Verbal contract for selling insurance products illegal and unenforceable after agent's bankruptcy

A respondent’s dealings with customers under the appellant’s direction after the respondent’s assignment in bankruptcy breached a prior agreement and the province’s Insurance Adjusters, Agents and Brokers Act, the Newfoundland and Labrador Court of Appeal has ruled, thus rendering a subsequent verbal contract illegal and unenforceable.

The appellant in Sansome v. Sheppard, 2022 NLCA 24 was a licenced insurance representative and a financial advisor agent who sold life and group insurance policies for commissions. He was also the president and sole shareholder Financial Consultants Limited (FCL).

A 2007 producer’s agreement made FCL the general agent broker of Manulife Financial. It provided that the agreement would automatically terminate upon the bankruptcy or insolvency of FCL or all its shareholders.

In September 2009, the appellant made a voluntary assignment in bankruptcy. Near the end of that year, the appellant told the respondent that he had lost his licence to sell insurance products upon filing the bankruptcy and asked the respondent to work with him on some of FCL’s clients.

In a July 2010 letter, Manulife advised the appellant that the agreement automatically terminated when he, as FCL’s sole shareholder, declared his insolvency and made an assignment in bankruptcy. The appellant and FCL could no longer represent Manulife or deal with any of Manulife’s clients relating to Manulife’s products, the letter said.

In September 2010, Manulife appointed the respondent as agent of record to service the appellant’s previous clients.

In court, the appellant sought damages based on breach of his alleged verbal agreement with the respondent, claiming 30 percent of commissions received through servicing some of the appellant’s past clients.

The judge, ruling in the respondent’s favour, found that the alleged verbal agreement was illegal and therefore unenforceable, and that Manulife terminated the 2007 producer’s agreement before the respondent did any business on any group insurance client accounts.

The Newfoundland and Labrador Court of Appeal dismissed the appeal upon seeing no errors in the judge’s factual findings, application of the law, or conclusions.

The July 2010 letter advised the appellant that the 2007 agreement was automatically terminated, which in turn ended Manulife’s sponsorship of FCL and the appellant’s status as Manulife’s representative, said the appeal court.

FCL was not a sponsored broker and the appellant was not a broker’s licenced representative as required by the Act, the court added. Therefore, it would be illegal for the respondent to pay the appellant any amounts or for the appellant to demand payments for any services that the respondent provided to the appellant’s former clients in line with the Act.

The appellant argued that he was licenced until he received an April 2011 letter from a compliance officer of the financial services regulations division of N.L.’s government services department, and that everything transacted with the respondent before that date was legal and enforceable.

However, the appeal court found this contention unsustainable. The appellant’s argument ignored the relationships between Manulife and FCL and between Manulife and the appellant, as well as the Act’s provision that a licence would be suspended when the sponsor named in the licence – Manulife, in this case – no longer sponsored the representative.