All too often, agents and brokers enterinto producer agreements with insurers without entirelyappreciating the terms to which they are agreeing.(iStock)

Pete Seeger, the legendary American folk singer, offered a greatdistinction between education and experience. “Education,” he said,“is when you read the fine print; experience is what you get whenyou don't.” The point being: it is extraordinarily important forparties to an agreement to review and comprehend its terms, or elsedifficulties may well ensue. But achieving the requisite level ofunderstanding is frequently easier said than done.

This is certainly true in the insurance context. All too often,agents and brokers enter into producer agreements with insurers withoutentirely appreciating the terms to which they are agreeing. Giventhat producer agreements are typically quite comprehensive andcomplex, and most floating around the industry lack any semblanceof standardization, this is not surprising.

Still, the failure of producers to fully grasp the details oftheir contracts with insurers — or otherwise know what thedocuments should and should not include — is problematic.

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A helpful overview

Despite their want of uniformity, producer agreements willinevitably touch upon the scope of authority, producerresponsibilities, commissions, ownership of expirations andtermination, along with a handful of other miscellaneous items.

It should be noted that an agent's agreement will differslightly from that of a broker, since agents represent the insurer and brokers actfor the insured.

For the most part, however, the agreements are rather similar.That being said, to the extent producer agreements do incorporatethe expected terms, agents and brokers alike should be mindful ofwhat the provisions mean and what they should cover.

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Scope of authority

What can a producer actually do on behalf of or alongside aninsurer? From accepting applications for insurance to collectingand receiving premiums, the scope of an agent orbroker's authority is presented, usually in quite specific terms,in the portion of the producer agreement bearing the heading,“Scope of Authority,” “Authority” or something to that effect.

It is critical that the authority and appointment languageincluded in a producer agreement properly identify and treat anagent as an agent and a broker as a broker. This distinction mustnot be muddied.

More specifically, a producer acting in the capacity of a brokerwill want to confirm that the agreement does not provide bindingauthority, appointment authority or authority to handle claims. Theinclusion of this type of verbiage can create a presumption thatthe producer is, in effect, acting as an agent of the insurer,which could spell trouble. This is because in several states (likeCalifornia), agents cannot charge broker fees, and the legal dutiesand obligations of agents versus brokers differ in manyinstances.

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Producer responsibilities

In some producer agreements, the responsibilities of theproducer are laid out in the Scope of Authority section. Othersconvey the producer's obligations in a stand-alone articlesometimes titled, “Duties of Agent” or “Responsibilities ofBroker.” In either case, producers are encouraged to take aclose look at the responsibilities described in the agreements theyenter with insurers.

While it is likely that most of the duties included will beconsistent with the ordinary obligations owed when placing businesswith an insurer, agents and brokers should not hesitate to requestthat language in their producer agreements setting forthparticularly burdensome or inapplicable responsibilities bemodified or deleted. Toward that end, it should be noted that thepower of producers to negotiate any of the terms in theircontracts' will be dependent upon their size and reach.

Duties relating to premiums merit special attention. This is sobecause producers operate in the capacity as fiduciaries when handling premiums,and agents or brokers that mishandle them cause great concern forboth insurers and regulators. Whether or not precisely stated intheir agreements, producers must understand that premiums are to bemaintained in a trust account for the benefit of the insurer (orthe insured in the event of return premiums).

Responsibilities regarding premiums do not end there. Thefailure to promptly remit premiums to insurers when they are duecan result in policy cancellations, uncovered claims,termination of producer agreements and legal liability (regulatoryand civil), among other things. The moral of the story is that evenif their agreements are less than comprehensive when it comes topremiums, producers need be diligent in the way in which theyhandle them, doing so in a timely and compliant manner, never outof trust, and all the while maintaining adequate records.

Of course, insurers may directly bill insureds for premiums due.In these circumstances, it would behoove producers to seek toremove any language from their agreements that hold themresponsible for premiums they do not collect. All the same,producers will typically be responsible for uncollected, butearned, premium when policies are agency billed.

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Commissions

Commissions are the lifeblood of producers. Consequently, thecommission section of any producer agreement (occasionallyheadlined, “Compensation”) should be front and center on thecollective radar screens of agents and brokers.

In terms of the amount of commissions that can be commanded, thegreater the volume of profitable business a producer can offer towrite with an insurer, the more leverage the agent or broker willhave when negotiating the commission percentage rate. Having saidthat, producers should be wary of any provisions in theiragreements that limit, restrict or offset the full payment ofcommissions. Should carriers present these terms, producers areurged to analyze them carefully and negotiate accordingly.

It is valuable to point out that insurers commonly imposecontractual language that confers upon them the right tounilaterally amend commission rates upon 30 days' notice. If everfaced with such a provision, a producer should consider requestinga longer notice period for new and renewal business. Likewise,agents and brokers should determine whether they are entitled tocontingent or bonus commission plans.

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Ownership of expirations

Producers' books of business are also known as expirations,which include customer and policy information and related records.No doubt about it, this data is of real importance to producers,which is why the ownership of expirations should be definitivelyaddressed in producer agreements.

Customarily, producers exclusively own their expirations duringthe terms of their producer agreements and once they end.Therefore, producers should be certain to affirm the collectiveright to move their books of business to other insurers or to sell,transfer or dispose of expirations upon the termination of their producer agreements.With that said, if a producer owes money to a given insurer uponthe expiration or cancellation of a producer agreement, the insurerwill seek to vest ownership in the relevant expirations. Yet theinsurer's contractual right to do so should be limited to theextent of the producer's indebtedness to the insurer, not to theentirety of the producer's expirations.

Additionally, producers are advised to push back againstprovisions that transfer ownership of their expirations to insurersin the event books of business are abandoned, licenses are revokedor suspended or producer agreements are terminated by virtue ofagent or broker fraud or misconduct. Also, producers should requestlanguage prohibiting insurers from soliciting, directly orindirectly, their expirations upon the termination of theirproducer agreements. This will prevent insurers from directing orencouraging insureds to change a producer of record to anotherproducer approved by the insurer in order to keep the business onthe books.

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Termination

All parties to a producer agreement must be aware of the groundsfor its termination, whether that be upon written notice or byvirtue of the suspension or cancellation of a license to transact insurance, a material breach ofcontract or otherwise. The specific reasons for which a produceragreement may be ended are enumerated in a portion of the contractgenerally labeled “Termination.”

Under this section, it should be stated that either the produceror insurer is entitled to terminate the producer agreement upon 30days' written notice, though depending on the producer'srelationship with the insurer, the state of the marketplace orother business factors, a longer notice period may be warranted. Tothe extent a producer's alleged breach of contract triggers aninsurer's right to terminate a contract, the agent or broker shouldseek at least 15 days to cure (or remedy) the purported breach.Lastly, any unusual termination n language should be deleted or, atthe very least, subject to negotiation.

Miscellaneous

Most producer agreements contain several additional provisions,three of which have to do with insurance, indemnification and choice of law. These shouldnot be overlooked.

It is in the best interests of all producers to carry adequateerrors and omissions (E&O) insurance, which producer agreementsroutinely require. In fact, producers may want to avail themselvesof higher policy limits than mandated by contract depending, ofcourse, on the risks being written.

Next comes indemnification. A mutual indemnity clause isone where each party agrees to hold the other harmless againstcertain events, claims and losses. In the absence of such languagein a producer agreement, the agent or broker should request itsinclusion.

Finally, producers must be forward thinking and contemplate whatmight happen in the event of litigation stemming from theirproducer agreements. Above all else, if a lawsuit were to be filed,an agent or broker would want the case to proceed close to home.For this reason, it would benefit all producers to request thattheir producer agreements be governed by the laws of their homestates and that cases arising from the contracts be venued wherethey reside.

A final word

Back to Pete Seeger. One of the songs forever linked to him is,“This Land Is Your Land.” For insurance agents and brokers, a morerelevant tune might be, 'This Producer Agreement Is Your ProducerAgreement,' with lyrics imploring them to read and understand thesecontracts, and to retain counsel to advantageously negotiate theirterms.

Mark B. Robinson is a co-founding partner of Michelman &Robinson, LLP, a national law firm headquartered in Los Angeles,with additional offices in Orange County (California), SanFrancisco, Chicago and New York City. Robinson is an insuranceindustry specialist who primarily represents retail brokers andagents in all aspects of their businesses. A recognized authorityon regulatory issues, Robinson's multi-state practice runs thegamut from complex mergers and acquisitions of brokerages tocompliance matters, and most everything in between. He can becontacted at 310-299-5500 or [email protected].

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