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WHAT You Own

As we discussed in the first installment (PIA Connection July/August 2003), the reason independent insurance agencies own their book of business is because the...
December 1, 2003

Part Two of a Three Part Series on Independent Agency Ownership

By Patricia A. Borowski
Senior Vice President
PIA National

As we discussed in the first installment (PIA Connection July/August 2003), the reason independent insurance agencies own their book of business is because the courts recognized (not created) their ownership based upon the common principals of property ownership.  However, in order for independent agents to maintain that ownership right they must understand what it is they own. This is particularly important when talking about an intangible property right because you can't physically see or touch the property owned so it can be harder for others (including its owner) to define.

While an independent agency and its carrier most often agree that the agency owns "the books of business" This agreement can be misleading. This is because when you ask the agency and the carrier what is contained within "the book of business," you are likely to hear two very different understandings.

From an historical perspective, the courts have recognized that independent agencies own the client relationship, the book of business and all records. This historical recognition has commonly included more than just the data and records that are collected and created by the agency.

The vast majority of PIA agencies operate in an incorporated format of some kind. As such, the various "books of business" developed are legally deemed a single asset of the agency; meaning that the parts of the book pertaining to different carriers are not treated as separate and distinct pieces of property. This small fact has material implications regarding the manner in which carriers may and may not attach  "these books" as collaeral and limits a carrier's ability to declare ownership of any business produced by the agency with the carrier's products.

For example, if a new carrier wishes to affect an appointment with an already existing independent agency and that carrier attempts in the agreement to declare the business produced by the agency owned by the carrier, a conflict occurs. The carrier's attempt to claim ownership of the book of business presents a major legal conflict that in the end will not bear in the favor of the carrier.

Contract Provisions

This is because simply placing a current client's coverage with a carrier's product does not create "ownership" on the part of the carrier under common law as it relates to independent agencies, despite what a carrier may think its contract provision does. Clients, current and new, are the agency's corporate asset.  And, as explained earlier, the book of business cannot be segregated into different pieces of property for each carrier the agent represents. Hence, if the carrier claims ownership of the book, that carrier become a joint owner of the agency since it claims ownership to the most significant asset comprising the agency business. Yet, legally there are many other consequences that are triggered when an outside entity claims ownership to the largest asset comprising the agency business.  Rather, the carrier's claim of ownership of the book represents a fundamental corporate change. In the case of a fundamental corporate change, there are three layers of legal protection or formalities that must be followed to properly affect such a fundamental change. These three formalities are as follows: (1) there must be approval of the sale of the book of business by the Board of Directors of the agency's business, (2) there must shareholder approval of the fundamental change, and, (3) in many instances, dissenters' appraisal rights must be given to shareholders.  Also, prior to affecting this fundamental change, the agency must notify all other carriers the agency represents of fundamental change in control of the agency's asset. At which point, each carrier must decide if they will continue their appointments. Once an owner, the carrier is liable for the legal compliance, debts and liabilities of the agency, and the carrier must report this ownership on their various annual statement filings, SEC reports and tax forms.

The next area of common confusion is the issue of records.  There are records and data that the agency owns outright and others that the agency owns the unlimited use and access. For instance, independent agencies own the client data, but must have full access, control and use of the carrier's insurance forms (an owned intellectual asset of the carrier's) for the policies that the agency sold for the insurer.  PIA agencies need these records, to include policy and coverage forms, rating and dec sheets and the like, within their ownership rights for E&O, legal compliance, corporate/tax records, and agency-carrier agreement performance to just name a few reasons.

Since the resurgence of privacy legislation, PIA sees increased push-back from carriers regarding the parameters of an agent's ownership of expirations. This is because carriers are both concerned and confused by the potential affects their acknowledgment of an agent's ownership of expirations has upon privacy laws;  since much of the expiration information is also the same information deemed "protected" by federal and state statute. Yet, the fact of the matter is a carrier's acknowledgment of agent ownership of expirations does not affect their privacy compliance.  Agents, like carriers, are also obligated to comply with the same privacy laws. Significantly, after the agency agreement is terminated, agencies are still legally obligated directly under privacy laws.

Commissions and Incentives

The final area of ownership this article will touch upon is earnings from the carrier to the agent as comprised by commissions and incentives. In contract law, these earnings are commonly referred to as "consideration."  While this might seem obvious, PIA has witnessed a level of deterioration in  the carriers' clear understanding of their duty to provide the agent with consideration (i.e. commissions and incentives).

Commissions, unless otherwise stated in the agreement, are earned as premiums are billed.  All earned commissions are due the agency, even in insolvency.  Yet, PIA has seen some life and health agreements which attempt to negate the carrier's duty to pay agent commissions if the premium balance is $1000 or less.  Despite whether a carrier believes to "mail checks" for commission amounts on premiums under $1000 is too expensive is irrelevant from the standpoint of legal consideration earned and owed. Simply, the commissions owed the agency must be paid.  Carriers would tolerate no less from the agency as respects premiums-due.

Commissions and profit sharing incentives are the major sources of income for the agency.  PIA's position has long been that if a carrier believes it needs to leave an agency or marketplace during the calendar year, it needs to make some accommodation for the potential earnings, in this area, an agency would have received had the carrier decided to stay.  While this is generally not a problem when a carrier is affecting an orderly and calm exit from a marketplace, PIA has seen the contrary when market pressures build.

Finally, is the value of the business developed.  Agency agreements may continue to include language about securing the book for payment of a debt to the carrier, so long as the contract also provides an option for otherwise agreed to collectivization of the debt.

While "taking a book" is traditional and a last resort by most independent agency carriers, PIA cautions carriers and agencies in their execution of this debt payment option.  Carriers must take care that their actions do not constitute an illegal taking of agency assets over a formally perfected and pre-existing debt. If an asset is improperly taken by a creditor without priority, the law may hold that creditor liable for any adverse consequences experienced by creditors with priority like banks, other agency partners/stock owners or other insurers.

However, if the book is taken over by the carrier, the carrier must immediately value the book. That value can be no less than what the book would be valued at using customary independent agency accounting valuation methods. A newer issue developing in the book value area is when a carrier sells their business to another carrier, forgetting that the "book" is really not owned by the insurer to begin with and therefore can't be sold as such.  For instance, the carrier buying is not purchasing the "right to renew."  Rather they are purchasing the obligation to decide about the renewals and access to the agency plant to foster continued and expanded service and further sales of the insurers products. 
Confusion on these points has become problematical when the purchasing carrier is not an independent agency insurer.  Despite what an acquiring carrier may believe and wish to financially and legally assert, the ownership and control of the independent agencies existed before the relationship with the carrier and the transaction. Agent ownership rights are not solely dependent upon the previous carrier's agreement in order to exist.

This discussion has merely presented the highlights of the current issues (or confusions) surrounding what independent agencies own in their "book of business." However, many of the issues discussed could be avoided or resolved if carriers stepped back and looked at independent agencies in the same way they view their own corporate asset structure.

There are fundamentally few differences between the corporate structures of the two.

PIA agency owners as well must exercise more deliberate care in understanding and asserting their ownership rights. This means agents need to comprehend and articulate why they own their books and articulate what is the book of business.

Next month: What actions are expected because you own

Read the other articles in this series:
Part 1: "Why Independent Agency Owners OWN"
Part 3: Why Agents Own: How to Maintain Control of Your Book of Business

This article originally appeared in the November/December 2003 PIA Connection.