused by wind should be covered by a policyholder's property policy, a state's wind pool, or the NFIP. The muddle created by this provision will increase disputes about coverage and prompt more lawsuits. It would hurt, not help homeowners."

That reasoning echoed what some insurers have said.

The Property Casualty Insurers Association of America opposes the windstorm option, arguing that while it is "well-intentioned, it may produce unintended negative consequences" for consumers.

"Adding wind coverage will create artificial subsidies, which essentially means rate hikes for consumers in non-coastal parts of the country who do not face the same wind-damage risks as coastal policyholders," said Ben McKay, PCI's senior vice president, federal government affairs. "It is unnecessary for Congress to expand the flood program, considering that wind coverage is already available either through the private sector or state wind insurance programs."

McKay said that residual state-based mechanisms provide coverage for wind damage where no market exists, and private insurers provide wind coverage where there is a market. "Adding wind coverage to the NFIP simply creates a federal government fund that will compete with existing state funds and potentially with the private market," he added.

PCI urged the Senate to pass flood legislation that does not include the wind provision.

The offshore reinsurance tax debate resurfaces in Congress again

An industry executive, representing a coalition of 14 large U.S.-based insurance groups, told the U.S. Senate Finance Committee late last month that a major tax advantage for certain foreign insurance groups could threaten the future of the domestic insurance industry.

The tax advantage allows foreign insurance groups based in places such as Bermuda or the Cayman Islands to legally avoid paying billions of dollars in taxes on much of their U.S. underwriting and investment income, said William R. Berkley, chairman and CEO of W. R. Berkley Corporation and spokesman for the Coalition for a Domestic Insurance Industry.

Berkley and the Coalition say the tax advantage, which originated in practice around 20 years ago, has already caused significant migration of insurance capital abroad. Berkley said the tax advantage permits foreign-based insurers with U.S. affiliates to move much of their taxable underwriting and investment income from their U.S.-based businesses out of the country merely by reinsuring the business with a foreign affiliate in a low-tax or no-tax jurisdiction. This type of reinsurance transaction generally requires a mere bookkeeping entry to shift revenue from one pocket to another and out of the reach of U.S. taxing authorities, Berkley noted.

"By contrast, U.S.-based insurers must pay current U.S. tax on all of their income from these policies," he told the committee. "Thus, even though the U.S. income-generating activities are the same, these foreign-domiciled insurers can avoid U.S. tax on much if not all of their underwriting and investment income."

A report for the hearings, prepared by the Senate Staff -- "Present Law and Analysis Relating to Selected International Tax Issues" -- describes the opposing points of view. "Insurance company reinsurance transactions with offshore reinsurers, particularly affiliated reinsurers, have been characterized as creating the potential for tax avoidance and as causing a competitive disadvantage for U.S. insurance businesses. At the same time, reinsurance is a fundamental component of global risk management techniques."

Recurring concern
The last time Bermuda-based insurers were called into question in Congress was in 2000, when supporters of HR 4192, or the Johnson/Neal bill, proposed legislation aimed at ending "favorable tax treatment" for foreign based insurers, principally those located in Bermuda. The main backers then were Chubb and The Hartford, which are also members of the current coalition. The bill was reintroduced in 2001, but failed to get approval.

While Bermuda-based insurance companies are considered foreign-owned, many such as ACE Limited and XL have strong ties to and a large presence in the U.S. market, and insist they are not trying to avoid taxation.

Bradley Kading, president and executive director of the Association of Bermuda Insurers and Reinsurers, summarized the points his organization focuses on. "1) Bermuda's substantial economic contribution to the United States; 2) Bermuda's insurers' role in filling U.S. insurance market needs; 3) Explaining that U.S. insurers do substantial affiliated reinsurance transactions for the same business reasons (risk transfer, avoiding trapped capital, diversification) that Bermuda reinsurers do them; 4) Bermuda insurers are primarily in Bermuda for ease of entry into insurance markets and that Bermuda regulation affords insurers an opportunity to quickly form an insurer and start writing business in time to take advantage of new market opportunities."

In a written statement presented to the Senate Finance Committee, Donald Kramer, chairman and CEO of Bermuda-based Ariel Reinsurance Co., pointed out that "a substantial percentage of U.S. insurance companies cede more that half of the gross premiums they write to reinsurers. Affiliate reinsurance is used routinely with the U.S.-based insurance company groups, for valid non-tax reasons." The practice enables related groups of companies to "pool risks and mange them more efficiently."

He joined company past and present Bermuda leaders -- notably Brian Duperreault, former CEO and chairman of ACE Limited, and Brian O'Hara, who founded and still leads XL -- in observing: "First and foremost we are in Bermuda because we can quickly deploy our capital, form a company, get licensed and write insurance."

Kramer said it is "simply incorrect" that Bermuda companies are located on the island "to avoid U.S. taxation." He pointed out that a reinsurance transaction, even among affiliates, "involves the true transfer of risk." In addition "regulation requires the price in a reinsurance transaction to be an arm's length price," he continued.

Kramer isn't alone, nor is he supported solely by ABIR members. Attached to his statement were letters from Risk and Insurance Management Society President Michael Liebowitz and Bill Newton, executive director of the Florida Consumer Action Network.

"RIMS has a history of opposing any legislation that encumbers free market movement and the transfer of risk that is vital to a sound global insurance and reinsurance community," wrote Liebowitz. "We strongly urge you to oppose any legislation that would result in negative implications for the global reinsurance marketplace and more importantly, those U.S. businesses who rely on this market to manage their risk exposure."

Nelson was even more specific. "We urge you [the Senate Finance Committee] to be on the lookout for amendments proposed this summer and fall that offer hundreds of millions in additional revenue that in the end will be paid for by Florida consumers!" Nelson wrote. "It's not a good deal and these amendments should be exposed as protectionist measures by U.S. insurers seeking to grab more business for themselves by increasing the taxes on their non-U.S. competitors."