What’s it like to be sued for doing your job as an agent or advisor?
For those who have gone through it, “unpleasant” is an understatement. Agent A, for example, who had to file bankruptcy, still vividly recalls walking up the courthouse steps, his wife at his side, wondering “What has this wonderful woman done to deserve this?”
Agent B sums up the experience as “two and a half years of hell. It was humiliating. I’d never had anything like this happen to me before.” And Agent E, who was named in a suit because he supervised the agent who was being sued, is still skittish. “If a potential client calls and can’t explain who referred him or how he got my name, I hang up,” he says.
These are real agents, with real stories. We agreed not to identify them in order to allow them to share their experiences freely. Agents who have been sued don’t like to talk about it (and frequently don’t even like to admit to it), but it’s no secret that many have been hit with suits, and even more have lived (and may be currently living) under the cloud of a threatened suit.
And there’s no reason to believe these suits will stop, or even slow down, any time soon. A quick search on the Internet will turn up dozens of class action lawsuits against insurance companies and their agents. It seems like every day, a new suit is filed or a new judgment handed down. You might not want to think about it, but you, or any agent you supervise, could find yourself sued by a client because of past actions you or one of your agents took.
If you think it can’t happen to you, all the agents who talked with us for this article would quickly disagree. It happens a lot more than you think, and sometimes the sources of the lawsuits can come as a complete surprise.
Agent A found himself on the hot seat in the wake of a take-over followed by a collapse. His original insurance carrier, of which he was also an officer, had been bought by an insurer in another state. The new parent failed, and regulators in his original company’s home state brought suit against each agent who had sold a policy there, as well as the officers of the original company. Even though reinsurance allowed every death claim to be paid, and no policyholder was harmed, the suit was still brought.
Agent A had to wait 10 years after the suit was filed before he got the call informing him a date was going to be set for a trial at the end of that month. Throughout those years, he had stayed in business as an insurance agent, and had continued to prosper. But the suit always threatened, even though no action was taken for a long time. “They just let it lay there. They even refiled after seven years, to keep it alive,” he said. He didn’t think the suit had teeth, “but they (the regulators) didn’t care. They basically wanted to punish anyone with the company at the time for allowing it to fail.”
Agent A did hire a lawyer, but he felt the attorney didn’t do much. As he recalls, “Friends who are lawyers told me, ’You don’t realize what you’re up against. You’re going to trial in the state capital, where the jury will likely be low-income minorities. You’ll be seen as a rich guy from a wealthy city. Even if you’re lucky enough not to have any judgment entered against you as an officer of the company, you’re going to spend $100,000 or $200,000 and an unbelievable amount of your time and emotional energy.’”
If he lost, Agent A’s attorney friends continued, the jury could assess him $2 million. And if he didn’t have it, his friends warned, the court could order him to pay $2,000 a month for the rest of his life. “If that destroys your retirement, your children’s college education?too bad,” they said.
For a while, Agent A ignored his friends. He was going to court. Justice, by God, would prevail. But after two years, he’d had enough. Agent A listened to his attorney friends and filed a Chapter 13 bankruptcy, the only move that would successfully stop the proceedings. Before filing, Agent A paid off all his creditors so they wouldn’t get hurt. The state insurance regulators fought the bankruptcy, but lost, and dropped the suit right after his bankruptcy was in place.
Agent A, understandably, is still bitter over his experience. “The only ones who do get punished are the successful people still in business. The assumption is, you stole the money and you’re a bad guy. I continued to allow it to be a cloud over my self-image. I allowed them to beat up my self-esteem. I’ve suffered from that now for more than three years. That’s a lot of downstream impact,” he says.
Sometimes you don’t even have to be the actual agent who made the sale to be sued. Just being the supervisor of the office is sometimes enough to catch you into a lawsuit.
Agent B, who was also a registered rep, supervised some agents who had sold some limited partnerships in 1993. The sponsoring company had gone bankrupt, and two investors in a deal feared they wouldn’t get their money back. So each took Agent B to arbitration.
“We had about 50 clients in these programs, some with large sums and some small. The two who sued were accredited investors, meaning each had a net worth of over $1 million. I was a supervisor, so I signed off on the orders,” he says, which was enough to get him named in the action. “They also named the selling agent and the owner of the broker-dealer through which the product had been offered,” Agent B explains.
Because limited partnerships are securities products, the arbitration hearings were handled by three-member panels appointed by the National Association of Securities Dealers. In the first case, the investor was awarded $250,000 in damages, even though he’d only lost $50,000. The second investor received a $124,000 award from the arbitration, even though his portfolio had actually gained $77,000. The arbitrators had reasoned that Agent B and others had allowed the clients too much concentration in one investment.
Agent B is still frustrated about what he had to undergo. “Arbitration was an awful experience. I think it’s very biased. In court cases there’s a lot more discovery, but arbitration is a hybrid?there are no real guidelines. If this ever happens again, we’re going to go to court,” he declares.
Agent E was yet another manager caught in a class action. A client of an agent managed by him was part of a class of policyholders upset that policy dividends were not enough to cover the premiums of an insurance policy he’d bought. “It seems these attorneys are using a shotgun?they’ll name anyone they can think of and throw them in the lawsuit,” he fumes.
As a result of being named in this suit, he’s become gun-shy. “People call me for insurance, and I ask how they got my name. If they can’t tell me, I don’t do business with them. I’ve turned down 10 potential clients this year because I felt uncomfortable,” he says.
The premium never vanishes
When Agent C opened his mail about two and a half years ago and learned he was being named as a defendant in a class action suit in which a long-ago former client was participating, he was stunned. The allegations dated back more than 10 years, to his days as a trainee agent, going around with a more experienced agent who was doing the actual selling but giving the trainee some of the credit on paper for the sales.
At issue was the sale itself?a small whole life policy had been replaced by a universal life policy from the same company. The premium did not vanish as illustrated, because of interest rate fluctuations, so the policyholder would have to pay premiums for longer than was originally projected. The policyholder was not happy about it. The company had offered to pay up the policy, but the client turned it down on the advice of his attorney, according to Agent C.
“I’m kind of bullheaded,” he says. “I don’t think anything was done improperly. I live in a small town, and if it were up to me, I’d go to court and clear my name. At the same time, I realize that if (the case) does go to court and news of it gets out, whether I’m right or wrong, people are going to think?because the lawsuit was filed?I’m guilty.”
But one thing that especially worries him is trying to document the events leading up to the sale. He left the company being sued 10 years ago, and was told he couldn’t take his files with him. “If I had it to do over, I would have copied every file, if that had been allowed,” he says.
The case has now been pending for more than two years. At this point, Agent C doesn’t know if it will go to trial or be settled out of court. But he has continued to endure the emotional impact of the suit. “It weighs on my mind, and it’s stressing me out,” he says. “I just want to get it over with. Why are people allowed to file these lawsuits? Every time the attorney calls and I recognize the voice, I immediately start wondering what’s going on now.”
Agent D’s situation involves a lawsuit over a premium offset policy written in the early 1980s. With premium offset policies, the policyholder paid a lump sum, which he understood would cover payment of policy premiums for the rest of his life. But as interest rates shifted in the following years, policy dividends were not enough to cover the premiums and the policyholder was asked for more.
The policyholder filed a formal complaint in 1994 with state insurance regulators and with the insurance company. He also hired an attorney, who sent Agent D a letter informing him that charges would be pressed. The policyholder also wanted his money back for the coverage Agent D had sold on each of his three children.
After two years, based on lawsuits other companies were facing regarding similar policies, a confidential out-of-court settlement was reached. But Agent D still had emotional toll from the trauma. “It’ s very stressful?I lost a lot of sleep over it, and had a lot of anguish. Even after it was settled, I didn’t know if the policyholder would come back and try to do something to me. He had threatened me verbally in front of other clients at my place of business. It was something I don’t think I would want anyone to experience.”
He still thinks about it. “You wonder if you’ve done the right thing for these individuals, or you wonder what you’ve done wrong. You try to relive the whole situation to see what you maybe should or shouldn’t have done,” he says.
The attorneys’ view
Whether sued agents would want to go as far as one of Shakespeare’s characters in Henry The Sixth, who counseled “Let’s kill all the lawyers,” is unknown?but there’s certainly a lot of frustration and resentment against the legal community. Agent F, who supervises two agents who have been sued, thinks the way errors & omissions insurance currently functions might have some fault in the proliferation of lawsuits against agents. He doesn’t think either of his agents would have been sued if their clients hadn’t been urged on by their lawyers.
“E&O coverage is a temptation for attorneys. E&O carriers estimate what it’s going to cost to litigate. Then they settle for an amount less than that. So attorneys encourage policyholders to sue because it doesn’t matter if you’re right or wrong?if you bring on a big enough reign of terror, the companies will pay. It just makes the system get worse and worse,” he says.
Still, if you’re an agent or carrier looking for sympathy, Merced, Calif.-based insurance fraud investigator Mark Colbert would advise you to look in the dictionary under “S.”
Colbert, a Metropolitan Life agent from 1990 to 1994, says he reported hundreds of churning cases through company channels during his tenure with MetLife, and was told to look the other way. Finally, in disgust, he turned over evidence to the California State Department of Insurance and the news media.
He lays much of the blame for the current spate of lawsuits, class action and otherwise, squarely on the companies employing and training the agents. “You have big companies pushing agents to sell any way they can. It doesn’t matter if the sales practices are ethically wrong, or if someone is getting hurt. You have to be productive if you’re going to keep your job,” he says, adding that it’s very hard for agents to overcome the kind of pressure corporations place on them to sell.
Also, he says, insurance agent culture rewards top producing agents without questioning how they get their sales. “I’ve had people come up to me and tell me about huge, huge producing agents who are industry leaders. More often than not, the huge sales are coming due to shady sales practices. I’ve always told them, ’Show me someone who is an industry leader and I’ll show you a thief,’” he says.
He doesn’t believe that most agents who land in trouble are surprised by it. Those who do so usually know they were on shaky ground. And on the witness stand, “The agents I’ve seen were salesmen to the end. They insist, ’I have no idea why I’m here,’” Colbert says.
Colbert disputes the idea that most policyholders are eager to file lawsuits in hopes of winning a big-bucks judgment. Most of the time, he insists, policyholders head for court only after they’ve repeatedly gone to the insurance company and have failed to receive satisfaction.
And being a whistleblower is not an easy position?maybe 1% of all agents would actually do so if confronted with situations, says Colbert. “At one point, I was eating Tums like M&M’s,” he says. Today, he appears in court frequently as an expert witness. He says he has received several death threats as a result of his investigations into agent fraud. But when a 70-year-old woman with tears in her eyes puts her head on his shoulder and tells him he’s the help she’s been praying for, he figures it’s all worthwhile.
His advice to agents? “My absolute number one guideline is agents have to live with themselves. An agent has to know his money came dirty or clean. To avoid problems, look within yourself. Do what’s right. And document everything?every phone call, everything said,” he says.
Richard Sabo, based in Pennsylvania, is another former insurance agent and whistleblower who now works as a consultant and fraud investigator. Normally, he says, a lawsuit alleges that a product was not properly explained or that all costs were not revealed. It comes down to lack of disclosure or understanding at the time of sale.
Unlike Colbert, Sabo believes many of the lawsuits stem from poorly trained agents, and agents taught that making the sale was the goal to be achieved above everything else. “A big problem we’re running into involves owners of universal life contracts not knowing their policies can be underfunded and can cannibalize themselves. Universal life is a risk contract. If internal costs go up or the interest rate goes down, your premium payment cannot fund the contract. Agents who weren’t trained to explain it properly are getting stung,” Sabo says.
He is sympathetic to the agents’ plight, having once been an agent himself. “Once I got into the consulting arena and started testifying as an expert witness, I realized what poor training I’d had. I wasn’t ripping people off, but I wasn’t doing things in writing. It was all verbal, with no typed proposals.”
Katherine Vessenes, a lawyer and compliance specialist in Bloomington, Minn., sees the possibility of more suits in the future. “I think variable annuities are going to be huge issues as we go forward. Regulators are hammering on them. You have moments when you wonder whether they understand them or not. If they start on variable annuities, then variable life policies can’t be very far behind,” she says. And top producers will be the most exposed, she adds, because when auditors come in, they ask for the files of the top 20 to 100 producers in a firm.
Agents always lose when they are sued, she adds, because no matter what, legal fees will be there. It’s also going to be difficult to defend against lawsuits involving variable annuities, because a lot of insurance companies haven’t taken the risk seriously and files are poorly documented.
Many times agents simply want to settle a case to put the emotional stress behind them. “Sometimes that can be a horrible, horrible decision. It could go on your insurance record. You may have to report this to clients,” she warns.
Sabo has several suggestions for agents who wish to avoid being sued.
- Always tell your attorney the truth.
- Remember the six P’s: Prior Proper Planning Prevents Poor Performance.
- Know your product.
- Keep the paperwork.
- Don’t cut corners. For example, don’t forge a signature simply because you don’t want to run all the way back to the policyholder’s house.
- Know the rules. Don’t assume it’s right because it’s what you were taught by the company.
- Disclose, disclose, disclose. The more you disclose up front and can prove, the less chance of a successful case against you.
Attorney Andrew Sigal, a consumer advocate in Los Angeles, also underscores the importance of disclosure. “Probably the biggest complaint (by policyholders) is (agent) failure to explain fully what the customer is signing,” Sigal says. “Make sure the potential client understands the advantages of going one way or the other. Lots of times, the client may not know the right questions. So it’s always good to ask, ’Is there something here you don’t understand?’”
Sigal also reinforces the idea of documenting everything and being honest with your attorney. “You always want to create a paper trail. That will definitely protect you. Also, always be candid with your attorney, even if the information may appear to be detrimental. If the attorney knows about it in advance, he or she can be prepared to deal with it.”
Sigal also doesn’t think that juries automatically decide against insurance companies and/or agents. “I don’t think a jury is going to ignore the facts. If the facts aren’t there, I don’t believe a jury is going to nail an insurance company. The only time bias against insurance companies comes into play is if the plaintiff proves his or her case,” he says.
Vessenes recommends that agents get their own E&O coverage beyond what their insurance company or broker-dealer may provide. “It’s nice to know you’ve got someone in your corner who is just for you,” she explains.
In addition to documenting, and then documenting some more, Vessenes also urges agents to maintain really good personal relationships with their clients. “Clients are usually unlikely to sue a friend,” she says.
Eileen Courter is a freelance writer based in Sun City Center, Fla. She has written about financial services for over 20 years.