After Mignault versus GWL: Is the insurance industry in trouble?

 

Mignault against GWL is a dispute based upon the concepts of the law of agency where Mignault was holding GWL responsible for the fraudulent actions of Gary Palmer an agent who then became at a later date a broker of GWL.

 

When I was working at Manulife and when Manulife decided to reduce the independent Channel to a shell in the name of profit, I voiced my opposition to two VPs named Woolley and Heldsinger whom I still call the 90 days manager or 90 days fools as it would be more appropriate. Woolley and Heldinger were good example of the type of management existing at Manulife which was based solely on the next 90 days.

 

Part of my opposition was based on the discovery that most of the growth of my inforce block of business resulted from captive business and not from independent producers. How could this be when I was managing an independent channel? It was simple. Manulife each time it was buying a company with a captive distribution channel would eliminate all its branches and therefore dump this inforce block of business in the independent Channel stating that this business was now independent and that Manulife as a manufacturer did not have any obligations towards the clients in dealing with this inforce business. Quite a magic trick don’t you think? Quite a sleight of hands making something disappear and making something else seemed to reappear…

 

I disagreed stating that once a captive agent business; always a captive agent business. I stated that Manulife could eliminate branches, agent relationships and changing these relationships into independent producer relationships, but from the client perspective this did not change anything. Additionally, Manulife had not informed the clients that their agents were now independent and therefore not explained what this meant. Conclusion: Manulife was responsible for the management and service of these policies.

 

I believed that implied authority and implied responsibility still existed upon Manulife for this past captive business. It was worst than this. Since this implied authority existed, this meant that in dealing with this business, the independent channel was acting as a super branch when it was not registered as a branch in Quebec. I was therefore breaking the law and this was a very serious matter. Was I right or wrong? Well the judgment of judge Keyser show that I was entirely and absolutely right.

 

Before reviewing the judgment, let’s look back at some of the history relating to the distribution of insurance. To summarize this history I will use what has been written by the Canadian Council of Insurance Regulators:

 

Over the past two decades, the distribution of life insurance has changed dramatically including a significant shift away from the traditional career agency model to MGA and AGA distribution models. Many of the current provincial insurance legislative provisions predate this change.

 

 Since the beginnings of the life insurance industry well over 100 years ago, common law has held that life insurance representatives are true agents of the insurer, that is, the insurer is bound by the actions of the representative, even those where the representative has acted without actual authority. Therefore, life insurance companies have had good reason to closely monitor the actions of their representatives. Until recently, this was done by the insurer recruiting and training representatives directly who would then work for them exclusively, often for their whole careers. This is the basis for the traditional life insurance “career agency” distribution model.

 

 CAILBA, in their submission to ARC, noted that the origins of life Insurance brokerage activity in Canada go back to the early 1970’s with both Maritime Life and Aetna Life using this model. It wasn’t until the late 1990’s that many of the major life insurers (Canada Life, Sun Life, Standard Life, Manulife, and Prudential, among others) began to dismantle their career branch systems in favour of contractual arrangements with life brokerage firms, which became known as MGAs.

 

Often it was the former career Branch Managers, disenfranchised by their respective companies, who created MGAs to provide a “home” for the now independent representatives.

 

 Current Regulatory Landscape

 

The responsibilities of insurance representatives and insurance companies are established by virtue of law governing insurance: contract law; agency law; tort law; statute law; and, in Quebec, civil law. Insurance contract law sets out the insurer’s legal obligations to the policyholder in exchange for payment (premium). Therefore, regardless of the fact that the policy was sold by an independent insurance representative or the fact that an insurer delegates certain functions to another party such as an MGA, an insurer is ultimately responsible for its product by virtue of the insurance contract between the insurer and the policyholder. (Note: this is the official position of the council of regulators which oppose the view of the industry. This explains why regulators want insurers to start managing MGAs as proposed in the British Columbia MGA model).

 

 Agency law governs the agency relationship between an insurer and an insurance representative, regardless of the fact that the insurance representative may act on behalf of more than one insurer, through one or various MGAs. Agency is a relationship in which one person is authorized to represent and act for another person. In the field of insurance, the “principal” is the insurance company and the “agent” is the representative. There are a number of court decisions under agency law that clearly set out the circumstances when an insurer is responsible to the policyholder…

 

 Tort law deals with legal liability issues usually involving damages for negligence. Under tort law, there are a number of court decisions which clearly set out the circumstances when an insurance company has been found negligent in fulfilling its contractual obligations to the policyholder (e.g. unfair denial of a claim). ..

 

 Finally, there is statute law which varies in jurisdictions across Canada and focuses on regulating the market conduct of insurance representatives and insurers. Under statute law, insurance representatives must meet certain criteria before they are issued a license to sell insurance…

 

 Mignault against GWL

 

As we have stated, Mignault held GWL responsible for the actions of one its agent named Palmer. GWL opposed this by stating that Palmer was not an agent but was instead was a broker.

 

The general rule as stated by judge Keyser is: “that regardless of whether the agent is an employee or an independent contractor (Fridman, The Law of Agency), principals are vicariously liable for the wrongful acts of their agents committed within the scope of their actual or apparent authority… There are two types of actual authority – express or implied. “

 

In the case of Mignault what we are interested in is implied authority. Judge Keyser defined implied of apparent authority as: “Apparent authority (also called ostensible authority) exists where the words or conduct of the principal would lead a reasonable person to believe that the agent was authorized to act, notwithstanding the fact that the principal and ostensible agent had never discussed such authority.”

 

Mignault bought from Palmer insurance annuities offered by GWL between 1991 and 2006. At first, he had signed an agent contract with GWL. However between 1995 and 1996 GWL began to have some concerns over Palmer’s actions and his agent contract was terminated. It seemed that despite the grave concerns which had led to the termination of the agent contract for cause, GWL still wanted Palmer’ sales. In 1998 he was offered a broker contract which he signed.  However Judge Keyser notes: “The number by which he was identified internally with GWL for purposes of commission payments changed, but he was still identified on all forms sent to clients as “agent”.”

 

It was also proven that in 1992, the Mignaults decided to do business with Palmer because he was a Great West Life agent and their goals were to consolidate their investments into GWL products.

 

Here judge Keyser noted a fact which he deemed remarkable but which is in fact the standard in the industry. This fact as noted by judge Keyser was: “when Palmer was terminated in 1996 by GWL, this information was not conveyed to the Mignaults and Palmer was allowed to continue to service their existing GWL accounts.”

 

I share the feeling of judge Keyser. When I became the Director of Sales for Manulife, just before my appointment, Manulife had cancelled the contract of an agent for cause. His name was Franco Distasio. I learned later that Manulife had not advised the regulator of this termination. I also learned that the clients were never advised of this termination. I became involved in this case following a complaint from a client stating nobody was looking after her investments which prompted me to look into the block of business and I was shocked by what I saw. The fact that Manulife had not disclosed the termination of Franco DiStasio had allowed him to transfer the seg funds to another insurer. I still believe today that these transfers were not in the best interest of the clients. No matter how I complained to Manulife demanding that this be changed, Manulife ignored my complaints and continued to cancel agent contracts in the same manner without notifying the clients. In fact, the fool named Heldsinger could not understand the principle of disclosure and continued to terminate agents for cause without notifying the clients as demonstrated in the Bertrand Lussier case.

 

It was only in 2006 that the Mignaults were notified of the frauds committed by Palmer. GWL refused to take responsibility for these frauds stating that as per the contract Palmer was an independent contractor. Judge Keyser noted again: “This contract was terminated in 1996 for a number of reasons but Palmer was allowed to come back to GWL in 1998, this time as a broker, which simply authorized him to submit applications for life insurance, annuities and accident and sickness insurance to GWL; His ability to operate for GWL was decreased as a result of his status changing. Notwithstanding this, he was still identified on all the forms sent out to clients of GWL throughout the time of his dealing with the Mignaults as agent, although at one point, the internal number assigned to Palmer by GWL changed.”

 

 I want to make a note here. It is amazing how many insurance executives don’t care about the clients. The GWL executives involved knew about Palmer’s practices. They did not act to protect the clients. They did not care. They simply wanted to protect GWL while getting their sales and protecting their paychecks. This was the purpose of the change to a broker contract. GWL could still get its sales while washing its hands of Palmer’s actions on the basis that he was independent.

 

To define whether Palmer was an agent or broker from the perspective of the Mignaults, judge Keyser noted the following: “For a period of time (1993 to 1996), Palmer 2013 was physically housed in GWL offices. Despite the contract between Palmer and GWL identifying him as an independent contractor, he was always described in GWL documents going to the Mignaults as “agent”. This is not disputed. Communications between the Mignaults and GWL showed Palmer being identified as agent on all of these communications such as:

 

 1. Client Statements

2. Transaction Statement

3. Confirmation Notices

4. Letters from GWL”

 

Finally in making its decision against GWL, judge Keyser use the following facts: “Throughout the involvement of the Mignaults with GWL from 1991 – 2006, the Mignaults were never advised of the limitations of Palmer’s authority as an independent contractor since GWL deemed this information to be internal. The Mignaults were never sent a copy of the agent’s contract that Palmer entered into in 1991. The Mignaults were never advised that Palmer was in fact an independent contractor and not a true agent of GWL (in the opinion of GWL). The Mignaults were never sent a copy of the broker’s contract that Palmer entered into with GWL in 1998. Nor were they advised of his 1996 termination by GWL… Astonishingly, clients with annuities serviced by Palmer were never advised of this termination. So Palmer, although GWL had lost confidence in him and thought his actions reflected unfavorably on GWL, was allowed without notice to continue to service existing GWL clients.

 

 For some inexplicable reason, in April 1998, Weiss, the same GWL executive who had earlier terminated Palmer, allowed him to return as a broker. He was internally given less ability to carry out business on behalf of GWL but this new limitation was also never communicated to existing clients. Perhaps more remarkably, even before this broker’s contract was entered into, GWL was served with a Requirement to Pay from Revenue Canada on behalf of Palmer as well as a second one later in November 1998. Despite the fact that the broker’s contract, according to GWL, was more restrictive than his original contract, GWL continued to refer to him as “agent” in all correspondence and documents transmitted to the Mignaults and other clients. Even though GWL changed his internal number for accounting purposes, he was at no time identified as an independent contractor or a broker to the Mignaults… Why were the Mignaults not advised that Palmer was an independent contractor when they first started purchasing GWL products through Palmer? Why was Palmer referred to as “agent” on GWL letterhead throughout their dealings with him? Why were the Mignaults not advised in 1996 that Palmer’s contract had been terminated? Why were they not advised in 1998 that a different broker’s contract had been entered into with Palmer?”

 

 As we can see, judge Keyser has a lot of questions that are left unanswered. I am certain he would be surprise to know that this is the standard in the industry. Clients are not informed of changes of their agent status and contracts. Not one client in the industry where the insurers have privatized their captive agents was informed of this change. The client was never shown the new contract of their advisor. On the statements the clients receive, their advisor still show as an agent and not as an independent contractor. This means the whole assumption of the insurers that they could privatize their responsibilities and obligations which was created under their captive distribution is wrong. As I have said at Manulife: once a captive agent business; always a captive agent business…

 

It is therefore not surprising that judge Keyser sided with the Mignaults: “For policy reasons, therefore, if one is to look at the case not from the perspective of the principal, but from the perspective of the vulnerable customer of that principal and the context of the business being done, I have no doubt that GWL as principal must be liable vicariously for the misconduct of Palmer. Again, at the risk of repetition, it is important to remember that throughout the dealings of the Mignaults with GWL, on the documentation provided to Palmer to give to potential clients, on documents transmitted to GWL through Palmer, and on documents sent from GWL to clients, he was always described as an agent. GWL appeared to hold Palmer out as their agent. That is in fact what the Mignaults believed he was. That is exactly what the other victims of Palmer’s frauds believed he was. And the ubiquitous “person on the Clapham omnibus” would have believed he was.”

 

 Conclusion

 

 As we have seen, judge Keyser reaffirmed the principles behind the agency law. However his judgment is unique because judge Keyser linked these principles to the commercial practices adopted by insurers when they privatized their distribution channel. In fact, judge Keyser rejected de facto this privatization on the basis of the tainted commercial practices adopted by the insurers.  So it is a great wake up call for the insurance industry. When you linked this judgment to the resulting orphan policies resulting from the privatization of the captive agents where the insurers did not step in to inform the clients they did not have a licensed agent anymore and where the insurers did not live up to their responsibilities and obligations to service these policies, as stated by judge Keyser, the insurers will be held accountable and responsible for any losses suffered by the clients as a result.

 

It is just a question of time before a client seeks to hold the insurers accountable for their actions through a class action. I have no doubts the amount will be astronomical. This is what happens when greed take precedence over what is right.

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