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How to Strengthen Your Agreements with Retail Producers

Do you have written agreements with your retail producers? Do your retail agreements address the key areas of potential exposure? It is highly recommended that Wholesale Insurance Brokers enter into formal written agreements with retail producers that identify key points in the relationship, including respective duties and obligations. It is alarmingly common for a Wholesaler to not have a formal written agreement in place with retail producers, which exposes the wholesaler to a range of liability. This article will identify the critical provisions that should be considered in an agreement with a retail producer.

1. Binding Authority
The agreement should expressly provide that the retail producer has no authority to bind, make, alter, vary, issue or discharge any insurance policy, extend the time for payment of premiums, waive or extend any policy obligation or condition, or incur any liability on behalf of Wholesaler or the insurers. In limited situations, binding authority may be allowed if permitted by law and authorized by the insurer. In such situations, the scope of the binding authority granted to the retail producer should be expressly detailed in the agreement, along with provisions allowing for termination of binding authority separate from the overall agreement

2. Cancellation Of Policies
Policies sold through the wholesale market may contain cancellation and earned premium provisions that differ from standard cancellation and pro-rata return premium provisions. For instance, a policy may provide that there is a “minimum earned” premium at the time the policy is written or is “fully earned” in the event of a total loss. These special cancellation provisions should be highlighted and explained in the quote provided to the retail producer. Further, in order to address these issues, among others, the agreement should provide that:

• Earned and unearned premium on a policy cancelled after its effective date will be computed in accordance with the policy’s cancellation provisions.

• Unearned commissions on cancelled policies (or other chargebacks) will be paid at a rate identical to the original commission scale and as paid.

• 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, and only with Wholesaler’s prior written consent.

• All requests for cancellation shall be submitted in writing to the Wholesaler.

Finally, where special cancellation provisions exist, it is a best practice for a Wholesaler to remind the retail producer of the need to explain such provisions to the insured.

3. Commissions
A schedule of commissions should be attached to the agreement and set forth when commissions are earned and the commission rates paid. If the commission rates are unknown, the schedule of commission should state that commissions through the wholesale market are governed by the class of risk and the insurer. Additionally, there should be a provision that allows the wholesaler to unilaterally modify the commission upon 30 day notice. Further, the agreement should provide that commissions will only be paid if: (i) the retail agent is properly licensed, (ii) has paid all amounts due and owing Wholesaler (and grants Wholesaler the right to offset commissions against such past due amounts), and (iii) is not in material breach of the agreement.

4. Ownership of Expirations
The agreement should contain a provision that the use and control of expirations and related records shall remain with the retail producer, unless the retail producer has not properly accounted for and paid all premiums, return commissions, or other monies due to Wholesaler, in such event the expirations shall be vested in the Wholesaler. The agreement should also include a provision indicating that if the agreement is terminated and the retailer producer has not properly accounted for and paid all premiums and return commissions for which the retailer producer is liable, the Wholesaler can retain a vested right, title and interest in the expirations and records of the retailer producer as of the date of termination. The Wholesaler should be allowed to retain the right to collect any indebtedness due from the retailer producer through the use and control of such expirations.

5. Indemnification
The agreement should include a mutual indemnification provision to protect both Wholesaler and retailer producer from third party claims that result from the other party’s negligent acts, errors, or omissions, or breach of its duties under the agreement.

6. Payment of Premiums
It is important that the retail producer understand and acknowledge that Wholesaler’s business depends on maintaining a good credit relationship with its markets and insurers and that the Wholesaler will suffer damages for the failure to timely pay premiums, fees and costs. Accordingly, the agreement should expressly set forth the manner in which premiums shall be paid and the due date. Further, the agreement should express whether the premium remittance is less commission or plus any applicable taxes, broker fees or policy fees. All fees should be clearly itemized and outlined in the agreement or, where appropriate, in a separate quotation, binder or policy. The agreement should further provide that the retail producer is solely responsible for the collection and payment of all insurance costs including, but not limited to, any premiums and minimum earned insurance costs, counter-signature fees and resulting charges required by any state, or any fees and taxes.

Since in most instances the Wholesaler will be contractually obligated to pay premium, fees and costs to the insurer, the retail producer should likewise expressly guarantee payment of all insurance premium, fees and costs for policies placed through Wholesaler, including earned premiums and fees incurred by audits or interim reports. Additionally, the retail producer should be liable for any credit extended to the insured. Finally, the retail producer should be reminded that it holds premiums in a fiduciary capacity.

7. Relationship of Parties
The agreement should reflect that the relationship of the parties should be that of independent contractors and that nothing in the agreement creates the relationship of principal and agent either between the parties or between Wholesaler and the retail producer’s customers. The agreement should further reflect that it does not create an agency relationship between the retail producer and any insurer.

8. Errors & Omission Insurance
The agreement should require retail producer to maintain errors and omission insurance with minimum limits of liability coverage. The retailer should be required to provide a certificate of insurance immediately upon Wholesaler’s request.

9. Termination
The agreement should specify the conditions for termination of the agreement. Typically, an agreement should provide that the Wholesaler can immediately terminate the agreement upon certain conduct of the retailer producer, such as insolvency, threat of insolvency, petition for bankruptcy, fraud, abandonment, willful, gross or negligent misconduct, termination or suspension of insurance license, and change of control. It is also important to provide that the agreement can be terminated by either party, for any reason, upon prior written notice (e.g. 60 days) to the other party, subject to state law notice requirements.

The forgoing article only addresses some suggested key provisions in an agreement between the Wholesaler and retail producer. Other essential provisions may exist that should be considered and included in the agreement. Moreover, the necessary provisions may vary depending on the Wholesaler’s particular circumstances and the retail producers with which it works. It is recommended that Wholesalers consult with legal counsel when drafting such agreements.

This article is not offered as, and should not be relied on as, legal advice. You should consult an attorney for advice in specific situations.