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, but noted that some are “old news” dating back to 2000. The company also said the allegations are false, which appears to be backed up by an investigation by the Louisiana Insurance Department that found no evidence of wrongdoing. (See “State clears Brooke of wrongdoing” on page 50).

Yet some upset Brooke franchisees are speaking out.

Arthur C. Mann, president of IGWT Insurance Services in Tampa, Fla., filed a lawsuit against in U.S. District Court claiming that Brooke misrepresented facts and manipulated funds. The lawsuit alleges fraudulent misrepresentation (Brooke Franchise and Heritage), negligent misrepresentation (Brooke Franchise and Heritage), breach of contract (one each against Brooke Franchise 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. He agreed to operate as a franchisee for five years in exchange for services. The lawsuit alleges that Brooke intentionally misrepresented yearly agency commissions and failed to fulfill its contractual obligations, among other problems.

According to Brooke General Counsel Cynthia Weber Scherb, the Mann lawsuit filed in January has been stayed by the court and sent to mediation. Mediation is scheduled for November in Overland Park, Kan.

“We believe that the allegations in the lawsuit are untrue, and we intend to defend vigorously,” Scherb 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 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 noted.

Coonrod maintains that Mann’s claims are similar to other Brooke franchisees that he has represented. “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.

Brooke Franchise Corp. and its finance arm, Brooke Credit Corp., help agents that want to buy a franchise obtain access to credit to make the acquisition, cover setup costs and expand operations. Brook also provides 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 additional fees and commission sharing. If Brooke funds the startup for the agent, the loan is normally amortized over 12 to 15 years at prime plus a 3.5 percent interest rate and 3 percent origination fee.

Brooke’s cash management program makes sure that if it lends money, it gets paid back. While franchisees retain ownership over their books of business, premiums and commissions are placed in a third-party trust account. Loan and premium payments are made before agencies can have the funds.

Joel Jennings of Metropolis, Ill., is another agent who says the company “ruined” his life and has filed suit. That’s a departure from the enthusiasm exhibited when he bought into the franchise about four years ago. At that time, he said Brooke was an answer to his prayers and offered strength of national companies that he needed to expand his business.

“Your agency is strengthened considerably when you go with Brooke,” Jennings told Insurance Journal in April 2004. “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 in 2004 that perpetuation was a principal reason why he decided to join Brooke. “I was working on how I could perpetuate my business and simplify my life at the same time. I was packing a lot of pressure managing and being financially responsible for everything that goes on around here,” he said.

Jennings is singing another tune now. “I am 71 years old and my retirement savings is gone.” He alleges he was duped by Brooke’s fees, loan payments and failed promises of help.

Rhonda Lobell, a Gonzales, La., insurance consultant and educator, is also miffed. She is filing bankruptcy, which she blames on her involvement with Brooke.

Lobell said she bought into the franchise with hopes of expanding her book of business but soon found out that she was losing, not making, money. She said that despite producing separate receipts showing 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 the company would just as soon see its franchisees fail 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.

Brooke Corp.’s general counsel disputes all 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 believes that the number of lawsuits with franchisees “has been very low, and that we’ve been successful in resolving them at little or no cost to the company.”

Despite the complaints, Brooke keeps growing. It just announced a deal to acquire 60 insurance agency locations from entities associated with Chicago-based J and P Holdings Inc. The agencies 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 franchise locations.