Knowing who you represent          By Larry Tencer

In the public’s view, Farmers, State Farm and Allstate are often thought of as being similar companies, which, in many respects, they are.  However, in one, very important area, they are totally different.  That difference is how each company is organized.   

State Farm is a mutual company, owned and controlled by its policyholders who elect a Board of Directors to oversee the operation of the company. Allstate is a stock company, owned by its stockholders who, like a Mutual Company, elect a Board of Directors to oversee the operation of the company. In both cases, the Board of Directors hires a manager (President, CEO) who hires other employees to run the day-to-day functions of the company. 

So what is "Farmers"?  And the answer is, "Totally different." "Farmers" is a community of policyholders that band together to insure themselves. This type of organization is called a Reciprocal, which is defined as an unincorporated business organization made up of subscribers (policyholders) and managed by an attorney-in-fact.  Many years ago, a bunch of farmers (real farmers, thus the name Farmers) gathered together and decided to form a group, pool their money, and insure them selves. They also decided to hire someone to manage the money and, among other things, pay any claims that occurred. The person they hired was called the attorney-in-fact.  

What was created that day grew into Farmers Insurance Exchange (and the other Exchanges) and the attorney-in-fact, originally hired to help and support the policyholders, became Farmers Group Inc (FGI), commonly referred to as "the management company". For many years, FGI was, in itself, a publicly traded stock company but is now a wholly owned subsidiary of Zurich.  

When you write an insurance policy, your customer must sign the Subscription Agreement at the end of the application. Have you ever pondered what the Subscription Agreement was? It is a formal legal contract that allows your customer to "join" that original group of farmers (the Exchanges) and your customer, in effect, hires FGI as his/her attorney-in-fact. FGI now "works" for your customer to manage his/her money and pay any claims.   

Today, there are three Exchanges; Farmers Insurance Exchange, Fire Insurance Exchange and Truck Insurance Exchange, each with their own attorney-in-fact. Farmers Underwriter’s Association is the principle attorney-in-fact and owns the other two, Fire Underwriters Association and Truck Underwriters Association. Legally, Farmers Underwriters Association does business as (DBA) Farmers Group, Inc. 

The primary functions of the attorneys-in-fact are to administer the Exchanges and to carry out the insurance transactions.  As such, they are authorized as an agent of your customer to accept or reject risks, sign contracts of insurance, seek new subscribers, collect premiums, pay losses, invest the funds of the Exchanges, contract for agents and brokers, commence and defend actions for and against the Exchanges. Just as an agent (you) owes a fiduciary duty to its principle (Farmers), there would seem little doubt that the attorney-in-fact owes a fiduciary duty to the Exchanges or more precisely your customer.   

The power granted by your customers to the attorney-in-fact is unusually broad and, because of the nature of a Reciprocal, it could be a detrimental to your customer. In a worst-case situation, an unscrupulous attorney-in-fact could possibly exploit your customers for personal gain or the betterment of the parent company. You must understand that the Subscription Agreement is a contract of adhesion, just like your Agent Appointment Agreement and is designed so that their management interests are absolutely protected.  Assuming an attorney-in-fact has a fiduciary duty to your customers, wouldn’t you think that the Subscription Agreement should offer the Exchanges the same control and protection as are available to the attorney-in-fact?  

The greatest potential for abuse by an attorney-in-fact involves the management fee each of your customers pays every time a policy is written or renews, a fee to administer the business of the Exchanges.  With FGI, the management fee is a percentage of the gross premiums paid by your customer, which comes off the top regardless of any other expenses. According to the fine print in the Subscription Agreements, the fee can be as high as 25%, although FGI has "indicated" it normally ranges between 11% and 14%.

While only charging between 11% and 14% may seem like a real bargain, in 1998, the California Insurance Commissioner noted that Farmers' management fees were not “on an actual cost reimbursement basis”.  Let's look at management fees charged compared to the expenses claimed.  According to Farmers Form A filing with California Dept. of Insurance, the management fees in 1999 exceeded actual expenses by a mere $758,700,000 (that's $758 MILLION dollars!).  In 1996 it was $660,726,000. In 1995 the figure was $545,392,000. In 1994 it was $546,728,000. These amounts, representing the management company's net profit from managing the Exchanges, are more than twice as much as it cost FGI to provide the management services.  These numbers must generate the question, "Do the Exchanges or for that matter your customers, have any control over the attorney-in-fact (FGI)?" An intelligent person would also ask, "Would you willingly permit such gross profits to be paid to anyone?"  Just imagine what a great financial position the Exchanges would be in today if the management company were limited to a net profit of only 25% over their actual management expenses.       

Having spent over 28 years as a Farmers agent, and the last several as UFAA’s Director of Legal Activities, I had little doubt years ago that FGI was abusing the trust originally granted to it by the Company’s founding fathers and violating its fiduciary duty to the Exchanges and your customers.  Here are just two obvious examples; the incessant pressure to sell life insurance and the auto/life discount.  First, it always seemed peculiar to me that FGI and not the Exchanges owned Farmers New World Life, especially knowing that life insurance was always more profitable on a year-in, year-out basis than the property and casualty business.  I would be willing to bet that Farmers New World Life has never had a year with an underwriting loss, which certainly isn’t the case for the Exchanges. The introduction of the auto/life discount was a stroke of genius on the part of FGI.  It was an absolutely brilliant way to generate more life sales for their sole benefit and only their benefit.  Brilliant, but at the expense of your customers.  Why?  Because it reduced the premium collected by the Exchanges in exchange for increased life sales.  It benefited the company wholly owned by FGI and hurt the Exchanges that FGI was supposed to be caring for.  

The management company has increased rates over the years, but has that benefited your customers?  Has your total number of policyholders increased in the same proportion as the rates?  Is your PIF or the Exchange's PIF, greater today than last year or five years ago?   

On the reverse side, do you think the amount of money that FGI continues to send across the pond to Zurich each year has decreased? Of course not!   Will your customers, the policyholders of the three Exchanges, ever get a break?  Not a chance. Will the Board of Governors of the Exchanges who, unfortunately are nominated by FGI, ever decide to take back control and appoint new attorneys-in-fact (a new management company) for the Exchanges? Absolutely not. The other alternative, and the more likely one, will be a policyholder's suit and I'm willing to bet that isn't that far off in the future.