If you don’t Like the Contract Terms – Don’t Sign It

Farmers Agents Must Fulfill Their Contracts with the Insurer

Insurance contracts are adhesive. You take the terms offered. The Farmers Group of insurance companies use captive agents who are required to sign an adhesive agency agreement to have the right to sell policies issued by the various Farmers Group policies. The Farmers agents were unhappy with their contract and sued to have it interpreted more favorably to the agents.

In United Farmers Agents Association, Inc. v. Farmers Group, Inc. et al., B282541, Court of Appeal of the State of California Second Appellate District Division Eight (February 22, 2019) the plaintiff United Farmers Agents Association, Inc. (UFAA), a trade association whose members are insurance agents who signed contracts with 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) sued the Companies and FGI.


The Companies are a group of insurers that mutually contract to sell insurance products through independent-contractor insurance agents. 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.

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.

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 allow any party to terminate the contract by giving three months’ written notice (the no-cause termination provision).

UFAA sued the Companies and FGI (collectively, Farmers) because it claimed Farmers engaged in numerous practices that violate the terms of the Agreements.

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).

The court conducted a bench trial over the course of three weeks. On the issues   the court heard testimony from numerous Farmers representatives.

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.

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 of new business. As a result, it is able to offer lower premiums than insurance companies that sell through agents.

Statement of Decision and Judgment

After trial, the court issued a detailed statement of decision, in which it found in Farmers’s favor on each claim. At the outset the court determined that UFAA lacked standing to pursue its claims. Although this finding was sufficient to warrant dismissal, the court nonetheless considered the merits of UFAA’s claims and found them wanting.


A litigant’s standing to sue is a threshold issue to be resolved before the matter can be reached on its merits. Standing goes to the existence of a cause of action and the lack of standing may be raised at any time in the proceedings.

The trial court determined that UFAA lacked standing . The only issue before the appellate court was whether the Agreements permit Farmers to terminate agencies for any reason. To decide that issue, the court needed only interpret and construe the terms of the Agreements; it did not need to consider evidence related to individual agents or the specific circumstances under which their agencies were terminated. On that issue there could be standing.

The UFAA claimed they had standing because of their claims of unconscionability in the application of the agency agreements. Unconscionability claims typically cannot be resolved simply by examining the face of the contract. This is because unconscionability is a flexible standard in which the court looks not only at the complained-of term but also at the process by which the contractual parties arrived at the agreement and the larger context surrounding the contract, including its commercial setting, purpose, and effect.

Although UFAA provided multiple reasons why the no-cause termination provisions are unconscionable — among them, that agents lacked bargaining power, the provisions are contained in contracts of adhesion, and the provisions are “extremely one-sided” — the focus of its claim was an allegation that Farmers had a uniform practice of informing its agents, prior to signing the Agreements, that it terminates contracts only for cause. According to UFAA, this practice rendered every no-cause termination provision unconscionable because Farmers’s representations constituted “substantive procedural deception,” “negate[d] the reasonable expectations of the agent,” and caused “unfair surprise.”

After weighing conflicting evidence, the trial court concluded UFAA failed to establish that Farmers had a uniform practice of informing agents that it terminates Agreements only for cause, a finding UFAA does not challenge on appeal. This factual finding was fatal to UFAA’s claimed associational standing. Given the need for individualized proof and participation of each agent, UFAA failed to satisfy the requirement for standing to pursue its claim.

Because of the need for individualized proof and extensive participation from each agent, the court properly determined that UFAA lacked associational standing to pursue the claim for improper sharing of information.


UFAA filed suit seeking declaratory relief against the Companies and FGI .  The Court of Appeal held that UFAA had associational standing to pursue its claims related to performance and office standards, but did not have standing to pursue its other claims. However, on the merits, UFAA was not entitled to declaratory relief on its claims related to office locations and performance standards.


It has been said that what is good for the goose is good for the gander. Here, the UFAA members sell adhesive contracts to their customers and earn a living doing so. They asked the court to change the adhesive nature of their contracts with Farmers that have been accepted and operated under by thousands of Farmers Agents. They failed to prove there was anything unfair or unconscionable about the agency contract. They must, therefore, continue to live within the terms and conditions of the agency agreement they all voluntarily signed. They could always have become an independent broker or agent of multiple insurers without the benefits provided by Farmers.

© 2019 – Barry Zalma

This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.

Over the last 51 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

Ten Volumes Comprising A Comprehensive Group of Materials on Property & Casualty Insurance Claims

Insurance claims professional and expert witness Kevin Quinley said about the following ten volumes: “Zalma’s series of books is a terrific blend of both the legal underpinnings and the practical implications for the claim practitioner.

Insurance Maven Bill Willson said: “Zalma On Insurance Claims” is a tour de force, an indispensable tool that should be a part of every claims training program in America and in the library of every claims professional for quick and frequent reference. This comprehensive guide belongs in the library of every insurance defense AND policyholder law firm. It should be a part of every claims training program of carriers, independent adjusting firms, and public adjusters. Many of these parts should be part of the training or reference programs for non-claims personnel, from agents to underwriters to risk managers.”

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About Barry Zalma

An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
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