Words Mean a Lot When Administrators and Carriers Write Marriage Vows

December 4, 2005

Program managers urged to protect themselves when negotiating carrier contracts.

Carrier contracts are like a marriage, according to Greg Thompson, president of THOMCO brokerage in Kennesaw, Ga. “As in a marriage, if you’re in a good relationship, you never have to consider the contract. But if things go badly, words mean everything,” he said.

Thompson attaches importance to program managers’ understanding the language in their carrier contracts. Like a prenuptial agreement, he said, a contract between carrier and agent keeps both parties honest in case the relationship falls apart.

For instance, if a company’s reinsurance is not renewed on a specific program, the agent’s contract could be terminated. Or if a carrier changes distribution strategies and begins dealing direct, contracts can be cancelled immediately, as in the case of Reliance, he indicated.

Thompson had a contract with now-defunct insurer Frontier that stipulated the contract could not be cancelled without a year’s notice. However, he negotiated a provision that if the company’s Best’s rating dropped below A, he could unilaterally terminate the contract. Because he had 90 percent of his agency’s business with Frontier at the time, the provision saved his business.

Every possible contingency

“You should always think of every possible contingency when working on a contract,” Thompson told fellow target marketers at the fifth annual Target Markets Pro-gram Administrators Summit recently held in Tempe, Ariz., where more than 300 Target Markets Program Ad-ministrators Association members and other attendees gathered.

For their part, carriers will try to include provisions that work in their favor, such as “suspension of authority” and “termination for cause,” Thompson said. Both phrases are vague enough to be open to interpretation. Suspension of authority, for example, is a “below the radar” way of putting the agency out of business because once a company suspends an agency’s authority, it is unlikely that the agency will be reinstated, he said. Although the term does not sound as bad as termination, it still gives the carrier control.

With “termination for cause,” most carriers will provide little or no advance warning for any violation of carrier guidelines, such as loss of reinsurance, cancellation, suspension or declination of licenses in any state, even when it arises from a simple oversight, he added.

To avoid being blindsided, agencies should include their own protective language when negotiating a contract, according to Thompson. Agencies should push for wording that is as specific as possible, such as stipulating a specific number of days before the carrier can suspend underwriting authority, change underwriting guidelines, or change premium rates or coverage. The preferred standard for the agency is 180 days, Thompson noted.

Key words

Additionally, agencies should pay attention to contract wording, Thompson said. Words such as “material,” “significant” and “reasonable” can protect the agency by clarifying terms that might be more vague.

“Exclusivity” often seems desirable to both the agency and the insurer, but can actually raise real problems, Thompson added. On either side, exclusivity is useless unless the contract includes plenty of advance notice to cancel, typically between six months and a year.

“Exclusives can be mutually problematic,” he said. “But without integrity on each side, absence of exclusivity is a problem. No contract can insulate a carrier or a program administrator from a bad partner.”

Some recent trends in program administrator contracts include the increased use of trust funds, in which the insurer requires the agency to segregate funds by carrier, as well as carrier ownership of claims data, in which the administrator must get permission from the insurer to use the information. Both of those carrier demands can be onerous to agencies, Thompson suggested.

However, he warned against handing over contract negotiation to an attorney. Because attorneys are paid by the hour, they can drag out the process and bog down negotiations. It is better for the program administrator to negotiate the carrier contract, and then get attorney feedback on the legal issues involved, Thompson recommended.

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