Producer and Carrier Contracts: An Agent’s Lifeblood, But Will Your Contracts Save You?

The world is a different place today. In days gone by, agents focused on protecting their expiration rights from carriers and producers stealing their books of business. From many angles, those were the halcyon days.

Carrier Contracts

For a very long time now the value of expirations has been diluted. Two other rights have become important and arguably have equal or excess value to expirations today to the more strategic brokers, carriers and tech people.

The first goes back over 15 years ago, when a particular carrier sent letters to certain agents’ clients advising the client that their agent’s appointment had been canceled. This was a mass event and not specific to individual agency issues or trust money issues or anything like that. The carrier simply seemed to want to eliminate a large proportion of its agents. Also, the carrier went beyond notifying clients that an agency’s appointment had been canceled and was quite proactive by encouraging those clients to move their business to specific other agents. The letters went out before the agents could contact their own clients.

If my memory is correct, the agents and agents associations protested, and the carrier noted that the contract “only” gave expiration rights to the agents and not exclusive communication rights. The Texas association, I believe, helped to get that law changed in the next legislative session.

It is unfortunate many other states have not done the same.

If carriers can communicate directly with clients regardless of the subject matter (obviously carriers must have the right to communicate relative to policy notices, renewals and so forth), they obtain some power and value over expirations. What do your contracts say?

Fast forward to a few years ago when certain smart individuals realized that the information in the renewals was possibly as important or more important than the expirations themselves. Most agents with whom I initially broached the subject could not separate in their minds how data and expirations are different. It is the data that is severable from the insurance renewal and/or unrelated or of no use to the user of the data.

Who actually owns the data in your file? I am not addressing ownership of the expiration, which is a de facto future cash flow rather than the data points. I saw an interesting article that ownership of the data is not only between carriers and distributors, but also potentially the owners of agency management systems. It is an interesting three-way split of the blanket!

Do you have the right contracts with your carriers and vendors? If you sell your agency, are you selling too cheap, considering the buyer can possibly split the value of the renewal rights cash flow and data points?

It reminds me of a billionaire who sold his railroad but kept the right of way for communication lines.

The right-of-way may have been as valuable as the railway. Where is your protection?

I have read a few hundred carrier contracts and it pays to read those contracts prior to signing.

Producer Contracts

For a long time, the debate has been about the ability of a producer to leave an agency and take the former employer’s clients. Initially, non-competes were used but so many courts have ruled that strict non-competes were not fair, so that a more balanced solution was sought. That solution is usually some form of non-piracy agreement, although trade secrets agreements are probably a better solution.

That said, all those agreements were written from the perspective that the agency was more powerful than the producer. I remember a consultant telling me when he was teaching me about producer contracts that a certain design was ideal because the terms were identical and therefore, fair.

However, the terms were not level because the producer would never be able to afford to get out of the contract.

The tables have turned somewhat over the past 24 months. Producers can now afford to get out of contracts and, in many cases, they have more money than the agency owners. The difference is that a handful of entities have decided the best way to grow is to take producers and pay for the ensuing litigation rather than just buy the books or regulate the producer while they sit out their contract. Some of these players have private equity money.

From this perspective, let’s say you have a great producer contract written by the best attorney. So what? By the time you litigate the situation, even if you win, you will probably lose. You just lose less.

I suggest your attorneys rewrite your contracts with this new development in mind. I also suggest agency managers think through the following question: If the contract can be broken, albeit broken unfairly, how do I keep my best producers (these opponents don’t want your worst producers) in my agency?

Different options might include increasing compensation. However, straight compensation increases often don’t hold water relative to the promises that are being made of ownership equity appreciation and upfront bonuses.

What else might work?

The number one solution is to institutionalize client relationships with others in the agency who have stronger ties to the agency than the producer, and therefore, will not leave. This is a strong risk mitigation strategy for many reasons, but particularly for this risk.

Other factors involve addressing what motivates good producers. Again, ignore marginal and poor producers. Good producers are often motivated by resources that enable them to write more business, more quickly. These resources may include a great staff, education, certain carrier representation, specific value-added services, and specific marketing (also a way to institutionalize client relationships).

Historically, some kind of deferred compensation plan became the equivalent of velvet handcuffs. Beyond the complexity and expense of creating 409A Treasury regulation-compliant plans, I still like this concept. If you have some form of vesting or deferred compensation or phantom stock or other versions and haven’t had the plan reviewed by a specialist tax attorney, do so because the penalties for non-compliance are huge.

Regular accountants are rarely sufficiently knowledgeable on this subject. More thought needs to be put into these plans because I am seeing some producers, for the first time, willing to walk away.

As the world has become more complex, it pays to invest in experts who know what they are doing. The worst possible solution is to use boilerplate contracts that you find online, from an agent forum or from your buddy. This is no place to cut corners.

With every difficulty comes opportunity. The opportunity is for those that will rise to these new challenges.