Pete Seeger, the legendary American folk singer, offered a great distinction between education and experience. “Education,” he said, “is when you read the fine print; experience is what you get when you don’t.” The point being: it is extraordinarily important for parties to an agreement to review and comprehend its terms, or else difficulties may well ensue. But achieving the requisite level of understanding 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 without entirely appreciating the terms to which they are agreeing. Given that producer agreements are typically quite comprehensive and complex, and most floating around the industry lack any semblance of standardization, this is not surprising.
Still, the failure of producers to fully grasp the details of their contracts with insurers — or otherwise know what the documents should and should not include — is problematic.
A helpful overview
Despite their want of uniformity, producer agreements will inevitably touch upon the scope of authority, producer responsibilities, commissions, ownership of expirations and termination, along with a handful of other miscellaneous items.
It should be noted that an agent’s agreement will differ slightly from that of a broker, since agents represent the insurer and brokers act for the insured.
For the most part, however, the agreements are rather similar. That being said, to the extent producer agreements do incorporate the expected terms, agents and brokers alike should be mindful of what the provisions mean and what they should cover.
Scope of authority
What can a producer actually do on behalf of or alongside an insurer? From accepting applications for insurance to collecting and receiving premiums, the scope of an agent or broker’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 language included in a producer agreement properly identify and treat an agent as an agent and a broker as a broker. This distinction must not be muddied.
More specifically, a producer acting in the capacity of a broker will want to confirm that the agreement does not provide binding authority, appointment authority or authority to handle claims. The inclusion of this type of verbiage can create a presumption that the producer is, in effect, acting as an agent of the insurer, which could spell trouble. This is because in several states (like California), agents cannot charge broker fees, and the legal duties and obligations of agents versus brokers differ in many instances.
In some producer agreements, the responsibilities of the producer are laid out in the Scope of Authority section. Others convey the producer’s obligations in a stand-alone article sometimes titled, “Duties of Agent” or “Responsibilities of Broker.” In either case, producers are encouraged to take a close look at the responsibilities described in the agreements they enter with insurers.
While it is likely that most of the duties included will be consistent with the ordinary obligations owed when placing business with an insurer, agents and brokers should not hesitate to request that language in their producer agreements setting forth particularly burdensome or inapplicable responsibilities be modified or deleted. Toward that end, it should be noted that the power of producers to negotiate any of the terms in their contracts’ will be dependent upon their size and reach.
Duties relating to premiums merit special attention. This is so because producers operate in the capacity as fiduciaries when handling premiums, and agents or brokers that mishandle them cause great concern for both insurers and regulators. Whether or not precisely stated in their agreements, producers must understand that premiums are to be maintained in a trust account for the benefit of the insurer (or the insured in the event of return premiums).
Responsibilities regarding premiums do not end there. The failure to promptly remit premiums to insurers when they are due can result in policy cancellations, uncovered claims, termination of producer agreements and legal liability (regulatory and civil), among other things. The moral of the story is that even if their agreements are less than comprehensive when it comes to premiums, producers need be diligent in the way in which they handle them, doing so in a timely and compliant manner, never out of 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 to remove any language from their agreements that hold them responsible for premiums they do not collect. All the same, producers will typically be responsible for uncollected, but earned, premium when policies are agency billed.
Commissions are the lifeblood of producers. Consequently, the commission section of any producer agreement (occasionally headlined, “Compensation”) should be front and center on the collective radar screens of agents and brokers.
In terms of the amount of commissions that can be commanded, the greater the volume of profitable business a producer can offer to write with an insurer, the more leverage the agent or broker will have when negotiating the commission percentage rate. Having said that, producers should be wary of any provisions in their agreements that limit, restrict or offset the full payment of commissions. Should carriers present these terms, producers are urged to analyze them carefully and negotiate accordingly.
It is valuable to point out that insurers commonly impose contractual language that confers upon them the right to unilaterally amend commission rates upon 30 days’ notice. If ever faced with such a provision, a producer should consider requesting a longer notice period for new and renewal business. Likewise, agents and brokers should determine whether they are entitled to contingent or bonus commission plans.
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 definitively addressed in producer agreements.
Customarily, producers exclusively own their expirations during the terms of their producer agreements and once they end. Therefore, producers should be certain to affirm the collective right 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 upon the expiration or cancellation of a producer agreement, the insurer will seek to vest ownership in the relevant expirations. Yet the insurer’s contractual right to do so should be limited to the extent of the producer’s indebtedness to the insurer, not to the entirety of the producer’s expirations.
Additionally, producers are advised to push back against provisions that transfer ownership of their expirations to insurers in the event books of business are abandoned, licenses are revoked or suspended or producer agreements are terminated by virtue of agent or broker fraud or misconduct. Also, producers should request language prohibiting insurers from soliciting, directly or indirectly, their expirations upon the termination of their producer agreements. This will prevent insurers from directing or encouraging insureds to change a producer of record to another producer approved by the insurer in order to keep the business on the books.
See also: 7 ways to win with your underwriter
All parties to a producer agreement must be aware of the grounds for its termination, whether that be upon written notice or by virtue of the suspension or cancellation of a license to transact insurance, a material breach of contract or otherwise. The specific reasons for which a producer agreement may be ended are enumerated in a portion of the contract generally labeled “Termination.”
Under this section, it should be stated that either the producer or insurer is entitled to terminate the producer agreement upon 30 days’ written notice, though depending on the producer’s relationship with the insurer, the state of the marketplace or other business factors, a longer notice period may be warranted. To the extent a producer’s alleged breach of contract triggers an insurer’s right to terminate a contract, the agent or broker should seek at least 15 days to cure (or remedy) the purported breach. Lastly, any unusual termination n language should be deleted or, at the very least, subject to negotiation.
Most producer agreements contain several additional provisions, three of which have to do with insurance, indemnification and choice of law. These should not be overlooked.
It is in the best interests of all producers to carry adequate errors and omissions (E&O) insurance, which producer agreements routinely require. In fact, producers may want to avail themselves of higher policy limits than mandated by contract depending, of course, on the risks being written.
Next comes indemnification. A mutual indemnity clause is one where each party agrees to hold the other harmless against certain events, claims and losses. In the absence of such language in a producer agreement, the agent or broker should request its inclusion.
Finally, producers must be forward thinking and contemplate what might happen in the event of litigation stemming from their producer 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 that their producer agreements be governed by the laws of their home states and that cases arising from the contracts be venued where they 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 more relevant tune might be, ‘This Producer Agreement Is Your Producer Agreement,’ with lyrics imploring them to read and understand these contracts, and to retain counsel to advantageously negotiate their terms.
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), San Francisco, Chicago and New York City. Robinson is an insurance industry specialist who primarily represents retail brokers and agents in all aspects of their businesses. A recognized authority on regulatory issues, Robinson’s multi-state practice runs the gamut from complex mergers and acquisitions of brokerages to compliance matters, and most everything in between. He can be contacted at 310-299-5500 or firstname.lastname@example.org.