Broker Service Agreements
It has been commonplace for companies with multi-national or large, complicated insurance programs to insist on entering into Broker Service Agreements (BSAs) with their broker(s) because of their unique or sophisticated servicing requirements and, in most such cases, the brokers are compensated on a fee basis.
For agents and brokers (whom we will refer to collectively as brokers) compensated on a commission basis, it has long been presumed that they would provide the services generally expected of a broker. In fact, there is one school of thought that holds policyholders may be better off not having a formal service agreement with their broker because if the BSA fails to clearly spell out all required services, the broker may not be held responsible for a non-specified service for which the broker might otherwise be held responsible in the absence of such an agreement.
As a backdrop to these differing perspectives on disclosure and transparency, clients are facing a downward trend in the services that are actually being provided by many brokers. Consequently, more clients are looking to BSAs in an effort to make their brokers more accountable.
What should be included in a BSA? Certain general provisions should be included, such as an indemnification provision in favor of the client and specific insurance requirements to be imposed on the broker. BSAs should contain confidentiality agreements to prevent confidential client information from being divulged to others. They should also have specific termination provisions, detailing the required advance notice of termination by the broker or the client, and spelling out any services that are required after termination and for how long. This would include the continued provision of loss data and assistance with the filing of claims involving policies procured by the broker for a reasonable period of time after termination.
Of course, the BSA will also need to spell out the extent and basis of all compensation to be received by the broker. Even when fee-based compensation is involved, this provision should include a requirement to disclose any insurance placements that involve commissions (including the amount and basis of such commissions). In addition, where the fee is to be the sole means of compensation, any commissions received should be credited against the fee (where permitted by law). The BSA should also address any contingencies, overrides, or bonus commissions from insurers. If such funds are a result of the client’s account, they should be disclosed and (where permitted) credited against the fee. If such funds result from the overall performance of the broker and are not tied to the specific client’s account, the broker need not be obligated to refund them, but the broker should still disclose them if requested by the client.
The BSA will have little value unless it contains a detailed list of responsibilities and expectations. A list of duties can include from 25 to 50 or more tasks and should include, among many others, insurance policy reviews, claim audits, renewal strategy meetings, loss data maintenance, underwriting data gathering, certificate issuance procedures and standards, and claim assistance. These tasks should be subject to specific timelines and/or specified frequencies of occurrence.
-- Charles H. Cox
Vol. XIX, No. 6
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In this issue, Terry Coughlin continues his series on unforeseen losses associated with modern technology and Charlie Cox discusses broker service agreements. Such agreements are usually seen as broker compensation substitutes for insurance commissions but, as he points out, they may not deal effectively with contingent commissions. These are the commissions that have been the subject of much legal distress for brokers since the New York Attorney General took Marsh and others to task two years ago for misusing them. Some of the major brokers have eschewed contingent commissions completely, while others have opted for disclosure, however vague that might be. The gauntlet was thrown down, though, when the CEOs of a couple of the major brokers called upon all brokers and agents to renounce the contingents. It may be easier for the Marshes, the Aons and the Willises of the world to do without this source of income, because they can compensate with other sources. The so-called "Main Street" brokers, on the other hand, howled in protest at such a notion. Agent and broker trade associations universally condemned such an idea as punishment of the "innocent" along with the "guilty." And now, no less than the National Underwriter has jumped on their bandwagon. But as they all rant and rail against the idea, one wonders if they are protesting a bit too much. --- Ed.
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