Words Mean a Lot in Vows Between Program Administrators and Carriers

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,” Greg Thompson, president of THOMCO brokerage in Kennesaw, Ga., told attendees at the fifth annual Target Markets Program Administrators Summit recently in Tempe, Ariz. Explaining the importance of language in carrier contracts, he said a contract between carrier and agent keeps both parties honest in case the relationship falls apart, much like a prenuptial agreement.

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.

Thompson had a contract with now-defunct insurer Frontier that stipulated the contract could not be cancelled without a year’s notice. However, Thompson 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.

“You should always think of every possible contingency when working on a contract,” Thompson said. For their part, carriers will try to include provisions that work in their favor, such as “suspension of authority” and “termination for cause.” Both phrases are vague enough to be open to interpretation, Thompson noted.

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’s unlikely the agency will be reinstated.

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.

To avoid being blindsided, agencies should include their own protective language when negotiating a contract, according to Thompson. They 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, he noted.)

Words are important when used in the contract. Terms like “material,” “significant” and “reasonable” can all 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 said. 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,” Thompson 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, and carrier ownership of claims data, in which the administrator must get permission from the insurer to use the information. Both of these carrier demands can be onerous to agencies, he suggested.