Please also feel free to let us know about any issues or topics that you may want us to address in future issues of The E&O Report. Many of the topics we write about in The E&O Report originate from issues agents and brokers bring to our attention through telephone calls and emails. If you have any ideas in this regard, please reach out to Jim Keidel and let him know what you have in mind. From our experience, an issue that one New York insurance agent or broker is facing may actually be much larger and affect many other producers across the state.
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When a new agreement is presented, the entire contract should be carefully reviewed by the agency or brokerage. In connection with the review, the agency or brokerage should also identify the key terms where there are questions or concerns. One consideration is whether to have an attorney involved in the review and negotiation process. Keidel, Weldon & Cunningham, LLP regularly conducts contract reviews and negotiations for insurance agents and brokers in New York and other states. Also, a great resource available to IIABNY members is the IIABA contract reviews located on the Big “I” website. Please note you must use your member login to access this section, which provides an overview of numerous company agreements and the contract provisions that should concern agents and brokers.
One of the key contract provisions agents and brokers should look at in any company contract is the ownership of business provision. Some agreements condition the ownership of expirations on the payment of all money owed to the company at the time of termination of the contract. An example of this type of language is as follows:
“The parties agree that in the event of termination of this Agreement, the Agency having accounted for and paid to the Company all sums that are owed to the Company, the Agency’s records and use and control of expirations shall remain the property of the Agency. If, however, any sum remains unpaid, the use and control of expirations shall become the Company’s property.”
This type of language is problematic because it does not state that the agent owns the expirations. Instead, it conditions ownership on the payment of all sums the company states are due and owed. We have seen situations arise where companies claim ownership of an agent or broker’s expirations because sums were not paid and both sides differed over the sums actually in dispute. An example of a better ownership of expirations provision is as follows:
“Your records, expirations and renewals of policies are your property. We will not take any action that could be construed as moving a policy from one of our producers to another without direction from our policyholder, unless required to do so by law. We will not use our records to solicit policyholders for the sale of insurance or other products without obtaining your written consent.”
Another contract provision agents and brokers should examine in any company agreement is the indemnification provision. This provision is one of the most important contract terms since it is often the basis for a company claim or lawsuit against an agent or broker. The key to the provision is that it should be fairly written and mutual in nature. An example of a problematic indemnification provision from a company contract is as follows:
“The Agent agrees to defend and indemnify the Company from and against any and all liability, loss, cost, damages and attorneys’ fees and expenses of whatever kind or nature which the Company may sustain arising out of or related to any wrongful act or omission of the Agent of its employees, officers, agents, sub agents or representatives.”
This type of language is one-sided and not mutual in nature. In addition, it is written in an overly broad fashion. An example of a better indemnification provision is as follows:
“The Agent and the Company each agree to defend and indemnify the other from any liability, including reasonable attorneys’ fees and expenses, which they may sustain as a result of the wrongful act or omission of the other party.”
A third type of contract provision agents and brokers should look at involves the right of the company to examine the books and records of the business. With this provision, the agency or brokerage should ensure the provision is fairly written and specific to the insurance written between the parties. An example of this type of provision that is problematic is as follows:
“The Agent hereby agrees that at all times and as often as the Company deems to be necessary the Company has the right to review the Agency’s books and records and to obtain copies of any documents that the Company desires.”
This type of language does not provide for reasonable notice of the company’s desire to inspect the agency’s books and records, and it does not limit the inspection to the insurance the agent places with the company. Further, it also does not state who will pay for the costs involved with making copies of any documents. An example of a provision that relates to the examination of an agency’s books and records that is better written is as follows:.
“The Company and the Agency agree that upon reasonable notice, and during normal business hours, the Company may examine the books and records of the Agency that relate to insurance that is placed pursuant to this Agreement. If any documents need to be reproduced, the Company shall bear the cost of that reproduction.”
A fourth contract provision an agency or brokerage should be aware of concerns the maintenance of E&O insurance. These provisions will typically state that the insurance be provided by an insurer with a particular rating, have certain limits of coverage and also does not exceed a particular deductible. An example of a typical maintenance of insurance provision is as follows:
“The Agency shall at all times that this agreement is in effect maintain an errors and omissions insurance policy with an insurance carrier with an A.M. Best rating of at least B+ with limits of at least $2,000,000 and a deductible not to exceed $10,000.”
We have seen agencies and brokerages get into trouble with this type of provision because they might have had insurance in effect that complied with the provision at the time they executed the contract, but later they either changed the insurer to a company with a lower rating, lowered their limits or increased their deductible. Agencies and brokerages should be sure to comply with the insurance requirement at both the time a contract is executed and thereafter. Doing so will ensure their compliance remains constant even if changes are made to their E&O coverage.
Agencies and brokerages should always look closely at the entire contract before executing it. In addition to the various items we discussed above, additional contract provisions should be examined that relate to the following issues:
· payment of premiums |
· claims reporting |
· binding authority |
· choice of law |
· issuance of certificates of insurance |
· arbitration in lieu of litigation |
During our upcoming 2016 annual E&O seminar series, we will cover company contracts in detail and review the provisions mentioned in this issue of The E&O Report as well as other contract provisions. The prudent insurance agency or brokerage examining a company contract should try to negotiate any problematic terms with the company that prepared the agreement prior to its execution. In our experience, companies will often modify contracts if they understand the specific concerns of an agent or broker. If, however, a company refuses to modify a contract, at least the agency or brokerage will then be in a position to make an informed decision as to whether it then desires to execute that agreement with the knowledge of the potential problems contained in the contract.
Submitted by
James C. Keidel, Esq..
Keidel, Weldon & Cunningham, LLP