Guide to Life Insurance Contracts

Background

Many agents are finding that life insurance has become a necessary addition to their agency operations. Some insurance companies, which have life insurance affiliates, actively solicit their property and casualty agents to write life insurance. In some instances, companies make it a requirement for certain contracts, in order to receive bonuses. In other instances, the agent finds that life insurance can be a lucrative additional source of income.

The IIAA Agency Contracts Committee has examined many life insurance contracts presented by insurance companies to property-casualty agents. We have observed a great difference in these contracts, and this article contains our recommendations for agents regarding their life insurance contracts and contracts with sub-producers. The Agency Contracts Committee extends its profound thanks to Jerome M. Greenberg, CLU, a member of the committee, for his extensive research which forms the nucleus of this report.

Agents have traditionally been very lax in examining the contracts which their companies present to them. This is due to the uneven bargaining power with the companies. This is even more prevalent in the life insurance part of our profession. Many agents, who start out solely as life producers, are trained by the large life companies. When they start out, these agents normally do not have the knowledge to understand their contracts fully and are usually told that this is the company's contract and that it cannot be changed. Unfortunately, this attitude pervades many of the other life insurance companies because much of their management comes from the larger life companies. It is the opinion of the Agency Contracts Committee that if enough Independent Agents are aware of the shortcomings of their life insurance company contracts, a more even bargaining position can be achieved.

Indemnification

The IIAA fought long and hard to get the property and casualty companies to include an indemnification agreement in their contracts to protect the agent in the event of company errors. Traditionally, life insurance companies have felt that an indemnification agreement was not necessary and most life insurance contracts we examined did not contain an indemnification clause.

Company representatives have usually told life agents that an indemnification clause is not needed because the company will stand behind its policy and make all necessary payments. Of course, if a problem occurs, that company representative may be long gone, and his or her statement is worth about as much as "the check is in the mail." The agent is left with his own E&O carrier defending and being forced to pay his own deductible.

Since the errors and omissions problem is constantly with us, the agent should make sure that each life contract which he signs contains an indemnification clause. It is interesting to note that many life companies are recommending to their full-time agents that the agent get E&O coverage.

The following clause has been recommended for property and casualty agency contracts, and the Agency Contracts Committee recommends it for life agency contracts:

"The company shall indemnify and hold the agent harmless against all civil liability, including attorney's fees and costs of investigation and defense incident thereto, arising as a result of:

  1. Company act or omission, except to the extent that the agent has caused such an error;
  2. Failure of the insured to receive premium notices, lapse notices or any other notice affecting coverage where such notices are sent directly to the insured by the company;
  3. Any action or inaction of the agent based on the agent's use of forms supplied by the company, or following instructions or procedures established the company, except to the extent that the agent has caused such failure; and
  4. Damages sustained by any persons as a result of information furnished by the agent to the company unless the agent furnished false information with malice or willful intent to injure."

Some life companies have included an indemnification provision that requires the agent to indemnify the company for agent mistakes (usually without a provision in which the company indemnifies the agent)! These provisions sometimes give the company sole discretion to settle cases and to determine the degree of the agent's fault. These provisions are extremely one-sided and unfair. We are not aware of one property-casualty company that requires an indemnification provision from its agents. Life companies will be a lot more attractive to independent agents if they follow the lead of the property-casualty companies and incorporate the IIAA recommended provision.

Commissions

For competitive reasons, most companies will offer remuneration in the form of commissions, expenses, and service fees. These compensation packages vary greatly, so the agent should review them carefully. Commissions on universal life and term insurance are typically less for whole life. Agents should check with the company to make sure that they are paid a commission for the longest period of time offered, in order to cover ongoing servicing of the client. A service fee for the life of the contract is not unusual, and while low, tends to cover ongoing servicing as more and more policies are placed on the books.

Commission vesting provisions are critical to the independent agent as discussed below.

Vesting of Commissions

In life insurance, there is no such thing as ownership of expirations. The traditional life insurance contract remains in force until the insured expires, not the policy. The agent should, however, make sure that the contract has a clause which "vests" commissions for a period of years. This term, "vested", was litigated long ago and held to be "fixed, accrued, settled and absolute." (Orthwein Vs Germania Life Insurance Company.) It is the guarantee that the agent will get the commissions for the period of years shown on the commission schedule.

It is customary for the initial commission to be much higher than subsequent commissions. In contrast to property-casualty insurance, most of the agent's costs are expended in the first year. The additional vested commissions are actually fees for ongoing servicing.

Some companies vest commissions only with general agents. The subagent contract has no vesting. Woe to the agent who stops writing with such a company and has his contract cancelled; he is no longer entitled to commissions and loses everything.

If the agent decides to deal through a general agency because of the services and support the general agency can provide, he should make sure his contract with the general agent protects the vesting of his commissions.

Different types of policies have different vesting periods. It is wise to compare company contracts, as some company contracts vest for longer periods than others.

Termination

Some life company agreements say that they can terminate at any time (and for any or no reason). Other agreements allow 30 days or more, and indicate specific reasons for termination. If you have vested commissions, you will continue to receive payment for your production for the life of the vesting (unless you owe the company money).

Unlike many life agencies which build up their business on the strength of the life insurance company they represent, most property-casualty agencies sell life insurance on the strength and reputation of the agency. While the termination of the life insurance agreement with a particular company might create some immediate problems, it is quite easy to get new life appointments. The agent should be given sufficient advance notice before termination, to allow him to transition smoothly to new company markets. The Agency Contracts Committee recommends at least 90 days advance notice of life contract terminations, where the agent has not lost his license or engaged in improper activity.

Arbitration

All agency agreements should have an arbitration clause. This provides a fair and objective means of settling disputes that might arise under the contract. Most life insurance contracts have no arbitration clause and some go so far as to say: "The company's decision in any dispute shall be final." The arbitration clause should allow the agent to present his case in his own state. IIAA's recommended provision is:

"If any dispute or disagreement shall arise in connection with any interpretation of this agreement, its performance or nonperformance, or the figures and calculations used, the parties shall make every effort to meet and settle their dispute in good faith, informally. If the parties cannot agree on a written settlement to the dispute within fourteen (14) days after it arises, or within a longer period agreed upon by the parties, then the matter in controversy shall be settled by arbitration, in accordance with the rules of the American Arbitration Association, and judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction.

The parties may agree to submit the dispute to one arbitrator; otherwise there shall be three, one named in writing by each party within ten (10) days after notice of arbitration is served by either party upon the other, and a third arbitrator selected by these two arbitrators within fifteen (15) days thereafter. If the arbitrators are unable to agree upon a third arbitrator, then the third arbitrator shall be chosen impartially by the American Arbitration Association.

The determination of the arbitrator(s) shall be final and binding on all parties, provided such determination is made in writing and signed by a majority of the arbitrator(s). Where arbitration results in an award, such award shall include interest in the amount of ten percent (10%) per annum running from the date when the amount that is the subject of the award first became due.

The costs of arbitration shall be borne equally by the parties provided, however, that the arbitrators may assess one party more heavily than the other for these costs upon a finding that the party did not make a good-faith effort to settle the dispute informally when it first arose."