Read Before You Sign-- Pointers for Reviewing Agency Agreements

Read Read BeforeBefore You Sign-- You Sign--Pointers for Reviewing Agency Pointers for Reviewing Agency

AgreementsAgreements

ByByPatricia A. BorowskiPatricia A. Borowski

Senior Vice PresidentSenior Vice President

PIA NationalPIA National

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Does it Seem as if Miss Alabama is Does it Seem as if Miss Alabama is Writing your Agency Agreements?Writing your Agency Agreements?

Question: If you could live forever, would Question: If you could live forever, would you and why?you and why?

Answer:”I would not live forever, because Answer:”I would not live forever, because we should not live forever, because if we we should not live forever, because if we were supposed to live forever, then we were supposed to live forever, then we would live forever, but we cannot live would live forever, but we cannot live forever, which is why I would not live forever, which is why I would not live forever.”—forever.”—Miss Alabama in the 1994 Miss Alabama in the 1994 Miss USA contestMiss USA contest

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Overview of the Overview of the PresentationPresentation

I. Background on the evolution of I. Background on the evolution of agency agreementsagency agreements

II. What purpose do agency II. What purpose do agency agreements serveagreements serve

III. Who needs to be educated on III. Who needs to be educated on agency agreementsagency agreements

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IV. Top problems with agency IV. Top problems with agency agreements todayagreements today General Problems—Problems with the General Problems—Problems with the

form and process in which agreements form and process in which agreements are created and issuedare created and issued

Specific Provision Problems—Problems Specific Provision Problems—Problems with the drafting of particular provisions. with the drafting of particular provisions. Will conclude with a discussion of Will conclude with a discussion of “Privacy.”“Privacy.”

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V. A suggested process for agents to V. A suggested process for agents to use in reviewing their agreementsuse in reviewing their agreements

VI. A suggested process for carriers VI. A suggested process for carriers to use in drafting/updating their to use in drafting/updating their agreementsagreements

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The Evolution of Agency The Evolution of Agency Agreements Over the Last 20 Agreements Over the Last 20

YearsYears Agency agreements as hand shakes--Agency agreements as hand shakes--

simplesimple Agency agreements as necessary Agency agreements as necessary

evils—expandedevils—expanded Agency agreements as corporate Agency agreements as corporate

strategy—frictionstrategy—friction

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The Evolution of Agency The Evolution of Agency Agreements Over the Last 20 Agreements Over the Last 20

yearsyears Agency agreements as an attraction Agency agreements as an attraction Agency agreements as compliance Agency agreements as compliance

vehiclesvehicles

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Where We are in the Where We are in the Drafting Cycle TodayDrafting Cycle Today

33rdrd phase drafter: Those carriers who have phase drafter: Those carriers who have consistently updated their agreements consistently updated their agreements over the years.over the years.

22ndnd phase drafter: Those who are making phase drafter: Those who are making the first revision to their contracts in 15 the first revision to their contracts in 15 years.years.

New comers: Those who are issuing their New comers: Those who are issuing their first agency agreement.first agency agreement.

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Basic Reason for Agency Basic Reason for Agency AgreementsAgreements——Yes we have Yes we have

forgottenforgotten I. Memorializes the establishment of a business I. Memorializes the establishment of a business

relationshiprelationship

II. Establishes the terms of the business II. Establishes the terms of the business relationshiprelationship

Distinction between language in the contract that Distinction between language in the contract that is enforceable versus not enforceable—Just because it’s is enforceable versus not enforceable—Just because it’s in the agreement does not mean there is a legal right in the agreement does not mean there is a legal right to enforce it!to enforce it!

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Basic Reason for Agency Basic Reason for Agency Agreements—Yes we have Agreements—Yes we have

forgottenforgotten Examples of provisions which are NOT Examples of provisions which are NOT

enforceable:enforceable: Language which is against public policy—Language which is against public policy—

Can’t use contracts to accomplish illegal Can’t use contracts to accomplish illegal goalsgoals

Language that conflicts with state or federal Language that conflicts with state or federal lawlaw

Language that is ambiguous Language that is ambiguous Language that is waived by acting contrary Language that is waived by acting contrary

to the languageto the language

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Basic Reasons for Basic Reasons for Agency AgreementsAgency Agreements

III. Reflects the INTENT of both III. Reflects the INTENT of both partiesparties

IV. Provides a legal remedy in the IV. Provides a legal remedy in the event of breach or grounds for a event of breach or grounds for a cause of actioncause of action

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Basic Goals to be Basic Goals to be Accomplished in an Accomplished in an

AgreementAgreement I. CLARITY—Clear language so that both I. CLARITY—Clear language so that both

parties are able to understand their parties are able to understand their obligations under the agreementobligations under the agreement

II. Satisfaction of each party’s legal II. Satisfaction of each party’s legal obligation harmoniouslyobligation harmoniously

III. Equitable terms for all parties to the III. Equitable terms for all parties to the agreementagreement

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Are These Goals Currently Are These Goals Currently being Accomplished by being Accomplished by

Agency Agreements?Agency Agreements? Overall, i.e., for many - “No.” Overall, i.e., for many - “No.”

There is still room for improvementThere is still room for improvement

So, how do we improve? EducationSo, how do we improve? Education

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Who Needs the Who Needs the Education and WhyEducation and Why

CarriersCarriers

Outside counsel or other resourcesOutside counsel or other resources

AgentsAgents

Regulators and LegislatorsRegulators and Legislators

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Top Problems with Top Problems with Agency AgreementsAgency Agreements

General ProblemsGeneral Problems—Problems with —Problems with the form and process in which the form and process in which agreements are created and issuedagreements are created and issued

1. Frequent grammar and spelling 1. Frequent grammar and spelling errors.errors. A carrier’s policy drafting skills are A carrier’s policy drafting skills are

better than those exhibited in the better than those exhibited in the agency agreementagency agreement

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Top Problems with Top Problems with Agency Agency Agreements Agreements

(continued…)(continued…)2. Agent’s don’t read their agreements2. Agent’s don’t read their agreements

These are bilateral contracts so take advantage of your These are bilateral contracts so take advantage of your powerpower

3. The cover-letters to these 3. The cover-letters to these agreements are misleadingagreements are misleading

Misleading on content—”We’ve only made minor Misleading on content—”We’ve only made minor modifications”modifications”Misleading about PIA’s endorsementMisleading about PIA’s endorsementMisleading about signing deadlinesMisleading about signing deadlines

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(continued…)(continued…) 4. Lack of knowledge and skill from 4. Lack of knowledge and skill from

outside counsel or other consultants outside counsel or other consultants who are drafting these agreementswho are drafting these agreements

Rarely is there an understanding or appreciation of Rarely is there an understanding or appreciation of the legal obligations of independent agencies as”the legal obligations of independent agencies as”

Insurance transaction partners with their carriers;Insurance transaction partners with their carriers; Independent insurance agencies insurance obligations Independent insurance agencies insurance obligations

to othersto others Agency legal obligations as a corporate entity.Agency legal obligations as a corporate entity.

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(continued…)(continued…) 5.5. The use of too many ambiguous The use of too many ambiguous

termsterms For example:For example:

i. “Agent agrees to give i. “Agent agrees to give proper service”proper service” ii.”Agent will ii.”Agent will promptly reportpromptly report any claims or causes any claims or causes

of action”of action” iii. “Agent will keep iii. “Agent will keep complete recordscomplete records.”.” iv. “Agent will use the iv. “Agent will use the highest degree of care.”highest degree of care.” v. “Agent promises not to share v. “Agent promises not to share “confidential or “confidential or

proprietary informationproprietary information.”.” vi. “Agent promises not to share any vi. “Agent promises not to share any personal personal

information information gathered from an insured.”gathered from an insured.”

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(continued…)(continued…) 6.6. The failure to define “notice”The failure to define “notice”

PIA recommends that material notices PIA recommends that material notices be in-writing via the U.S. post office and be in-writing via the U.S. post office and sent separate and apart from any en-sent separate and apart from any en-masse mailing masse mailing

PIA recommends that notice be deemed PIA recommends that notice be deemed sent on the date of the post-marksent on the date of the post-mark

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(continued…)(continued…) 7.7. Agreements which attempt to bind Agreements which attempt to bind

agents to unknown or unnamed third agents to unknown or unnamed third partiesparties For exampleFor example::

““This agreement shall apply to the companies the agent This agreement shall apply to the companies the agent has been licensed to represent…”has been licensed to represent…”

““Company X is entering into this agency agreement on Company X is entering into this agency agreement on behalf of its affiliated companies.”behalf of its affiliated companies.”

““Each of the companies designated above, and their Each of the companies designated above, and their successors and assigns is a party to the agreement.”successors and assigns is a party to the agreement.”

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(continued…)(continued…) Specific Provision ProblemsSpecific Provision Problems—This —This

relates to issues that are present in particular provisions in relates to issues that are present in particular provisions in agency contracts like “indemnity, commissions, agent’s agency contracts like “indemnity, commissions, agent’s authority” etc.authority” etc.

1. Refusal to give advanced notice to 1. Refusal to give advanced notice to agents regarding changes in agents regarding changes in commissioncommission For exampleFor example::

““Commission will be paid at a rate from time to time Commission will be paid at a rate from time to time established by the company.”established by the company.”

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(continued…)(continued…) i.Usually carriers tell us that they would give i.Usually carriers tell us that they would give

advanced notice, but this is a problem because advanced notice, but this is a problem because this tells us that the contract is not this tells us that the contract is not representative of their INTENTrepresentative of their INTENT

ii. PIA recommends that an agent receive 90 ii. PIA recommends that an agent receive 90 days advanced notice of any downward change days advanced notice of any downward change in commission ANDin commission AND

iii. A commission rate must be in effect for 12 iii. A commission rate must be in effect for 12 months before a downward change in months before a downward change in commission can occurcommission can occur

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Top Problems with Top Problems with Agency Agency

Agreements (continued…)Agreements (continued…) 2. Refusal to give advanced notice of 2. Refusal to give advanced notice of

changes in an agent’s authoritychanges in an agent’s authority PIA suggests at least 90 days advanced written notice of PIA suggests at least 90 days advanced written notice of

changes in authority – longer if a termination with changes in authority – longer if a termination with mandatory run-off period.mandatory run-off period.

3. Moving procedures/obligations off the 3. Moving procedures/obligations off the agreementagreement For exampleFor example::

““Agent promises to adhere to or comply with all company Agent promises to adhere to or comply with all company manuals, written instructions, or guidelines as issued from manuals, written instructions, or guidelines as issued from time to time.”time to time.”

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(continued…)(continued…) 4. Attempts to impose duties on the 4. Attempts to impose duties on the

agent beyond termination of the agent beyond termination of the agreementagreement i. For examplei. For example::

““Agent duties and obligations under this agreement will Agent duties and obligations under this agreement will be continuous and survive termination, cancellation, be continuous and survive termination, cancellation, expiration of other conclusion of Agreement.”expiration of other conclusion of Agreement.”

ii. This kind of language is illegal because there is ii. This kind of language is illegal because there is no consideration to enforce it!no consideration to enforce it!

iii. The only duties that will survive termination are iii. The only duties that will survive termination are those that are already required by law.those that are already required by law.

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(continued…)(continued…) 5. The placement of non-compete clauses in agency 5. The placement of non-compete clauses in agency

agreementsagreements i. i. For example:For example:

““In the event of termination of this Agreement for the nonpayment of accounts or for In the event of termination of this Agreement for the nonpayment of accounts or for abandonment of or the failure to properly service the Book of business, the Agent for a abandonment of or the failure to properly service the Book of business, the Agent for a period of three years from such date of termination shall not directly or indirectly, by period of three years from such date of termination shall not directly or indirectly, by any means whatsoever solicit or accept the solicitation of insurance business from any any means whatsoever solicit or accept the solicitation of insurance business from any insured who was in the Agent’s book of business at the time of termination date.”insured who was in the Agent’s book of business at the time of termination date.”

ii. Non-compete agreements are rarely enforced because they are tantamount to ii. Non-compete agreements are rarely enforced because they are tantamount to involuntary servitude.involuntary servitude.

iii. Non-compete agreements are not enforceable in the independent agency iii. Non-compete agreements are not enforceable in the independent agency system because IA’s are not captives.system because IA’s are not captives.

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(continued…)(continued…) 6. Repeatedly confusing “license” 6. Repeatedly confusing “license”

with “appoint”with “appoint” i. For example:i. For example:

““Upon request and recommendation of the agent, the Upon request and recommendation of the agent, the company may license producers.”company may license producers.”

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Top Problems with Top Problems with Agency Agency

Agreements (continued…)Agreements (continued…) 7. Unclear Triggers (this also relates to 7. Unclear Triggers (this also relates to

the use of “ambiguous” terms)the use of “ambiguous” terms)

i. Companies are using unclear triggers to i. Companies are using unclear triggers to take away the agent’s book of businesstake away the agent’s book of business

ii. ii. For exampleFor example:: ““In the event the Agent fails to In the event the Agent fails to properly serviceproperly service

policies, the Company reserves the right to service such policies, the Company reserves the right to service such policies and the Agent agrees to relinquish to the policies and the Agent agrees to relinquish to the Company all records regarding the Agent’s book of Company all records regarding the Agent’s book of business.”business.”

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(continued…)(continued…) iii. For exampleiii. For example::

““In the event the Agent fails to pay the In the event the Agent fails to pay the Company monies due or Company monies due or any other any other indebtnessindebtness, then the Agent agrees to , then the Agent agrees to relinquish to the Company all records relinquish to the Company all records regarding the agent’s book of business.”regarding the agent’s book of business.”

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(continued…)(continued…) 8. Avoid language which asks an agency 8. Avoid language which asks an agency

to “guarantee” another’s payment to to “guarantee” another’s payment to the carrier – or requires agency to the carrier – or requires agency to “warrant/certify” some aspect:“warrant/certify” some aspect: i. “guarantee” or “warrant/certify” are very i. “guarantee” or “warrant/certify” are very

specific legal term of art which mean an absolute specific legal term of art which mean an absolute promise by one party to another. Reasonableness, promise by one party to another. Reasonableness, control & knowledge – are modifiers.control & knowledge – are modifiers.

ii. ii. For example:For example: ““Agent agrees to guarantee insured’s payment of Agent agrees to guarantee insured’s payment of

premiums to the Company.”premiums to the Company.”

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(continued…)(continued…) 9. Provisions dealing with Ownership 9. Provisions dealing with Ownership

of Expirations that purport to “grant” of Expirations that purport to “grant” an agency ownership of their book of an agency ownership of their book of businessbusiness

WHY DO YOU OWN?WHY DO YOU OWN?

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OWNERSHIPOWNERSHIP

Independent Agencies OWN because the courts Independent Agencies OWN because the courts recognize (not granted) their control and recognize (not granted) their control and property rights over “the business.”property rights over “the business.”

There is about 100+ years of case law that There is about 100+ years of case law that states unequivocally that independent states unequivocally that independent agencies own the bookagencies own the book

The agency agreement The agency agreement is notis not the source of the source of ownership, but merely a reflection of the ownership, but merely a reflection of the status of the common law or case-lawstatus of the common law or case-law

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(continued…)(continued…) iii. Connect all provisions in the contract iii. Connect all provisions in the contract

dealing with ownership because often times dealing with ownership because often times significant language pertaining to an agency’s significant language pertaining to an agency’s ownership rights is NOT in the section entitled ownership rights is NOT in the section entitled “Ownership of Expirations”“Ownership of Expirations”

For exampleFor example—— ““Company shall not refer or communicate the names Company shall not refer or communicate the names

of policyholder and expiration dates to any other of policyholder and expiration dates to any other agent or broker except for the purposes of agent or broker except for the purposes of solicitation”solicitation”

This sample language shows an attempt to encroach This sample language shows an attempt to encroach upon ownership rights upon ownership rights

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(continued…)(continued…) 10. Provisions dealing with the 10. Provisions dealing with the

company’s right to take over the book company’s right to take over the book of business which lack a procedure of business which lack a procedure for taking over the bookfor taking over the book

i. Substitute reasonably acceptable collateral i. Substitute reasonably acceptable collateral to give the Company as an alternative to the to give the Company as an alternative to the book of business.book of business.

ii. Establish a time-frame for selling the book--6 ii. Establish a time-frame for selling the book--6 months is appropriate with a valid valuation months is appropriate with a valid valuation method.method.

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(continued…)(continued…) 11. The increasing use of “laser 11. The increasing use of “laser

amendments” or agreement amendments” or agreement addendums issued to comply with a addendums issued to comply with a particular lawparticular law

i. GLBA, HIPAA, Record Retention, On-Line i. GLBA, HIPAA, Record Retention, On-Line Privacy AgreementsPrivacy Agreements

ii. These amendments are redundant and create ii. These amendments are redundant and create a hierarchy of compliance for agents.a hierarchy of compliance for agents.

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(continued…)(continued…) iii. These amendment often go above and iii. These amendment often go above and

beyond what the law requires.beyond what the law requires.

iv. These amendments conflict with an agent’s iv. These amendments conflict with an agent’s outstanding legal obligations.outstanding legal obligations.

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(continued…)(continued…) V. Privacy amendments often usurp/interfere V. Privacy amendments often usurp/interfere

with an agency’s ownership of expiration—with an agency’s ownership of expiration— Often protected privacy information is the same Often protected privacy information is the same

language contained in the booklanguage contained in the book

VI. Make Privacy obligations work for youVI. Make Privacy obligations work for you--Use the requirement of issuing a notice to clients --Use the requirement of issuing a notice to clients as an opportunity to show your control over the as an opportunity to show your control over the book.book.

If not in last privacy session, please contact us for If not in last privacy session, please contact us for copies.copies.

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(continued…)(continued…)

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A Suggested Process for A Suggested Process for Agents Agents in Reviewing their Agency in Reviewing their Agency

AgreementsAgreements I. Make reviewing your new agency I. Make reviewing your new agency

agreement(s) or addendums a routine process agreement(s) or addendums a routine process – written, filed together with each agreement, – written, filed together with each agreement, keep all letters from & to carrier on agreement keep all letters from & to carrier on agreement to include all changes & develop a summary.to include all changes & develop a summary.

II. Before reading the agreement, decide II. Before reading the agreement, decide whether or not you are interested in a whether or not you are interested in a business relationship with the company and business relationship with the company and note what are the important aspects you note what are the important aspects you desire to accomplish with that carrier.desire to accomplish with that carrier.

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AgreementsAgreements III. If the business relationship is important III. If the business relationship is important

to or holds real promise for you – to or holds real promise for you – thenthen read through the agreement using the read through the agreement using the issues raised by this lecture as a guide issues raised by this lecture as a guide (i.e. ambiguity, book of business language, (i.e. ambiguity, book of business language, conflict, against public policy, etc.)conflict, against public policy, etc.)

IV. While reading, note any questions, IV. While reading, note any questions, confusions or concerns on the contractconfusions or concerns on the contract

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AgreementsAgreements V. If you have an existing relationship with V. If you have an existing relationship with

the carrier, compare the new contract to the carrier, compare the new contract to the old in the areas you have questions, the old in the areas you have questions, confusions, or concernconfusions, or concern

VI. Compare this agreement to other VI. Compare this agreement to other agreements you’ve signed that have agreements you’ve signed that have worked and you agree with to help worked and you agree with to help suggest alternative language to the carriersuggest alternative language to the carrier

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AgreementsAgreements VII. Check with PIA to see if PIA has a review VII. Check with PIA to see if PIA has a review

of the agreement on file. If there is not of the agreement on file. If there is not review on file for this particular agreement, review on file for this particular agreement, PIA will review the agreement for you.PIA will review the agreement for you.

VIII. In addition to involving PIA, write a letter VIII. In addition to involving PIA, write a letter to the CEO of the company or VP in charge to the CEO of the company or VP in charge of marketing and document your questions, of marketing and document your questions, confusions, or concerns with the agreement.confusions, or concerns with the agreement.

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AgreementsAgreements IX. Ask for a response from the company IX. Ask for a response from the company

in writing. in writing.

X. Based on the response, decide what X. Based on the response, decide what provision language you’re willing to provision language you’re willing to swallow (if any) for the business swallow (if any) for the business relationship.relationship.

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AgreementsAgreements XI. Decide what language must be XI. Decide what language must be

changed or no business relationshipchanged or no business relationship

XII. Sign the agreement when you like it.XII. Sign the agreement when you like it.

XIII. Sign the agreement when you must, XIII. Sign the agreement when you must, but note the date of letter expressing your but note the date of letter expressing your questions, confusions &/or concerns on the questions, confusions &/or concerns on the agreement.agreement.

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AgreementsAgreements XIV. Be careful about NOT signing the XIV. Be careful about NOT signing the

agreement AND not making your agreement AND not making your reservations known in writing and yet reservations known in writing and yet continue to do business with the company. continue to do business with the company. The fact that you continue to do business The fact that you continue to do business with the company can be construed as with the company can be construed as acceptance, especially when you have no acceptance, especially when you have no documentation of your request for needed documentation of your request for needed changes/clarifications.changes/clarifications.

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PIA’s Agency Agreement PIA’s Agency Agreement Review ProcessReview Process

PIA will review agency agreements for PIA PIA will review agency agreements for PIA member agency owners ONLY, as well as member agency owners ONLY, as well as insurers & other insurance parties with insurers & other insurance parties with which our members do business. which our members do business.

If a carrier would like PIA’s input in If a carrier would like PIA’s input in updating an agreement or creating an updating an agreement or creating an agreement agreement they must commit to the entire they must commit to the entire processprocess

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Explain the circumstance surrounding the Explain the circumstance surrounding the agreement (i.e. is it a new agreement, do agreement (i.e. is it a new agreement, do you want the entire contract reviewed or you want the entire contract reviewed or only a particular provision)only a particular provision)

With carriers PIA will review the agreement With carriers PIA will review the agreement which means writing up a detailed which means writing up a detailed commentary on the contract spotting out commentary on the contract spotting out global legal issues that we see. Must ask the global legal issues that we see. Must ask the state affiliate about state specific issues.state affiliate about state specific issues.

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PIA will send the review to the company and PIA will send the review to the company and a courtesy copy to the requesting agent. a courtesy copy to the requesting agent. However, the process is confidential at this However, the process is confidential at this point and PIA does not make the review point and PIA does not make the review available to its members.available to its members.

Once the carrier has had a chance to read Once the carrier has had a chance to read over the review, PIA will schedule a over the review, PIA will schedule a telephone conference to talk about the telephone conference to talk about the agreement. This is a mutual education agreement. This is a mutual education process where both PIA and the carrier can process where both PIA and the carrier can learn about the other’s position. learn about the other’s position.

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During the conversation, the carrier may decide to make During the conversation, the carrier may decide to make changes to the agreement based on the review or clarify changes to the agreement based on the review or clarify their language. the company can either issue a written their language. the company can either issue a written response to PIA’s review or PIA will write-up the company’s response to PIA’s review or PIA will write-up the company’s comments following the conversation and ask that they comments following the conversation and ask that they approve PIA’s write-up.approve PIA’s write-up.

At this point, PIA will make the contract available to its At this point, PIA will make the contract available to its members at their request. Usually, a notice is placed in PIA members at their request. Usually, a notice is placed in PIA National’s weekly online publication “Newsline.”National’s weekly online publication “Newsline.”

For PIA members – we can provide both formal and informal For PIA members – we can provide both formal and informal reviews, but requests that members not “swamp-requests.”reviews, but requests that members not “swamp-requests.”

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PIA is happy to review agreements for PIA is happy to review agreements for both members and carriers, but both members and carriers, but remember PIA’s commentary is a remember PIA’s commentary is a review of business considerations & review of business considerations & not a substitute for true individual legal not a substitute for true individual legal review by an attorney practicing in review by an attorney practicing in your state nor are we a substitute for your state nor are we a substitute for an agent’s own letter to the company.an agent’s own letter to the company.

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WHY READ BEFORE YOU WHY READ BEFORE YOU SIGN?SIGN?

OWNERSHIPOWNERSHIPQuestions? Thanks for being PIA member & attending this Questions? Thanks for being PIA member & attending this

programprogramPat BorowskiPat [email protected]

mailto:[email protected]

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Read Before You Sign-- Pointers for Reviewing Agency Agreements