The Agency/Producer Agreement
Most Wholesale/Retail relationships are conducted without a formal, written agreement. However, it is strongly recommended that a written agreement be utilized. The very nature of the Wholesale Market requires explicit documentation of the requirements and authorities shared by both the Retailer and Wholesaler. It is important to recognize that the responsibilities involved in the agreement extend beyond the normal two-party business relationships.
The following summarizes eleven specific provisions recommended for inclusion in the written agreement between the Wholesaler and Retailer:
All amendments to the agreement, including the schedule of commissions, require the express written consent of both Wholesaler and Retailer.
2. Arbitration Clause
The stipulation of a procedure for the resolution of any controversy caused by the agreement is what makes the agreement a viable document. The arbitration clause should indicate the procedure to be followed in the event of a disagreement or dispute involving the interpretation of the agreement or the performance or nonperformance of the parties to the agreement This arbitration procedure is outlined below.
- The parties will make every effort to establish a meeting for the purpose of settling unresolved disputes. It is understood that this meeting will be conducted in good faith.
- If the parties to the agreement are unable to resolve their conflict within fifteen days, the controversy will be resolved by arbitration.
- All unresolved disputes with regard to the conditions of the agreement will be decided by a panel of three disinterested arbitrators. The party who desires arbitration will appoint one disinterested arbitrator and will furnish written notice of the appointment to the other party. Within ten days thereafter, the other party will appoint one arbitrator. The two appointed arbitrators will, within fifteen days thereafter, together select a third arbitrator who will be designated as the presiding officer of the panel. If the appointed arbitrators fail or refuse to choose a third arbitrator within thirty days after having been appointed, the third arbitrator will be chosen by a court having jurisdiction over the disputed agreement.
- The decision of a majority of the panel will be binding on the parties without right of appeal, and may be enforced by a court having jurisdiction over the agreement in question. The determination of the panel must be in writing and bear the signatures of a majority of the arbitrators.
- Expenses of arbitration will be shared on an equal basis by the parties. Arbitrators shall have the right to select one party for a greater amount of the expenses should it be found that the party did not initially offer a good faith effort to resolve the difference on an informal basis.
- Specify which state, county and court will have jurisdiction.
3. Authority to Bind
The Retailer has no authority to bind coverages unless specifically authorized in writing by the Wholesaler. There are certain states that prohibit binding authorization for a non-admitted company. Such restrictions are enforced by statute. Other states maintain provisions in their insurance regulations that control the binding authorities of non-admitted carriers.
Because there are specific situations where the Wholesaler can grant binding authority to the Retailer, it is suggested that the limits of any specific binding authority be negotiated between the Wholesaler and the Retailer. As indicated previously, any such agreement should be in writing.
4. Cancellation of Policies
Frequently, policies obtained through the Wholesale Market contain a provision that the premium is “fully earned” in the event of a total loss, or that there is a “minimum earned” premium at the time the policy is written. A “minimum earned” premium provision would be especially significant in the event of cancellation of the policy by the insured. Certain policies require premium payment prior to their effective date and cannot be cancelled by the insured or Retailer without penalty once the premium is received. Since there exist unusual cancellation conditions that require approval of both the Wholesaler and the insurer, it is important that any cancellation procedure that deviates from the agency agreement be specified and reviewed by the Wholesaler and Retailer. It is recommended that the agreement stipulate the following:
- The earned premium on any policy cancelled after its effective date will be computed in accordance with the policy’s cancellation provisions.
- Return commissions on cancelled policies will be paid at a rate identical to the original commission scale.
- The right of “flat” cancellation should be provided when acceptable evidence for cancellation is received by the Wholesaler prior to the effective date of the policy.
Since it is not uncommon for policies issued through the Wholesale Market to contain provisions which apply to “fully earned” or “minimum earned” premiums, the Wholesaler should be certain that any special cancellation condition or other conditions outlined in the quotation, binder or policy be explained to the Retailer when the risk is initially accepted. It is important to understand that the Retailer has no authority to cancel policies issued through the Wholesale Market; therefore, it is vital that all requests for cancellation be submitted in written form to the Wholesaler on a timely basis.
A schedule of commissions is normally not a part of the agreement between Wholesalers and Retailers. It is provided as a separate schedule and is not subject to the provisions of the agency agreement. The commission rates paid through the Wholesale Market are governed by both the class of risk and the insurer. In certain instances the Wholesaler can commit to a specific commission level. It is suggested that this specific commission level be incorporated into the schedule of commissions. In addition, an indication of which commissions are to be negotiated should be included in the commission schedule.
The indemnity provisions of the agency agreement should be written in a bilateral fashion, because both Wholesaler and Retailer are, in essence, independent businesses that require protection from the negligence of other individuals or businesses.
7. Ownership of Expirations
The agency agreement should contain a provision which will guarantee the Retailer’s ownership interest in that business which has been placed through the Wholesaler. The wording of this provision should indicate that: “The use and control of expirations, and the records thereof, shall remain in the undisputed possessions and ownership of the Retailer.”
The agreement should also include a provision which restricts the Wholesaler from the use of the expirations of the Retailer in any marketing method for the sale, service or renewal of any form of insurance coverage of the customers or prospects of the Retailer.
In addition to the above provisions regarding expirations, there should be a provision indicating that, if the agreement is terminated and the Retailer has not properly accounted for and paid all premiums and return commissions for which the Retailer is liable, the Wholesaler can retain a vested right, title and interest in the expirations and records of the Retailer as of the date of termination. The Wholesaler can retain the right to collect any indebtedness due from the Retailer through the use and control of such expirations. The Wholesaler agrees to use reasonable business judgment in the sale of these expirations and is accountable to the Retailer for all sums received which, net of expenses, exceed the amount of indebtedness. The Wholesaler is urged to make a specific inquiry of the Retailer to determine if there has been any assignment of the Retailer’ s ownership of expirations. Such an assignment is generally a collateral condition to any financing agreement between Retailers and insurance companies. An assignment of the Retailer’s ownership of expiration rights would take precedence over the foregoing clause in the “Ownership of Expirations” section of the agency agreement.
8. Payment on Premiums
This essential segment of the agreement should be explicit in stipulating the time for premium remittance. The agreement should state whether the premium remittance is less commission, plus any applicable taxes, fees or policy fees. In order to avoid misunderstanding, any other charges or special fees should be specifically outlined in the agreement, on the quotation, binder or policy.
The majority of Wholesale/Retail agreements hold the Retailer liable for uncollected premiums, fees and charges, including earned premiums developed by audits or interim reports. Since the Wholesaler is responsible to the insurers for all earned premiums, this liability is not unusual. The Retailer must be fully aware of the responsibility for premium payments in all situations involving the Wholesale Market These obligations include not only those areas already mentioned, but policies which contain specific provisions for payment of “minimum earned premiums,” “fully earned premiums,” or “earned policy fees or charges.” The Retailer must also realize that certain policies prohibit flat cancellations.
The agreement should indicate whether or not the Retailer has the right of assignment. Typically, the right of assignment is subject to prior approval by the Wholesaler.
The agreement should specify immediate termination in the event there has been a violation of either party’s fiduciary responsibility, including insolvency, threat of insolvency, fraud, abandonment, willful, gross or negligent misconduct, including the termination or suspension of either the Wholesaler’s or Retailer’s license. What would happen in the event of an agency merger should also be addressed.
Agreements normally run on a continuous, until cancelled, basis. Termination of the agreement may be readily accomplished by mutual agreement of the parties or by one party furnishing thirty days written notice of termination (subject to state law).
11. Evidence of "In Force" E&O Coverage Should be Exchanged by both Wholesalers and Retailers
Why is this important?
- As evidence of good faith and professional understanding.
- Solvency of insurer.
- Coverage (effective dates, as required and requested).
- Policy protection (parallel, limits, deductibles, exclusions).
- Time frames (adequate time for placement, market needs).
The previous discussion of the agency agreement is not intended to be definitive; rather it is intended to provide guidance only. The points mentioned are areas for review, consideration and understanding. Final documentation of the actual agreement should be based upon appropriate research and discussion by all parties to the agreement.