Agency appointment contracts form the legal foundation of the relationship between independent insurance agencies and insurance carriers. The agency-carrier contract should set forth the rights, responsibilities and obligations of the respective parties with regard to all material aspects of the relationship.

The provisions in the agency-carrier contract will likely trump any other understandings between the parties. Thus, it is imperative that agencies review, understand and, when necessary, seek to negotiate the terms of these contracts before signing and proceeding with a new or existing carrier relationship.

For decades, the Big “I" Office of General Counsel has worked closely with national and regional carriers to provide input and proposed revisions to new agency-carrier contracts before they are released. Many carriers have agreed to adopt more favorable terms for agencies as a result of these efforts.

While a carrier's willingness to negotiate changes will vary significantly based on the carrier's policies and the relevant circumstances, an agency may be able to secure significant improvements before executing a contract.

Here are nine common considerations for agency-company appointment contracts:

1) Ownership of Expirations

Ownership of expirations is one of the most critical issues for agencies to consider in agency-carrier contracts. It is the cornerstone of the independent agency system, and an agency derives much, if not most, of its value from the ownership of its expirations and records.

U.S. courts have generally recognized independent agents' ownership of expirations dating back to the seminal case of National Fire Insurance Company v. Sullard, 97 A.D. 233 (N.Y. App. Div. 1904), finding an independent agent owned his “expiration register" over company claims. Despite this longstanding precedent, the contractual terms surrounding ownership of expirations have significant consequences.

For example, contracts will often address the circumstances under which a carrier may take ownership of expirations, particularly after termination of the contract. Contracts may also address ancillary issues such as whether and how the company may engage in direct marketing through use of the agent's client records. One important emerging issue is the control of data and records, which continue to grow in value in an increasingly digital world.

First, agents should ensure that the carrier affirmatively recognizes the agency's ownership of both expirations and records. Also, try to limit the carrier's ability to take control of the agency's expirations to only the agency's nonpayment of undisputed premiums collected by the agency after termination of the contract. Agents can also require that the carrier provides advance written notice and an opportunity for the agency to cure or furnish acceptable collateral security before taking the agency's expirations.

Some contracts may attempt to provide the company with a lien or security interest against agencies' books of business or expirations. Such a lien or security interest could conflict with the agency's obligations to a lender or limit the ability to obtain financing.

In any event, the agency should ensure that any lien or security interest applies only to the expirations or book of business with the applicable company.

2) Commissions

While expirations constitute much of an agency's inherent value, commissions represent much of the day-to-day income. The agency should be aware of how its agency-carrier contracts address a variety of commission-related issues, including the timing of commission payments paid directly by the company, whether or not the company has the right to deduct commissions from premiums, the frequency of adjustments and the amount of advance notice, if any, that the carrier has to provide before adjusting commissions rates.

The contract should specify whether the agency may deduct commissions on agency-billed policies. If the policies are direct billed or the agency is not allowed to deduct commissions, the contract should specify the timing of commission payments.

The frequency that the carrier may reduce the agency's commissions can vary. Carriers typically agree to provide 30-90 days advance written notice prior to any unilateral reductions, but the agency may wish to request 90 or more days advance written notice for any changes. The agency may also want to request that carriers limit reduction to once per calendar year.

The contract should also have a separate commission schedule setting forth the commissions applicable to the carrier's lines of business. The agency should be aware of any language stating that the parties or the carrier will set commission rates on a policy-by-policy basis.

3) Premium Collection

Many agencies have a role in receiving, maintaining and disbursing transacted premiums and should pay special attention to provisions affecting the flow of premiums. The agency should understand whether the contract provides for company billing, agency billing or a combination of both, as well as the circumstances under which the company may move policies from agency billing to company billing.

With respect to agency billed or direct billed, agents should know what is permitted and under what circumstances. Agencies should consider whether the carrier specifies any circumstances under which it may change the billing method from agency billed to direct billed.

Further, be aware of language requiring the agency to pay premiums “whether or not collected" by the agency or similar language. This is contrary to the typical result where nonpayment by an insured will cause the policy to lapse or be canceled. If this concerns the agency, then it may request that its responsibility be limited to remitting premiums it actually receives.

Carriers typically require agencies to waive commissions on any premiums collected by the carrier. Determine whether the contract allows the agency to be relieved of collection if it turns over collection to the carriers, and look out for language that limits the premiums that can be turned over to the carrier for collection, such as audit premiums. The agency should be permitted to turn over all uncollectable premiums to the carrier for collection.

4) Indemnification

An indemnification provision describes the circumstances under which each party is responsible for compensating the other party for any claims or losses arising out of the contract. Agents should take a careful look at how any indemnification provisions are structured and what types of claims or losses might be covered.

Try to ensure the indemnification obligations are mutual. Be aware of language, in the indemnification provision or elsewhere, that requires only the agency to cover the carrier's fees and costs in the event of a lawsuit or collection efforts against the agency. At a minimum, such a provision should be mutual and provide that the prevailing party is entitled to have its costs and fees paid by the other party.

An agency will want to determine whether its insurance adequately covers any indemnification claims that may be made by the carrier against the agency. Also, watch for any language that would impose a so-called contributory negligence standard, whereby the carrier's indemnification obligation is eliminated entirely if the agency contributed even a small fraction of fault. Instead, the agency should seek language that apportions responsibility according to each party's respective degree of fault, or a so-called comparative fault standard.

5) Changes in Ownership

A requirement that the agency provide advance notice of a change in ownership can be problematic. Such notice may violate the terms of any applicable non-disclosure agreement between the agency and the counterparty to a merger or acquisition.

The agency-carrier agreement should not terminate immediately upon a change in ownership, and the agency should not have to provide notice to the carrier for every change in ownership. A change in ownership provision should apply only to changes in a majority or controlling interest.

6) Carrier Communications With Insured

Be aware of any language that allows the carrier to communicate directly with, or sell directly to, the agency's clients. If the carrier insists on including such language, the agency may want to request language that confirms that the carrier provides advance written notice of direct communications with the agency's client, copy and/or identify the agency's name and contact information on all correspondence and direct policyholders to the agency for questions and requests for service; the carrier will pay commissions on any direct sales by the carrier to the agency's clients; and direct sales will not erode or in any way adversely affect the agency's ownership of expirations.

7) Claims Reporting

Claims reporting requirements can differ significantly between carriers. Some carriers may simply require notification of actual lawsuits filed against a policyholder. Other carriers may require notice of any circumstance that may increase the carrier's risk of any potential claim mentioned by a policyholder to the agency.

Agencies may wish to limit such provisions to actual notification of a claim or lawsuit. Otherwise, the agency might arguably be agreeing to notify the company of every client complaint, no matter how minor.

8) Post-Termination Rights and Responsibilities

Agency and carrier business needs and circumstances change over time, and carrier relationships inevitably will come to an end. Some contracts, however, fail to address what happens next and agencies need to consider their rights and responsibilities after a notice of termination.

Important language includes provisions relating to the payment of commissions on policies that continue after termination; the agency's ongoing access to its clients' records, including any records in the carrier's database; the authority to service policies after termination; and their clients' renewal rights upon policy expiration.

Appointment contracts often permit carriers to cancel all policies as soon as permitted by applicable law. A run-off provision provides agencies and insureds with greater certainty following termination of the contracts.

A run-off provision should provide a period of time, such as one year, after termination during which the carrier agrees to renew all policies that meet current underwriting standards and should specifically state that the agency has the authority to service policies following the termination of the contract and to receive commissions at a pre-determined rate, such as the rate in place at the time of the notice of termination.

Also, be aware of provisions that require the agency to service policies but do not require the carrier to pay commissions unless provided by law and language that allows the company to engage in selective cancellation without regard to its current underwriting standards, which may undermine the effect of the run-off provision.

9) Data Security

Data security regulation is developing quickly in the U.S. New York has enacted one of the nation's most far-reaching laws; the National Association of Insurance Commissioners (NAIC) has issued a model data security law, which a number of states are beginning to implement; and carriers are amending or revising their agency contracts to address these new laws and regulations.

Consider pushing back on provisions that impose data security requirements more stringent than the requirements applicable by law, and consider pushing back on provisions that are not mutual and impose burdens and obligations on the agency without requiring the same of the carrier. The agency should also be aware of any contractual provisions requiring the agency to distribute privacy notices on the carrier's behalf or take on other duties or responsibilities that are not mutual.

Scott Kneeland is Big “I" general counsel. Eric Lipton is Big “I" senior counsel.

This article is based on The Big “I" Guide to Agency-Company Appointment Contracts by the Big “I" Office of General Counsel. For sample contract language and other key agency-company appointment terms, go to the Big "I" Legal Advocacy webpage. This article includes general information only and is not intended to provide specific legal or financial advice. If specific legal or other expert advice is required or desired, the services of an appropriate, competent professional, such as an attorney, should be sought.