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"Why Independent Agency Owners OWN"

Over the past several years, there has been increasing confusion about why independent agency owners own their agency assets. That's why, beginning in April...
August 10, 2003

Part One of a Three Part Series on Independent Agency Ownership

By Patricia A. Borowski, CPIW, CAE
Senior Vice President
PIA National

Over the past several years, there has been increasing confusion about why independent agency owners own their agency assets. That's why, beginning in April 2003, PIA National began a public education effort that speaks to critical aspects affecting the ownership, content and control of the independent agency's core asset - "the book of business" - as well as the other assets of their business.

While advocating on behalf of PIA members in this area is not new, over the last three years there has been more confusion about the issue of asset ownership and control. This is not a problem peculiar to carriers. When asked, why do you own your book? PIA finds that agency owners are often not sure.

We have found that generally there are three reasons causing this broad lack of knowledge about the issue of agency ownership of assets:

First, the history of independent agency ownership is not formally taught by any insurance organization.  New people coming into the business on the whole have no way to appreciate the critical meaning of, and the rights and obligations of, this ownership.

Second, as PIA predicted in 1994, the growing marketing system of choice for carriers today is the American Agency System. While this is good news for PIA agencies, it means they are partnering with an increasing number of carriers that heretofore have been steeped entirely in either a direct-response or captive agent system. These carriers recognize the business benefit they derive from doing business with independent agencies, but do not have the knowledge or experience to grasp the legal import of these new relationships.

Third, one purpose of the Gramm-Leach-Bliley Act (GLBA) was to create a federal legal framework by which participants from the insurance, banking or securities sectors could enter as direct competitors into each other's segments. This increases the number of parties-at-interest that are not educated to the ownership rights of independent agencies, but are parties that have actively exercised their own view and control of their ownership rights.

While some of these new people may have a vague recognition that something of this nature exists, their understanding is - at best - not well enough formed so that the individual can act or not act accordingly. At worst, other parties-at-interest see independent agency ownership rights as interfering with or immaterial to their ownership rights, which they view as preemptive of all others.

What Agency Owners Should Do

PIA has and will always help PIA members influence carriers to issue quality, legally fair agency agreements.  Keeping carriers on that path must be a collaborative effort among PIA National, PIA affiliates and PIA members.

However, these collective efforts should not be seen by members as a substitute for agency principals taking the time to thoroughly review their agency agreements to determine if there are language or requirements throughout the agreement that could interfere with their agency ownership and control of their book.  If found, agencies should follow through and put their questions and concerns in writing to the issuer of the agreement, requesting clarification or amendment, based upon their pre-existing rights. 

Irrespective of whether an agency owner believes that they alone cannot affect a change in a carrier's agreement on these matters, your ownership and control of that book should drive you to individually and independently speak in writing to these other parties.  This is in addition to taking advantage of PIA's agreement services.

Another area of confusion for members is that agency owners do not sufficiently understand or appreciate the difference between non-compete verses non-piracy clauses, and how these need to used to protect their agency ownership and control of their assets.  If correctly drafted, the anti-piracy provision will be the more desirable, durable and protective of the two.

Precedent Already Established

I'm always surprised and concerned when I hear anyone respond to my, why do you own, question with, "because the agreement says so."  Well, that actually isn't legally accurate at all.  Quite the opposite is true. 

Put simply, there are three elements that comprise the why and what of PIA agency ownership of "the book." All three are parts of a single whole - the foundation of why you own, what you own and your expected actions over that asset.  These are:

  • The initiating legal reasons why the courts determined agencies own, and the continuing subsequent, broader, additional reasons why the courts continue to determine that agencies own.
  • What that ownership and control includes in terms of how the courts have consistently articulated the content of "the book and records."
  • The key role that "control" plays in this, and how the courts have responded to the evolution of what that means in a changing market.

Lessons From Legal History

It is important for everyone to appreciate that well over 100 years ago, the courts did not grant ownership to independent insurance agencies.  Rather, the courts recognized their already established ownership.  The attribution in the founding cases regarding written expression in the agreement was actually "unless the agreement says otherwise" not "if the agreement says so."

Through the years, the courts have periodically been asked to revisit this core issue in many different ways.  In the vast majority of cases, the answer across all United States insurance jurisdictions over all these years has been extraordinary consistent: independent agencies own and control their book of business, and that it is a recognized and protected property asset. 

From PIA's legal perspective the courts are expanding captive-agents rights, limiting their carriers' rights, and using the consistent legal view of the courts regarding independent agencies as the measure of when agents develop additional ownership and control rights. But the courts have not been, and are not, limiting independent agencies' rights.

With Rights Come Responsibilities

Balancing this ownership and control is the fact that the courts have also recognized that independent agencies have an expected, increased legal obligation and duty to the client compared to captive agents, and in some respects carriers.  This is why there is an exceptionally large, detailed, and additional body of agent and broker errors and omissions law that specifically speaks to and is more demanding of independent insurance agents and brokers. 

Fundamentally, the courts expect insurers to be honest and accurate in disclosing their policy terms, conditions and costs, as well as faithfully executing their duties under the policy.  In contrast and in addition to the insurer obligations, independent insurance agencies are also required to answer clients' questions about the broader issue of the consumer's insurance needs - not just the specific policy being presented.  The courts further expect the independent producer to know the critical factors between and among the various policies offered from their multi-markets as respects each client's and carriers'/markets' different and varying insurance needs or requirements.  "I didn't know," is not a defense for independent agents and brokers.

These are critical legal differences that limit a carrier's generalized obligation to the consumer and broaden that of the independent insurance agent or broker.  This is why PIA members have and will always need to obtain and retain their own E&O insurance policy, and why an independent insurance agency carrier would not/cannot extend E&O coverage to their independent agencies. 

PIA's Agency Ownership Education Effort

Over the course of the ensuing months, PIA National will publish a series of discussion papers helping everyone in this business to get up to speed on the benefits and obligations of PIA member agencies owning and controlling their key business asset, the book.

Our goal is to have a consistent, uniform PIA advocacy and legal opinion on this most fundamental, important character that makes independent agencies.  In doing so we hope to improve our individual and collective actions and results as we educate, protect, defend and retain PIA agencies' ownership in whole.

Further, by providing this education to regulators, legislators, carriers, and other parties PIA hopes to influence better statutes, regulations and law expressed in reasonable fashion to both accomplish its public policy goals and respect our members' ownership rights, a significant asset from which states and the federal government derive tax income.

Last, PIA will assist PIA agencies in evolving their practices to continue demonstrating their ownership and control over this key pension asset -- one that is legally traded, taxed and attached, as other corporate assets are.

Read the other articles in this series:
Part 2: WHAT You Own
Part 3: Why Agents Own: How to Maintain Control of Your Book of Business

Patricia A. Borowski may be reached at patbo@pianet.org or (703) 518-1360.

This article originally appeared in the July/August 2003 PIA Connection.