Be alert: Red flags in agency agreements

Raise your hand if you enjoy reading contracts. Why am I getting the sense that I am the only one with his hand up? OK, I get it. Contracts are boring. They are long and filled with terms that barely resemble English. While I can’t get you out of reading the terms of service on your new credit card, I can help you out with some other contracts: agency agreements to be precise.

That’s right! It’s time for the next installment of the wildly popular[1] series: “What’s Actually in Your Agency Agreement!” (trademark pending). As your host, I will guide you through some of the most problematic or interesting—at least to me—clauses that have popped up in agency agreements in
recent years.

Before getting into actual contract provisions, let’s talk a little about types of contracts. Just like Star Wars movies, not all contracts are equal. Some are good—the Empire Strikes Back of contracts. And some are not—the Clone Wars of contracts.

Some contracts are with insurance carriers, others are with wholesalers or vendors. Be aware of whom you are contracting with as that often will give you a clue as to what you can expect in the agency agreements. Carrier contracts—especially those with national carriers—often contain extensive cyber security provisions, as well as detailed clauses related to termination and indemnification. Agreements with wholesalers or vendors often will contain quirky provisions related to policy cancellations and ownership of expirations. Of course, all contracts are different, so what are some of the provisions you should be on the lookout for?

Cybersecurity

Cybersecurity was featured in the last “red flags” article (see the article Now is the winter of our discontent …) due to an increase in the number of agency agreements that were requiring agencies to adopt certain cyber security protections as part of the agreement. This is closely related to an increase in state’s passing insurance-specific cyber security laws or regulations. Since that time, there has been a new development in agency agreements related to cybersecurity. This one does not involve an agency’s cyber security practices. Instead, it addresses cyberinsurance. Many agreements now are requiring agencies to purchase certain levels of cyberinsurance, like how agencies are required to buy certain levels of errors-and-omissions coverage.

In fact, the cyber insurance requirement often is contained in the same section as the E&O requirement and often requires the same limits—usually between $1 and $1.5 million.  If you need to purchase cyber liability insurance for your agency, PIA Northeast offers a product that can help you. For more information, log on to pia.org/quote/cyber.php. While we are talking about E&O, a new trend with E&O requirements is clauses that go beyond merely requiring an agency to procure certain coverage amounts. Often, agency agreements will contain requirements that agencies not only purchase E&O coverage in certain amounts, but they will provide the carrier or wholesaler with information related to the E&O policy, including the carrier it is written with, its location, the policy number and expiration date.

Cancellation

Recently, I have seen cancellation clauses popping up in agency agreements. These clauses do not address the cancellation of the agency agreement. Instead, they deal with the procedure for the carrier or wholesaler to cancel an insurance policy between an insured and the carrier/wholesaler.

The language of these clauses is pretty consistent. Usually, it will state that a policy cannot be returned on a flat cancellation unless done so prior to the inception date of the policy in question. These clauses are a little perplexing as they seem to be unenforceable contract provisions.

Contractual provisions cannot be enforced against someone who is not a party to the contract. And, the insured is not a party to the agency agreement. As such, these cancellation provisions would not automatically apply to the insurance policy of a client. A similar provision would have to appear in the insurance policy for this to apply to the insured. In those cases, the carrier or wholesaler would have to spell out the cancellation policy more clearly—including minimum earned premium.

Limitations on placing business

Producers should be on the lookout for any clause in the agency agreement that limits their ability to place clients with carriers other than the one with which the agency has the specific agreement.

A clause that had made its way into some big carrier agency agreements is one that severely restricts an agency’s ability to place insurance business with a carrier outside of the one noted in the agency agreement. Under these clauses, agencies are given authority to sell, solicit, and service business for a carrier. However, the agencies are limited from placing business outside of the carrier and its affiliates.

These clauses require agencies to place all business with the carrier. Only business that is not acceptable to the carrier—and that is not eligible for placement through its affiliates—may be placed with an outside the carrier. Often, agency staff members are required to demonstrate that they tried to place a risk with the carrier before they can place the risk elsewhere.

Choice of law

Choice-of-law clauses in agency agreements are not new. However, they are almost always buried at the end of an agreement, and therefore, are easy to miss.

What is a choice-of-law clause? I’m glad you asked. Choice-of-law clauses—sometime referred to as governing-law clauses—impact agency agreements in two main ways. First and foremost, they identify which state’s laws will apply to the contract in question. This is significant as often the state law that governs the contract is not the same state law that governs the agency. Usually, it is the state in which the carrier or wholesaler is located. In the event of a dispute, the state listed in the agreement—and not the agency’s home state—will be outlining the rules to follow.

The other part of these clauses is a requirement that—in the event of a dispute—not only will the state’s law identified in the contract dictate the rules by which a decision will be determined, but that any court action will be brought in the state identified in the contract.

In a practical sense, this means that agencies located in the Northeast could have their agency agreement dictated by the state law of Nebraska or Idaho. Further, in the event of a dispute, the agency would need to retain counsel familiar with Nebraska or Idaho state law, not to mention travel to that state to appear in court.

Don’t panic, PIA can help

That wasn’t so bad was it? Hopefully, this article gave you a small sampling of what to lookout for in your agency agreements. Of course, I realize this article does not do anything to make contracts easier to read or make those legal words any more legible.

Fortunately, PIA is here for you. If you are a member, PIA Northeast’s team of attorneys is on stand-by to review your agency agreements, so you don’t have to do it yourself.

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[1] Nope