Reducing risks in program contracts

Retail insurance agents and brokers rarely have much ability to alter the contracts they have with the insurance companies that appoint them. Agreements between insurers and program administrators or MGAs, however, are another matter. Numerous issues in them are subject to negotiation, and their final form largely determines how happy a program administrator will be with the relationship. As the saying goes, God–or the devil–is in the details.

At the annual convention of the Target Markets Program Administrators Association, which was held in October in Tempe, Ariz., a panel of insurers, program administrators and an attorney discussed a variety of issues that should be addressed in program-business contracts. The panel's moderator was Philip J. Harvey, president and managing director of Venture Programs. Others on the panel were Greg Thompson, president and CEO of Thomco; Franklin Sanders, vice president, program business management, Chubb Custom Market; Craig Fundum, president, Zurich Program Business; Stephen T. Fitzpatrick, senior vice president, QBE The Americas; and Gregory Katz, an attorney with the law firm Wilson Elser Moskowitz Edelman & Dicker LLP. Following are edited excerpts from the presentation.
Harvey: Our purpose today is to discuss contractual relationships between program administrators and carriers. What are the key points of the contract to consider?
Katz: The question we're most frequently asked is, “What does the law require?” or “What would run contrary to a state's law?” In fact, little of what's in a contract will be based on the law in your state. Rather, you are entering into a contract–which is binding, negotiable and enforceable. So you're not going to find a great deal of guidance from courts that have visited this issue. I will tell you that if you ever end up in litigation with the other party to the contract, the terms of the agreement itself will most likely dictate who walks out of that courtroom with a smile.
Before the contract is drafted, ask yourself, “What if?” What if the contract is terminated under various scenarios? What happens and who gets what? If you spend time upfront on the contract, you'll avoid a lot of trouble later if the relationship unexpectedly ends.
MGA agreements used to just focus on commissions. An MGA or carrier would send us an agreement and essentially say: “Look at it quickly. We're going to sign it. We've got the commission structure we want.” Nowadays, the commission structure is the easy part. It's the other parts that really have to be your focus.
Harvey: Thank you, Greg. Craig, let's say we just made a deal yesterday. We talked about a $10 million rollover program. What's next?
Fundum: First I'd like to stress that we, like other carriers, have a process. I have a group of sales guys who are out looking for opportunities. So, Phil, when we discuss an opportunity with you and conclude it sounds like something in which we would be interested, my guys will send you a nondisclosure agreement within two days.
Harvey: Craig, how negotiable is your NDA?
Fundum: We have a standard agreement protecting both parties. It typically lasts a year. If you're looking at a longer term, we'll talk about that. We tell you to take it to your counsel and, if you don't like it, get back to us with what you'd like to have in the NDA.
Harvey: I think it's important to be as specific as you can concerning what the NDA is going to protect. I'm going to send Craig my program data-all the “secret sauce” and the recipes that I've toiled over and developed and built up over time. And one of two things is going to happen. Either Craig is going to say, “Hey, this is good stuff. Let's go forward,” or “Hey, Phil, this isn't for us. Let's go our separate ways.”
Greg, considering how important this data is to program administrators, how long should they be protected under an NDA? What's reasonable?
Katz: I would say it depends on whether you're in a real niche market. In that case, you may want a longer period of protection than when writing something like nonstandard auto, where the program statistics, loss runs and industry information are easily obtainable.
We normally hear the NDA should last from six months to two or three years. There's no right answer. It obviously has to be a period of time with which you're comfortable. I would always recommend that it be in excess of a year. It might be a year and six months; it might be two years. You know your marketplace and the importance of the data that you're providing to that carrier partner. You know how much protection you need. While the issue should be discussed, it's usually not something that a carrier is going to fight over, as long as the time period is reasonable. I've never seen an MGA agreement get bogged down on that specific provision.
Some nondisclosure agreements, when you look at them closely, really turn out to be no more than confidentiality agreements. They essentially say, “We're not going to share your information outside the organization,” but there's nothing in them to prevent the carriers from using that information to create programs of their own. So it's important to ensure that there is language in the nondisclosure agreement that prevents the carrier from using your information against you, whether you do the deal or not.
Harvey: Franklin, let's talk about the data. We're both happy with the NDA and are moving along. I've given you all my data. You've crunched my numbers, you're interested and we're getting pretty close to agreeing on the structure of the deal. At this point, what's Chubb's position on who owns the data?
Sanders: Provided the data obviously are not publicly available, I'd generally say the data belong to you.
Harvey: Is there any program data you would construe to be yours? How about claims data?
Sanders: In regard to data produced by an operating program, I think the claims data belong to the carrier. That's not to say the program manager doesn't have a right to have access to it.
Harvey: If we agreed that I would use my own TPA–not your staff–to adjust claims, does that change the answer?
Sanders: No. If we're paying the claims off of our paper, it's our data.
Thompson: On many of our programs we get an actuary, at our expense, to prepare a report from the claims data the carrier has for our program. We share the report with the carrier. If we have to move the business–for whatever reason–we show that actuarial report to prospective markets. If we were working with you, Franklin, would you consider that to be a violation of our agreement?
Sanders: It depends on the reason for termination. If the termination were amicable, we wouldn't have any problem with your using that information as you've described. If the termination were “for cause”–like for fraud or other criminal activity–we probably would have a problem.
Thompson: I'd be interested to hear what some of the other panel members might say.
Fitzgerald: In the situation you just described, we would consider that we have mutual rights to the data. You have a right to use actuarial data based on the historical performance of your business. If it's data that we use to forecast our expectations of your business, we would consider that our data. We both have mutual things to consider.
Fundum: We share that view. I think the issue is ownership of work product. At the time you sign the NDA, your data is your proprietary information. Once we agree to work together, we have to do a bunch of analysis on your data. That work product, we believe, is ours. In the case that you described, Greg, I think we have equal rights to that information.
Thompson: And it would be equal rights, Craig, not only to our actuarial report but also to the actual claims data itself. Joint ownership, is what we're saying.
Fundum: I think that's right. Again, if the termination is amicable and, as Franklin said, there's been no violation of laws, I agree.
Thompson: A related issue is ownership of the forms. Suppose I develop policy forms for a program. Perhaps the carrier amends them slightly or a lot. If there's a breakup, does the program administrator have the right to take those policy forms?
Fitzgerald: We would look at policy forms as part of the public record. We're responsible for seeing that the forms pass muster from a regulatory point of view. We will treat them as our policy forms from that point forward.
Sanders: I agree completely. If the carrier files it, it's the carrier's property, but you can have access to it for future use with a carrier.
Harvey: I'd like to touch briefly on authorities. The contract will spell out underwriting authorities, policy-issuance authorities, claims authorities, audit authorities, etc. I'd like to urge those who are thinking about developing or transferring programs to not always insist on having binding authority. That can close opportunities to work with some carriers, because many of them don't build binding authority–at least extensive binding authority–into their models. What we often say is, “If you want to do all the binding, that's OK with us. Just make sure you promise us a quick turnaround.”
Let's move on to termination provisions. Let's assume I have a program and that I haven't violated the contract. I get an e-mail at 4:50 on a Friday afternoon. It's from my carrier partner, and it says: “Dear Phil, It's really been a pleasure. We're going to invoke the termination provisions of our contract. You've got 90 days to move your program.” That really makes your weekend, of course.
I think any professional in this business will tell you, it's absolutely impossible to replace a program in 90 days. Steve, what do you think is reasonable? Let's assume contract termination is not “for cause.”
Fitzpatrick: Our situation is a little unusual. Praetorian (the program-writing division of QBE The Americas) this summer was acquired from Hannover Re, which previously had transferred its Clarendon program-business operations into it. Now we're owned by QBE. So we really have three different sets of program-administrator agreements out there.
We've spent a lot of time on this subject, because I think 90 days is what we used to use in some cases. I think something like 180 days is much more reasonable. We look for reciprocity, however. If we agree that we're going to have a one-year termination period, then we expect the program manager to give us that same period.
Sanders: Generally we start at 180 days. The period depends on the nature of the program. Maybe some programs require longer than that. In some instances, you may have a run-up of longer than a year before any action can be taken, to give the program time to build momentum. And then you change, for instance, to 180 days after that.
Fundum: I keep talking about the process. Almost immediately after signing the NDA, you're going to get a sample contract from us. It's going to have our sample clauses in it. And as we do our due diligence, you should be doing yours on that contract and identifying the areas where you might have issues. Then as our negotiations move forward, these don't become 11th-hour issues threatening to blow up the program.
At Zurich we have a protection clause. When we kick off a program, we say to you, “There's a period of time–sometimes 18 months to two years–where we will protect that program.” It takes that much time to get the program up and rolling. Then we kick into the normal termination clauses, and our standard is 180 days. If it makes sense to extend beyond that, we absolutely do that.
Harvey: Let's move on to channel conflicts. A lot of program carriers–especially the ones that recently have come into the program-business market–are multilines carriers that have agency plants. As you negotiate with such carriers and look at their contracts, it's a good idea to ask: How am I protected on the back end? On the front end, Zurich protects me for two years, during which time I build up my book. Then suddenly the insurer's San Francisco branch decides to set up a mini-program that competes with mine. Maybe it's not even a program but just a specialty with a certain broker who has influence with my type of business and wants to specialize in it through that branch office. How is that going to affect my program? Am I subject to losing business to other Zurich distribution channels via broker-of-records letters?
Assume you don't have an exclusive–because most deals are what we call “semi-exclusive.” That means that as we build a relationship with the carrier, and the fruits start to grow, we may try to renegotiate the relationship: “We're a little different than we were two years ago. We've got numbers on the books. How about if we get a little bit closer on this program? How about more explicit language on how we're going to be protected on our book of business?”
Thompson: I'd like to comment on the exclusivity issue. We have basically a handshake agreement with a carrier that as long as we're doing a decent job for them, and they're doing a decent job for us, the deal is going to be exclusive. The understanding is that the business relationship could change, however, in which case the exclusive can change.
The most common exclusive that you see is a mutual exclusive. That's pretty fair if you're going to have an exclusive. For program administrators, the problem with such exclusives–and this has happened to us–is that something negative may happen to that carrier. Maybe their rating is downgraded. Or maybe Genghis Khan is appointed CEO, and the company becomes impossible to deal with. So we decide we need out and give them 180 days' notice, as per the contract. But there's a little problem. We're still exclusive to them for 180 more days. We're stuck with a carrier whose paper we might be unable to sell or that is causing us other problems. So I'd urge caution when it comes to mutual exclusives. They may actually catch you in unanticipated ways. They've caught us.
We also see one-way exclusives, where the carrier wants you to use them exclusively, but they're not exclusive to you. On the surface, that could seem pretty unfair. The way we've handled that issue, when a carrier has insisted on it, is to put a 30-day or 60-day notice on our exclusive, enabling us to terminate the exclusive fairly quickly if we feel we must.
Fundum: I'm part of a huge organization. It's virtually impossible for me to grant a full-blown exclusive on a class of business. Now, we have exclusives at Zurich but here's how we think about them: We can discuss exclusives when it comes to such things as a customized approach to a particular group of customers, proprietary forms filed for a program or technology used for a particular group of customers. If you think of exclusives in that way, it becomes easier for a carrier–certainly for Zurich–to discuss them. The difficulty comes when we're told, “We want an exclusive for flower shops.”
Sanders: Generally, our preference is to look at geographic rather than national exclusives. Then you don't have the channel conflicts between your programs, which is a problem to manage as well.
Fitzpatrick: I know we have a few exclusives out there; but as general rule, we don't grant them. We would work hard, however, to see that two program administrators do not work the same space. We generally write deals that are small to midsize–no more than $20 million deals. It's hard to be exclusive with a program of that size. An insurer also can be hobbled by an exclusive in instances in which business doesn't materialize as anticipated under a program.
Question from the audience: It's fairly typical in a program manager's agreement to have a hold-harmless clause, where the program manager agrees to indemnify the insurer from losses arising from the program manager's errors and omissions. What's troublesome, however, is that in some cases the insurer wants the hold-harmless to apply to the subproducers' (i.e., retail agents' or brokers') errors, omissions or malfeasance. That's a pretty major issue. Our errors and omisssions carrier will not cover losses assumed under such a contract, if they weren't our legal responsibility in the first place.
Harvey: We have two individuals–one is an attorney–who do nothing but deal with subproducer contracts. If you're selling product through retailers, you should have a hold-harmless provision in your contract with them and obtain evidence they have E&O insurance to back them up. You also should obtain copies of their licenses.
Over the years, I've had some situations where a subproducer–or his or her employee–has taken the funds. Naturally, we canceled coverage for nonpayment. In one instance, the insured went to the insurance department, which came back to the carrier and said, “The subagent is Venture's subagent–and you're going to have to stay on the cover.” So I caution program managers that they are the agent of record in these matters. States have done away with brokers' licenses, which we used to have as well as producers' licenses. So you want to make sure you're protected by a properly drafted subproducer agreement.
Thompson: I'd like to make a comment about indemnity agreements in program contracts. Basically what we prefer is a clause that essentially says that we, the program administrators, are responsible for our negligence and another that says the carrier is responsible for its errors and negligence.” Ideally, the two indemnity clauses should be “mirrored.”
Comment from audience: In any relationship with a carrier, you ought to be able to renegotiate the contact, once you've established a track record and have a little momentum.
Thompson: We have actually done that recently. Contracts negotiated in the hard market were pretty lopsided. We have had success recently renegotiating contract provisions with one of our carriers. We said, “You know, a few of these provisions are a little over the top, and would you work with us to amend them?” And they did. We didn't get everything we wanted, but they did make some material changes to the contract.
Harvey: I think that goes to the importance of “picking your partner” carefully. I've had great partner relationships for 17 years, and the carriers and I are continually amending our deals as we go along, because we're both discovering situations that we didn't discuss or identify in the beginning. Again, good communication is really important. If you get into a deal that seems inflexible, then I would start considering how to get out of it, because the relationship is not going to be any better five years from now.
Question from the audience: How should the program contract address profit-sharing when the program's terminated?
Thompson: Contracts are all over the board in regard to how this issue is handled. In some, as soon as the contract is terminated–by either party–the profit-sharing disappears. I've also seen contracts in which profit-sharing is recalculated.
This is an important point. A contract could be terminated for any number of reasons by either party, and you certainly would prefer not to lose the profit-sharing that you had worked so hard to earn. Certainly, in the case of a “for cause” termination by the carrier, I think it would be perfectly reasonable for the carrier to cut off profit-sharing. But in a “not for cause” termination, ideally it should continue.