It has been commonplace for companies with large, complicated insurance programs to insist on entering into broker service agreements with their broker or brokers because of their unique or sophisticated servicing requirements and, in most such cases, the brokers have been compensated on a fee basis.
For agents and 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 nonspecified service for which the broker might otherwise be held responsible in the absence of such an agreement.
Times are rapidly changing in the insurance industry, and the scope of broker services and the method of their compensation has become the focus of much attention. Today, we see national brokers forced into a world of transparency and full disclosure that has, in some instances, become so cumbersome that it can be a hindrance to the insurance brokerage transaction or service itself. On the other end of the scale, however, are smaller brokers and/or intermediary brokers that do not believe disclosure of their compensation is necessary and fight to avoid doing so.
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? A BSA should include general provisions 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. BSAs 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 as 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 without specific ties to the 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 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 COX is a principal of the Orchard Park, N.Y., consulting firm of Aldrich & Cox.
February 1, 2007
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