Read Before You Sign-- Pointers for Reviewing Agency Agreements

1. Read Before You Sign--Pointers for Reviewing Agency Agreements By Patricia A. Borowski Senior Vice President PIA National

2. Does it Seem as if Miss Alabama is Writing your Agency Agreements? • Question: If you could live forever, would you and why? • Answer:”I would not live forever, because we should not live forever, because if we were supposed to live forever, then we would live forever, but we cannot live forever, which is why I would not live forever.”—Miss Alabama in the 1994 Miss USA contest

3. Overview of the Presentation • I. Background on the evolution of agency agreements • II. What purpose do agency agreements serve • III. Who needs to be educated on agency agreements

4. Overview of the Presentation • IV. Top problems with agency agreements today • General Problems—Problems with the form and process in which agreements are created and issued • Specific Provision Problems—Problems with the drafting of particular provisions. Will conclude with a discussion of “Privacy.”

5. Overview of the Presentation • V. A suggested process for agents to use in reviewing their agreements • VI. A suggested process for carriers to use in drafting/updating their agreements

6. The Evolution of Agency Agreements Over the Last 20 Years • Agency agreements as hand shakes--simple • Agency agreements as necessary evils—expanded • Agency agreements as corporate strategy—friction

7. The Evolution of Agency Agreements Over the Last 20 years • Agency agreements as an attraction • Agency agreements as compliance vehicles

8. Where We are in the Drafting Cycle Today • 3rd phase drafter: Those carriers who have consistently updated their agreements over the years. • 2nd phase drafter: Those who are making the first revision to their contracts in 15 years. • New comers: Those who are issuing their first agency agreement.

9. Basic Reason for Agency Agreements—Yes we have forgotten • I. Memorializes the establishment of a business relationship • II. Establishes the terms of the business relationship Distinction between language in the contract that is enforceable versus not enforceable—Just because it’s in the agreement does not mean there is a legal right to enforce it!

10. Basic Reason for Agency Agreements—Yes we have forgotten • Examples of provisions which are NOT enforceable: • Language which is against public policy—Can’t use contracts to accomplish illegal goals • Language that conflicts with state or federal law • Language that is ambiguous • Language that is waived by acting contrary to the language

11. Basic Reasons for Agency Agreements • III. Reflects the INTENT of both parties • IV. Provides a legal remedy in the event of breach or grounds for a cause of action

12. Basic Goals to be Accomplished in an Agreement • I. CLARITY—Clear language so that both parties are able to understand their obligations under the agreement • II. Satisfaction of each party’s legal obligation harmoniously • III. Equitable terms for all parties to the agreement

13. Are These Goals Currently being Accomplished by Agency Agreements? • Overall, i.e., for many - “No.” • There is still room for improvement • So, how do we improve? Education

14. Who Needs the Education and Why • Carriers • Outside counsel or other resources • Agents • Regulators and Legislators

15. Top Problems with Agency Agreements • General Problems—Problems with the form and process in which agreements are created and issued • 1. Frequent grammar and spelling errors. • A carrier’s policy drafting skills are better than those exhibited in the agency agreement

16. Top Problems with Agency Agreements (continued…) 2. Agent’s don’t read their agreements • These are bilateral contracts so take advantage of your power • 3. The cover-letters to these agreements are misleading • Misleading on content—”We’ve only made minor modifications” • Misleading about PIA’s endorsement • Misleading about signing deadlines

17. Top Problems with Agency Agreements (continued…) • 4. Lack of knowledge and skill from outside counsel or other consultants who are drafting these agreements • Rarely is there an understanding or appreciation of the legal obligations of independent agencies as” • Insurance transaction partners with their carriers; • Independent insurance agencies insurance obligations to others • Agency legal obligations as a corporate entity.

18. Top Problems with Agency Agreements (continued…) • 5.The use of too many ambiguous terms • For example: • i. “Agent agrees to give proper service” • ii.”Agent will promptly report any claims or causes of action” • iii. “Agent will keep complete records.” • iv. “Agent will use the highest degree of care.” • v. “Agent promises not to share “confidential or proprietary information.” • vi. “Agent promises not to share any personal information gathered from an insured.”

19. Top Problems with Agency Agreements (continued…) • 6.The failure to define “notice” • PIA recommends that material notices be in-writing via the U.S. post office and sent separate and apart from any en-masse mailing • PIA recommends that notice be deemed sent on the date of the post-mark

20. Top Problems with Agency Agreements (continued…) • 7.Agreements which attempt to bind agents to unknown or unnamed third parties • For example: • “This agreement shall apply to the companies the agent has been licensed to represent…” • “Company X is entering into this agency agreement on behalf of its affiliated companies.” • “Each of the companies designated above, and their successors and assigns is a party to the agreement.”

21. Top Problems with Agency Agreements (continued…) • Specific Provision Problems—This relates to issues that are present in particular provisions in agency contracts like “indemnity, commissions, agent’s authority” etc. • 1. Refusal to give advanced notice to agents regarding changes in commission • For example: • “Commission will be paid at a rate from time to time established by the company.”

22. Top Problems with Agency Agreements (continued…) • i.Usually carriers tell us that they would give advanced notice, but this is a problem because this tells us that the contract is not representative of their INTENT • ii. PIA recommends that an agent receive 90 days advanced notice of any downward change in commission AND • iii. A commission rate must be in effect for 12 months before a downward change in commission can occur

23. Top Problems with Agency Agreements (continued…) • 2. Refusal to give advanced notice of changes in an agent’s authority • PIA suggests at least 90 days advanced written notice of changes in authority – longer if a termination with mandatory run-off period. • 3. Moving procedures/obligations off the agreement • For example: • “Agent promises to adhere to or comply with all company manuals, written instructions, or guidelines as issued from time to time.”

24. Top Problems with Agency Agreements (continued…) • 4. Attempts to impose duties on the agent beyond termination of the agreement • i. For example: “Agent duties and obligations under this agreement will be continuous and survive termination, cancellation, expiration of other conclusion of Agreement.” ii. This kind of language is illegal because there is no consideration to enforce it! iii. The only duties that will survive termination are those that are already required by law.

25. Top Problems with Agency Agreements (continued…) • 5. The placement of non-compete clauses in agency agreements • i. For example: • “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 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 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 involuntary servitude. • iii. Non-compete agreements are not enforceable in the independent agency system because IA’s are not captives.

26. Top Problems with Agency Agreements (continued…) • 6. Repeatedly confusing “license” with “appoint” • i. For example: • “Upon request and recommendation of the agent, the company may license producers.”

27. Top Problems with Agency Agreements (continued…) • 7. Unclear Triggers (this also relates to the use of “ambiguous” terms) • i. Companies are using unclear triggers to take away the agent’s book of business • ii. For example: • “In the event the Agent fails to properly service policies, the Company reserves the right to service such policies and the Agent agrees to relinquish to the Company all records regarding the Agent’s book of business.”

28. Top Problems with Agency Agreements (continued…) • iii. For example: • “In the event the Agent fails to pay the Company monies due or any other indebtness, then the Agent agrees to relinquish to the Company all records regarding the agent’s book of business.”

29. Top Problems with Agency Agreements (continued…) • 8. Avoid language which asks an agency to “guarantee” another’s payment to the carrier – or requires agency to “warrant/certify” some aspect: • i. “guarantee” or “warrant/certify” are very specific legal term of art which mean an absolute promise by one party to another. Reasonableness, control & knowledge – are modifiers. • ii. For example: • “Agent agrees to guarantee insured’s payment of premiums to the Company.”

30. Top Problems with Agency Agreements (continued…) • 9. Provisions dealing with Ownership of Expirations that purport to “grant” an agency ownership of their book of business • WHY DO YOU OWN?

31. OWNERSHIP Independent Agencies OWN because the courts recognize (not granted) their control and property rights over “the business.” There is about 100+ years of case law that states unequivocally that independent agencies own the book The agency agreement is not the source of ownership, but merely a reflection of the status of the common law or case-law

32. Top Problems with Agency Agreements (continued…) • iii. Connect all provisions in the contract dealing with ownership because often times significant language pertaining to an agency’s ownership rights is NOT in the section entitled “Ownership of Expirations” • For example— • “Company shall not refer or communicate the names of policyholder and expiration dates to any other agent or broker except for the purposes of solicitation” • This sample language shows an attempt to encroach upon ownership rights

33. Top Problems with Agency Agreements (continued…) • 10. Provisions dealing with the company’s right to take over the book of business which lack a procedure for taking over the book • i. Substitute reasonably acceptable collateral to give the Company as an alternative to the book of business. • ii. Establish a time-frame for selling the book--6 months is appropriate with a valid valuation method.

34. Top Problems with Agency Agreements (continued…) • 11. The increasing use of “laser amendments” or agreement addendums issued to comply with a particular law • i. GLBA, HIPAA, Record Retention, On-Line Privacy Agreements • ii. These amendments are redundant and create a hierarchy of compliance for agents.

35. Top Problems with Agency Agreements (continued…) • iii. These amendment often go above and beyond what the law requires. • iv. These amendments conflict with an agent’s outstanding legal obligations.

36. Top Problems with Agency Agreements (continued…) • V. Privacy amendments often usurp/interfere with an agency’s ownership of expiration— • Often protected privacy information is the same language contained in the book VI. Make Privacy obligations work for you --Use the requirement of issuing a notice to clients as an opportunity to show your control over the book. If not in last privacy session, please contact us for copies.

37. Top Problems with Agency Agreements (continued…)

38. A Suggested Process for Agents in Reviewing their Agency Agreements • I. Make reviewing your new agency agreement(s) or addendums a routine process – written, filed together with each agreement, keep all letters from & to carrier on agreement to include all changes & develop a summary. • II. Before reading the agreement, decide whether or not you are interested in a business relationship with the company and note what are the important aspects you desire to accomplish with that carrier.

39. A Suggested Process for Agents in Reviewing their Agency Agreements • III. If the business relationship is important to or holds real promise for you – then read through the agreement using the issues raised by this lecture as a guide (i.e. ambiguity, book of business language, conflict, against public policy, etc.) • IV. While reading, note any questions, confusions or concerns on the contract

40. A Suggested Process for Agents in Reviewing their Agency Agreements • V. If you have an existing relationship with the carrier, compare the new contract to the old in the areas you have questions, confusions, or concern • VI. Compare this agreement to other agreements you’ve signed that have worked and you agree with to help suggest alternative language to the carrier

41. A Suggested Process for Agents in Reviewing their Agency Agreements • VII. Check with PIA to see if PIA has a review of the agreement on file. If there is not review on file for this particular agreement, PIA will review the agreement for you. • VIII. In addition to involving PIA, write a letter to the CEO of the company or VP in charge of marketing and document your questions, confusions, or concerns with the agreement.

42. A Suggested Process for Agents in Reviewing their Agency Agreements • IX. Ask for a response from the company in writing. • X. Based on the response, decide what provision language you’re willing to swallow (if any) for the business relationship.

43. A Suggested Process for Agents in Reviewing their Agency Agreements • XI. Decide what language must be changed or no business relationship • XII. Sign the agreement when you like it. • XIII. Sign the agreement when you must, but note the date of letter expressing your questions, confusions &/or concerns on the agreement.

44. A Suggested Process for Agents in Reviewing their Agency Agreements • XIV. Be careful about NOT signing the agreement AND not making your reservations known in writing and yet continue to do business with the company. The fact that you continue to do business with the company can be construed as acceptance, especially when you have no documentation of your request for needed changes/clarifications.

45. PIA’s Agency Agreement Review Process • PIA will review agency agreements for PIA member agency owners ONLY, as well as insurers & other insurance parties with which our members do business. • If a carrier would like PIA’s input in updating an agreement or creating an agreement they must commit to the entire process

46. PIA’s Agency Agreement Review Process • Explain the circumstance surrounding the agreement (i.e. is it a new agreement, do you want the entire contract reviewed or only a particular provision) • With carriers PIA will review the agreement which means writing up a detailed commentary on the contract spotting out global legal issues that we see. Must ask the state affiliate about state specific issues.

47. PIA’s Agency Agreement Review Process • PIA will send the review to the company and a courtesy copy to the requesting agent. However, the process is confidential at this point and PIA does not make the review available to its members. • Once the carrier has had a chance to read over the review, PIA will schedule a telephone conference to talk about the agreement. This is a mutual education process where both PIA and the carrier can learn about the other’s position.

48. PIA’s Agency Agreement Review Process • During the conversation, the carrier may decide to make changes to the agreement based on the review or clarify their language. the company can either issue a written response to PIA’s review or PIA will write-up the company’s comments following the conversation and ask that they approve PIA’s write-up. • At this point, PIA will make the contract available to its members at their request. Usually, a notice is placed in PIA National’s weekly online publication “Newsline.” • For PIA members – we can provide both formal and informal reviews, but requests that members not “swamp-requests.”

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

50. PIA’s Agency Agreement Review Process WHY READ BEFORE YOU SIGN? OWNERSHIP Questions? Thanks for being PIA member & attending this program Pat Borowski patbo@pianet.org 1-703-518-1360