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.

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 Franchising 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 General Counsel Cynthia Weber Scherb, 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 Park.

“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,” Scherb said.

Scherb added 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 Corp. chairman and chief executive officer, echoed Scherb, saying “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 recently 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.

Topics Lawsuits Agencies