Bruce Murphy
Murphy’s Law

The Greed of American Family

Jury finds insurance company underpays agents, as execs get rich.

By - Apr 27th, 2017 01:44 pm
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American Family Insurance

American Family Insurance

Last week a jury ruled that the Madison-based company, American Family Insurance, has grossly underpaid retirement benefits to its agents, and may owe them as much as $1 billion. Why would a company want to treat its agents, who are so critical to its success, in this way? The answer tells us a lot about the state of American business today.

American Family began modestly, as a small company founded in the 1920s that mostly provided car insurance to Wisconsin’s farmers, who were considered lower risks than city drivers because they drove less often. Over the decades the company gradually added other customers and other lines of insurance and today sells insurance in 19 states.

Despite that growth, the company remained a mutual company, meaning it is owned by its policy holders rather than stock holders. And the policy holders in turn have their closest relationship with the company’s insurance agents. As the company’s website notes, “American Family Insurance and its sales force of nearly 3,500 agents provide industry-leading service to customers… No matter how life changes, your American Family agent will be there, providing the caring support and dependable service you deserve.”

But by the mid-1990s, that homey sounding philosophy began to change as the company moved toward the winner-take-all philosophy of America’s corporate board rooms. By 1994, as Business Week then reported, corporate executive pay had skyrocketed over a 20 year period: In 1974, CEOS in America earned about 35 times more than the average worker, but by 1994 they made 150 times more.

American Family began jacking up its executive pay, as a column I did for Milwaukee Magazine back then documented. CEO Dale Mathwich saw his compensation rise by 26 percent in 1994, rising from $681,192 to $856,121. The company now had 23 executives making more than $200,000, up from just two the year before.

Meanwhile, the agents, who worked on commission only, were being forced to take a 10 percent cut in commissions while increasing the amount of paperwork they handled for the company. In response, one agent named Dan Gadzinski organized a proxy fight, pushing American Family policy holders to elect a different slate of company directors.

Gadzinski had worked for the company for 29 years, supporting his two children and his wife of 32 years, was a U.S. Navy veteran, regular church goer, and seemed to embody the American dream of middle-class success. As an American Family policyholder, he was one of the company’s owners and felt he had a right to organize the proxy fight. The company felt differently and fired him.

In the years since then, compensation for corporate executives has, if anything, grown at an even faster pace. By 2014 CEOs were earning 331 times more than the average worker; that was more than twice the gap in Switzerland and Germany, about four times bigger than in Australia and five times bigger than in Japan, the business publication Bloomberg.com found.

At American Family, its top 10 officers earned $23.6 million in 2014, led by chairman and CEO Jack Salzwedel with $8.1 million and president and COO Daniel R. Schultz with $4.1 million. Salzwedel’s pay is 12-times higher than the company CEO earned back in 1994.

“We are totally startled at the HUGE increases the AmFam officers took for 2014. Absolutely FLOORED! “ wrote an analyst for the NAAFA, which represents insurance agents nationally. “The average increase for the top ten officers was 27.81%. Overall… our top ten officers cost the company 34.4% more in 2014 than they did in 2013.”

The analysis noted that American Family’s board of directors, which approved these huge raises, is well-paid by the company, with an average annual fee of $122,875 per member.

Certainly the company has been successful. In the mid-1990s it had grown large enough to join the Fortune 500 and today, with annual revenue of $8.7 billion, has risen to the 332nd biggest company on the list.

And how much of that success has been shared with the company’s agents, which its website tells customers is “your very own dream champion. No matter how life changes, they’ll be by your side, ready to support you.”

A jury has found that the company violated the federal Employee Retirement Income Security Act and owes money to 6,978 current and former American Family agents across the country, including about 700 based in Wisconsin.

“You can work for American Family for 10 years and not get any retirement benefits,” notes Milwaukee attorney Charles Crueger, who along with his partner Erin Dickinson is representing the agents. Agents aren’t vested, the retirement money can always be taken away, and the company hasn’t put “a dime” into the plan, Dickinson noted.

If the judge agrees with the jury’s advisory finding, the company would be required to “restore and protect retirement benefits,” as the Milwaukee Journal Sentinel reported, providing full vesting for agents and creating a retirement fund that could cost the company more than $1 billion.

American Family claims the agents it touts as so critical to the company are actually “independent contractors” who needn’t be offered these benefits. But Dickinson noted that they are “captive agents” who cannot shop around for insurance from other companies for their customers, and can only sell American Family policies.

“A company cannot just call its agents ‘independent contractors’ to avoid following the federal law protecting retirement benefits and then insist on controlling how those agents do their work,” she told the media.

American Family spokesman Ken Muth told the media “We strongly disagree” with the jury’s finding.

As for how the company treats its employees, its website declares that “Our holistic approach to employee well-being goes beyond promoting physical health and nutrition. We focus on overall quality of life including mental health, stress management, mindfulness and emotional well-being, financial health, community engagement and social well-being.

There was no mention of retirement benefits in that description.

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12 thoughts on “Murphy’s Law: The Greed of American Family”

  1. JK says:

    This outcome has some twists and turns to it. There were two similar cases against Uber last year where the plaintiffs negotiated a settlement rather than requiring the benefits. In a “Gig” economy, we might expect contractor groups and employers to resolve through settlements rather than employer benefits. Employers are not required to provide retirement benefits to its employees or agents/contractors. American Family could close/freeze their retirement benefits programs altogether and the agents’ argument would be moot. What’s interesting to me in this instance is that the court obviously ruled according to the letter of the ERISA law, but the Agents have many benefits that employees do not…which makes this case not about a big company beating up on their workers. For example, they can set up their own tax-advantaged retirement program, they can right off virtually all of their work expenses. Employees don’t have these benefits. Also the argument that they are not really agents because they can’t sell for other companies is not accurate. I assume they signed a contract with AmFam at some point which makes them exclusive to that company. They can always quit and represent other companies’ products.

  2. bb says:

    This is really about the owners of the company, the policy holders. Policy holders need to realize and take back their power. They can speak out and get rid of egregious management like this. Just as importantly, the profits of the company should be going back to the owners, not the 10 top executives. These executives have no “sweat equity” in building the company nor are they “at risk” for any of the company’s financial liabilities both of which would entitle them to larger compensation, They are pillaging the owners and agents for their own undeserved gain. The profits should be distributed to the owners either as dividends or lower insurance rates. The rubber stamping, over-paid, “friends club” boards around the country should be replaced with those who really work in the best interest of the owners.

  3. JPKMKE says:

    I’m not close to it but what I see are moderate salaries for their top execs compared to their peers with large bonuses consistent with growth. It looks like they’ve almost doubled policies in force over the last 20 years with roughly the same number of employees. Most companies can’t do that. Keeping in mind that a C-level executive’s first obligation is to the shareholders/owners, I don’t see a company that is not benefiting from the investment they make in their executives. The agents might have a beef but that doesn’t necessarily mean the leaders are not acting in the best interest of the shareholders.

  4. Deb Strzelecki says:

    I had been a loyal customer of Am Fam for over 35 years. No claims as far as home owner’s and got a speeding ticket for 10 over back in 1990. In the 2000s, my rates went up every year. Plus, even though I’d had the breed since 1975, I had to start paying $100 a year more for owning a Doberman, never mind all of my Dobes have had obedience and canine good citizen degrees. My current Dobe is also a TDI registered therapy dog. None the less, I still had to shell out that extra $100 every year for having a “dangerous breed.”
    I finally shopped around and am now a State Farm customer. Much more extensive coverage for far less.
    Am Fam can go to hell.

  5. Tom D says:

    JK (post 1): Three points:

    1. One big difference between Uber drivers and these agents is that Uber drivers are NOT exclusive–they can drive for Lyft (using the same car) at will; many Uber drivers do just that and keep both apps open on their cell phones as they drive around. There is no way these agents would be permitted to sell State Farm policies.

    2. These agents don’t “have many benefits that employees do not” (at least not any you listed). Tax-advantaged retirement plans–401(k) or defined-benefit plans–ARE available to many employees (including those at American Family Insurance). Likewise, employees can write off expenses that come out of their own pockets (like office space). Besides, most employees have no work-related expenses at all (other than commutation). And commutation expenses aren’t deductible for independent contractors either.

    3. Even if American Family terminates its retirement plan, these agents’ claims are not moot. Any termination would only affect benefits going forward, and these agents are demanding benefits for PAST service (which would not be affected by a plan termination).

  6. JK says:

    Tom D

    1) I think I made the same point, only I am saying that at some point the exclusive arrangement they signed with AmFam was agreeable. Now they are saying that it doesn’t serve them well. I don’t think Uber drivers should be treated as employees either.

    2) You must mean commuting expenses. Otherwise my comment was not to say the employees did not have access to employer provided benefit plans. It was to refer to other options which conceivably the Agents could set up. If, somehow due to the agreement the Agents have with the company, they do not qualify for normal business expense accounting and tax treatment, then that is the agreement they signed. Claiming that the provider of the product they sell is now (and retroactively) liable for something they never agreed to provide to Agents may work under ERISA but seems a bit unjust don’t you think? I compare it to agreeing to provide a service for a $1 and then when you find out years later that you could have agreed to $2, you try to hold the buyer to the new price even though that is not what your contract says.

    3) You are correct that they are technically not moot. I was obviously making the point that companies are not required to provide retirement benefits to employees or contractors.

  7. Mike says:

    I know of another shady practice this company participates in. I asked American family for a home insurance quote about four years ago. They said they couldn’t help me because I had galvanized steel water pipes in my house. There is nothing wrong with this material pipe, it just happens to be in most old homes. Not insuring these homes is a form of redlining (which I believe is illigal).

  8. AW says:

    JK, it’s not just the point of the agreement, which yes, both parties at one time did indeed accept and sign.

    Agents go in thinking, they will indeed, be independent contractors and own their own business. They later discover, that they can’t hire employees for their office without AmFam approval, AmFam can terminate the agents staff, AmFam must approve office location, agents are required to attend meetings, agents computers usage is monitored, their office hours are set by the company, and the list goes on and on. AmFam also owns all of the policies that the agents write. If an agent wanted to pass the “business” THEY built down to the next generation, it is not their call to do so. That is not the definition of an independent contractor/self employed business owner.

    In a nut shell, AmFam agents are independent cotractors for AmFam, when it is convenient for them to be…taxes, ERISA and operating expenses for those 3,500+ agency locations.

  9. JK says:

    I’m sure you’re right, AW. I have not seen the agreement. I am not affiliated with AmFam in any way and I am not defending the company. However this story is about a company which grew it’s business tremendously in the last twenty years, was not obligated to pay their contract agents retirement benefits, and now is facing a new requirement. The story hypothesizes that greed and success led to higher exec salaries with lower pay for agents than they deserve. I just don’t agree. There is so much more to this story than agent victimization. The IRS rules for assessing contractors treated as employees are meant to increase taxes on employment. They are not meant to somehow defend downtrodden contractors who don’t like the deal they signed once up on a time.

  10. AW says:

    They didn’t hold up their end of the bargain – i was an amfam agent for over 20 years and we were NOT self employed, except for paying all office expenses and self employment tax. They mandated and controlled everything we did. the contract never said that they would tell we would be independent contractors to get us to sign on and then change and truly treat us as employees.

  11. Bob S says:

    I wish I had access to the percentage of American Family agents that are terminated or ‘resign’ within 12 months of becoming vested in the ‘retirement program’.

    In my opinion AmFam should also have punitive damages tacked on, they deserve it.

  12. What is the most recent update on this issue? It’s now June 21

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