In the world of insurance sales, few things surprise independent agents more than a commission chargeback—especially when it’s requested years after the original transaction.
While these occurrences may seem arbitrary or unfair, they often are rooted in the fine print of agency agreements and the operational mechanics of the insurance industry. It is important for agents to understand why insurance carriers may request commissions back from them, how these scenarios typically are governed by agency contracts, and what provisions agents should watch for to protect their earnings and financial stability.
Why do carriers request commission chargebacks?
Usually, insurance carriers pay commissions to agents upfront upon the sale or issuance of an insurance policy. However, if that policy lapses early, is rescinded, or is canceled within a specified period, the carrier may no longer have realized the revenue it anticipated, in which case it may want those commissions back from agents.
Some of the most common reasons for chargebacks include:
- policy cancellations during the free-look period or shortly after issuance;
- nonpayment of premiums;
- misrepresentation or fraud by the policyholder;
- and/or rescissions due to underwriting issues or client ineligibility.
When it comes to carriers trying to get their money back, these chargebacks typically are enforced through clawback provisions in the agency agreements.
The role of the agency agreement
At the heart of most commission-related disputes is the agency agreement. These contracts govern the relationship between the insurance carrier and the agent or agency, and in the case of chargebacks, the most relevant provisions are those that outline commission structure, chargeback rules and timelines, termination clauses, offset provisions and time limits—if any—for reclaiming commissions.
In some cases, there is no statute of limitations imposed within the contract, which means a carrier could request a chargeback years after the initial payment. While not common, this scenario does occur—especially if a policy issue was only recently discovered.
Carriers recovering commission debts through offsets
If an agent still has an active appointment or is writing business for the carrier, the carrier may recover commission chargebacks via offsets, which means that the carrier can deduct the amount owed from future commissions.
For example, if a chargeback of $1,000 is owed to the carrier and the agent earns $2,500 in new commissions the following month, the carrier might withhold $1,000 to settle the debt and pay out $1,500 to the agent. Offset provisions are standard in most agency contracts and often operate automatically unless challenged or negotiated.
Due to the nature of offsets, PIA always recommends any right of offset—if allowed at all—be limited to amounts owed under the agreement at issue.
What happens after termination?
Termination of the agency agreement complicates things. If the agent is no longer writing business or the agent is no longer appointed with the carrier, the carrier—when owed commissions—may send an invoice requesting repayment, pursue legal action or refer the matter to collections, and/or withhold renewal or residual commissions if still contractually allowed.
Depending on the terms of the agreement, agents may remain liable for chargebacks even after termination. This is especially important when agencies sell blocks of business or retire, as such obligations can follow them unless explicitly released.
Failing to repay chargebacks also can have serious consequences, such as triggering termination of an active contract with a carrier. Most agency agreements include provisions that treat nonpayment of commission debts as a breach of contract. If an agent or agency fails to repay chargebacks within a specified time, the carrier may reserve the right to terminate the agency agreement for cause.
This type of termination can lead to immediate suspension of new business submissions, loss of future commissions, and forfeiture of any remaining renewals or residuals (depending on your agreement). In some cases, it also may impact the agent’s ability to contract with other carriers—especially if the termination is reported to industry databases or background checks.
One other important consideration to note is ownership of an agent’s book of business, and how that could be impacted by failure to pay commission debts. In many contracts, agents retain ownership if they remain in good standing with a carrier. However, if debts such as unpaid chargebacks or other commission obligations go unresolved, the agreement may specify that ownership of the book reverts to the carrier.
This means the agent could lose rights to future renewal commissions and the ability to transfer or sell that block of business. Understanding these ownership clauses is essential—especially when evaluating the long-term value of your book and the financial risks tied to unpaid obligations.
Best practices for agents and agencies
Receiving a notice from a carrier that commissions are owed back to it can cause frustration and confusion—especially if a significant amount of time has passed since the event triggering the chargeback. To avoid any such unpleasant surprise and to better protect you and your business, agents and agency owners should do the following:
Review all contracts carefully. Take the time to understand the contractual relationships you have with each of the carriers you work with, including the duration of chargeback exposure and whether it survives contract termination.
Maintain agency records. By keeping clear documentation of policies sold, lapses and communications, this can help dispute any improper or excessive chargebacks.
Watch termination language. Ensure that residual commissions and post-termination obligations are spelled out clearly as opposed to leaving the point vague or not discussed at all. Additionally, you can apprise yourself of when not paying a commission debt may impact any of your active agency agreements.
Negotiate provisions where possible. This is especially important for high-volume producers, since it’s not unusual to seek limited lookback periods or cap chargeback obligations.
Seek legal review. Tying into the previous point, before signing any agency agreement or selling an agency, a legal review can help avoid long-term liabilities.
As part of PIA Northeast membership, agents can receive free contract reviews from PIA’s staff attorneys. In addition, if you need direct representation for contract negotiations, PIA can help by connecting you to an attorney through the PIA Circle of Consultants.
Your best defense
While commission chargebacks are a normal part of the insurance business, they can have serious financial implications—especially when they arise long after the original commission was earned.
Understanding and negotiating your agency agreement is your best defense against unexpected clawbacks. By being proactive, agents can protect themselves and ensure that their hard work continues to pay off—without surprises years down the road.
For more information on agency agreements and what to look for, PIA Northeast members can review PIA research series: agency agreements in the PIA QuickSource library.
Danielle Caswell, Esq.
Danielle Caswell earned her bachelor’s degree from New York University and her law degree from Brooklyn Law School with a particular focus on intellectual property, information, and media law. Previously, Danielle was an associate at a law firm in New York City where she focused primarily on intellectual property and entertainment-related transactional and litigation matters.
