Read Before You

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?
• AnswerI 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 ProblemsProblems with the form and
  process in which agreements are created and
  issued
• Specific Provision ProblemsProblems 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 evilsexpanded
• Agency agreements as corporate strategyfriction

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 AgreementsYes 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 enforceableJust
  because its in the agreement does not mean there
  is a legal right to enforce it!

10
Basic Reason for Agency AgreementsYes we have
forgotten

• Examples of provisions which are NOT enforceable
• Language which is against public policyCant 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. CLARITYClear language so that both parties
  are able to understand their obligations under
  the agreement
• II. Satisfaction of each partys 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 ProblemsProblems with the form and
  process in which agreements are created and
  issued
• 1. Frequent grammar and spelling errors.
• A carriers policy drafting skills are better
  than those exhibited in the agency agreement

16
Top Problems with Agency Agreements
(continued)

• 2. Agents dont read their agreements
• These are bilateral contracts so take advantage
  of your power
• 3. The cover-letters to these agreements are
  misleading
• Misleading on contentWeve only made minor
  modifications
• Misleading about PIAs 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 ProblemsThis relates to
  issues that are present in particular provisions
  in agency contracts like indemnity, commissions,
  agents 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 agents 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 Agents 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 IAs 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 agents 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 Agents 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 agents book of business.

29
Top Problems with Agency Agreements
(continued)

• 8. Avoid language which asks an agency to
  guarantee anothers 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 insureds 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 agencys
  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 companys 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 agents
  outstanding legal obligations.

36
Top Problems with Agency Agreements
(continued)

• V. Privacy amendments often usurp/interfere with
  an agencys 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
  youve 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 youre 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
PIAs 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 PIAs input in updating
  an agreement or creating an agreement they must
  commit to the entire process

46
PIAs 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
PIAs 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 others position.

48
PIAs 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 PIAs review
  or PIA will write-up the companys comments
  following the conversation and ask that they
  approve PIAs write-up.
• At this point, PIA will make the contract
  available to its members at their request.
  Usually, a notice is placed in PIA Nationals
  weekly online publication Newsline.
• For PIA members we can provide both formal and
  informal reviews, but requests that members not
  swamp-requests.

49
PIAs Agency Agreement Review Process

• PIA is happy to review agreements for both
  members and carriers, but remember PIAs
  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 agents own letter
  to the company.

50
PIAs Agency Agreement Review Process

• WHY READ BEFORE YOU SIGN?
• OWNERSHIP
• Questions? Thanks for being PIA member
  attending this program
• Pat Borowski
• patbo_at_pianet.org
• 1-703-518-1360