Here is a published article I wrote about insurance broker agreements:
* Business Insurance Broker Agreements – NCMA CM
Magazine in May 2009 -
BUSINESS INSURANCE BROKER SERVICES AGREEMENT CHECKLIST
In your contracts management activities, it is
likely nowadays that you will be asked by your employer to review your entity’s business insurance broker services agreements.
Once the exclusive domain of only in-house counsel or an entity’s outside counsel, business insurance broker services
agreements are often additionally reviewed today by an entity’s contract management personnel in order to potentially
surface additional issues than may not have been considered by counsel. Sometimes this additional contract review is requested
by your CFO, your risk management group or your procurement management. As with any substantive agreement executed by
an entity, business insurance broker services agreements are important contracts that need to be properly reviewed.
Business insurance is a broad description of
typically the following 14 general types of insurance: (1) property insurance [loss/damage to the location of the business
or its contents]; (2) casualty insurance [loss/damage to the business]; (3) commercial general liability (CGL) insurance [3rd
party bodily injury/death, property damage, advertising injury, and reputation damage liability caused by negligence]; (4)
commercial auto insurance [damage to an entity’s vehicles and damage caused to others by an entity’s vehicles];
(5) workers’ compensation insurance [liability to employees for accidental job-related injuries]; (6) business interruption
insurance [loss or damage to cash flow and profit caused by business interruption]; (7) health insurance [workers’ health
insurance]; (8) life and disability insurance [workers’ life and disability insurance]; (9) insurance specially written
and scripted for a particular task; (10) umbrella coverage [higher levels of coverage to augment certain policies like
CGL]; (11) directors and officers (D&O) insurance [covering liabilities that an entity’s directors and officers
may incur]; (13) products liability insurance [loss as a result of a defective product that causes injury or bodily
harm]; (14) professional liability insurance [loss sustained because of an error or oversight on insured’s part].
Normally, an entity will want to
focus on its core competencies and will authorize another company or companies (knowledgeable about insurance matters) to
represent the entity in the sourcing, procurement, and on-going management of the entity’s insurance portfolio.
Bigger entities will generally use a “broker” – not an “agent” (captive or independent) –
because brokers are like a state licensed super-independent agent with more education and experience than an agent.
Brokers have a duty to analyze the insured’s entity for the correct insurance coverage. Brokers carry errors and omissions
insurance as well as other insurance to cover the broker’s liabilities to the insured and others.
I never cease to be amazed how many entities (big and small)
engage business insurance brokers without using a written broker services agreement. In my contracts management
career, I have reviewed many business insurance broker services agreements. In order to systematically cover the multitude
of unique issues in a typical insurance broker services agreement review, I have developed a practical Business Insurance
Broker Services Agreement Checklist. Set out below is my 60 item checklist that I use in reviewing business insurance broker
- 60 ITEM CHECKLIST –
1. Does the agreement
contain broker risk management functions (risk identification & analysis, insurance audit, risk control evaluation,
and risk financing plans)?
2. Does the agreement cover broker administration
functions (claims management, confidentiality, SLAs, reports, and periodic broker assessments)?
3. What are the broker’s
marketing functions to obtain the required insurance?
4. What are the broker’s claims services?
Does the broker have any loss control services?
6. What are the other required broker services?
7. Is broker compensation
8. What is the term of the agreement?
9. What are the broker indemnification provisions?
10. Is there
a method for dispute resolution (including broker fee disputes)?
11. What audit rights are in the agreement?
12. Are there
13. What is the governing law of the agreement?
14. Is the broker service team clearly identified?
are the termination provisions of the agreement?
16. Is there insurance the broker must carry (errors and omissions, etc)?
the broker provide run-off services after termination for 3 to 5 years (if required)?
18. Is the
broker required to obtain occurrence or claims-made CGL coverage for the insured?
19. Is the broker required to obtain
additional tail or nose CGL coverage for the insured?
20. Is the ownership/use of broker services work products
21. Address conflicts of interest (actual, potential or subject matter) and establish a conflict procedure.
Address confidentiality of your entity’s information.
23. Address data privacy.
Add a termination for convenience provision for your entity.
25. Address publicity constraints.
Add a document retention obligations.
27. Address business continuity.
28. Consider a convergence
of several preferred insurance brokers that can provide the full range of brokerage services in return for discounted pricing.
29. Use periodic broker performance assessment / scorecards.
30. Consider making brokers responsible for complying
with your entity’s policies and guidelines.
31. Require the brokers to be knowledgeable about your entity.
the broker be able to obtain special policy endorsement when they are needed by your entity, such as obtaining waivers of
subrogation from the insurers and adding additional insured parties to your entity’s insurance policies?
33. Require broker compliance
with all applicable laws and regulations such as ethics laws/regulations, state brokers laws/regulations, insider-trading
laws, FCPA, anti-boycott laws, and export compliance laws/regulations.
34. Consider requiring the broker use of your entity’s
approved couriers so you can leverage the courier volume for discounts.
35. Attach a list to the agreement of all
of your entity’s affiliated entities that are to be covered by the agreement.
36. Perhaps seek most-favored-customer
37. Use service level agreements.
38. Use an audit rights provision
39. In addition to policy
limits per occurrence and in the aggregate, CGL commonly also has separate dollar limits on liability due to intentional acts
(like libel, slander, false imprisonment, etc), advertising injury, damage to the insured’s rented property, fire damage,
and faulty product manufacture. Are these limits clearly stated to the broker?
40. Insurance policies are “auditable” – meaning the initial premium charge can be later increased
if the initial estimate of exposure (such as number of employees, gross revenue, etc) is under calculated. Over-estimates
are not entitled to a full prorated refund and are subject to a minimum premium limit. The minimum premium limited can
be waived by or negotiated with the broker. Address this issue.
41. In the event of early cancellation by the insured of an insurance coverage, there is
a minimum earned premium amount. Is that clearly worked-out with the broker and is the amount reasonable?
42. Typical CGL “exclusions”
address depreciation (not measurable), nuclear disaster/war (uninsurable), auto liability (covered by other policies), arson
& fraud (contrary to public policy), and punitive damages. Are exclusions clearly addressed with the broker?
43. Some entities, that are
satisfied with their broker, negotiate further broker savings in exchange for not soliciting competitive quotes. You
may want to try this approach.
Use “off” renewal dates by not starting policies at the end or beginning of a calendar year to give the insurance
companies more un-rushed time to quote the insured’s policies. This will give your entity a better opportunity
to explain to the insurers the low risk nature of your entity’s business.
45. Broker fees typically charge on a commission basis ranging
from 10% to 15% of premium. Many savvy insureds try to negotiate that down to 8% to 10% or seek a fixed fee not based
46. Regardless, even
if you are happy with your brokers - do an RFP every 3 to 5 years. Broker RFPs should be evaluated on premium savings, service
fees, contingency revenue, coverage enhancements, service capabilities, claims management, alignment with insured, performance
criteria, and benchmarking capabilities.
The CGL insurer has: (1) a duty to provide the legal defense of the insured covering fees and costs; and (2) a duty to indemnify
the insured for resulting damages awarded/settled up to the policy limit. You have to check the applicable CGL policy
to see if the policy limit is inclusive of defense fees/costs. So – when comparing policies offered by brokers –
be sure it’s apples to apples.
CGL policies vary as to if the insured can choose its own defense counsel or if it must accept whoever the insurer chooses.
Address this issue.
Exactly what is covered by insurance depends on the substantive law of each state. So be aware that coverage varies
somewhat from state to state.
CGL offers two types of coverages, “claims made” and “occurrence”, that the insured needs to consider
and arrange with the broker. Occurrence forms cover losses that happen during the policy term. The loss can be reported
years later, but the key is when it happened. A claims-made policy covers claims made during a period of time. The loss may
have happened many years in the past, but is reported during the current policy term. It is difficult to move from one type
of form to the other. Occurrence forms are somewhat more valuable since they respond to claims years later. A claims-made
form certainly has value, but no guarantee of continued insurability, so if the insured is for some reason cancelled by the
insurer, the insured may not have coverage in the future for activities in the past. The key concept here is that a claims-made
policy normally costs less than an occurrence policy, but insureds run the risk of not being covered for a potential claim
because the insured did not discover it until after the insured’s policy expired. The decision (between claims-made
and occurrence) is a gamble, and the insured pays a price to lower its risk. Tail coverage picks up where a claims-made policy
leaves off, covering occurrences that happened while the policy was effective, but claimed after the policy expired.
As a result, the combination of a claims-made policy and tail coverage looks very much like an occurrence policy, with
one big difference. When
an occurrence policy expires, the premiums stop, while the coverage (on occurrences that happen during the policy period)
continues on an on-going basis. Tail coverage, on the other hand, is something the insured purchases after the
insured’s claims-made policy expires... and the insured continues to pay for it until it decides that the risk of discovering
an old occurrence no longer outweighs the cost of the tail coverage premium. The cost of an occurrence policy is high, but
fixed, whereas the cost of a claims-made/tail coverage combination is initially lower, but of longer duration and potentially
of higher total cost. The decision of which to buy effectively hinges on the nature of the insured’s risks. If its business
is such that any liability is immediately apparent, and thus claimable, the
insured is probably safe with a claims-made policy. If, however,
the insured’s potential liability can linger undetected for years then it may be safest with an occurrence policy. Also
consider nose coverage. This is the opposite of tail coverage, although it fulfills a similar need. Nose coverage
most commonly provides prior acts coverage for insureds that are moving from a claims-made policy to an occurrence policy.
It is generally provided by the replacement policy. 
51. You can maximize
a broker’s performance with a good broker services agreement that includes, but is not limited to, the following concepts
where the: (1) insured pays broker a fixed fee not a commission on premiums; (2) broker returns all insurer rebates and contingent
insurer commissions to the insured; (3) broker insures a certain level of expertise; (4) broker insures timelines and schedules
for things like renewal strategy, claims review meetings, etc.; (5) broker does audits of the insured’s policies to
see if they comply with insurance agreements; (6) brokers are accountable for their acts and errors; (7) broker provides required
service levels; and (8) broker insures confidentiality.
52. Some of the largest brokers are: Marsh & McLennan; Aon; Willis Group Holdings; Arthur
J. Gallagher & Co.; Wells Fargo Ins. Services; Brown & Brown; Jardine Lloyd Thompson Group; BB&T Insurance
Services; Hilb Rogal & Hobbs; and Lockton Companies.
53. Some of the largest business insurers are: AIG; Berkshire Hathaway Group; Allstate; Hartford
Financial Group; The Travelers Companies; Liberty Mutual; Nationwide; Progressive; Loews Corporation (CNA); and Chubb.
The brokers should pick market leaders.
Brokers should have a valid broker license in each applicable state.
55. Check with the applicable state department of insurance regarding
broker complaints and ethical violations.
When brokers look at insurance companies they should consider price, stability (with a good A.M. Best or Standard & Poor
rating), and service.
One progressive trend among insureds is to not eliminate the broker but rather to redefine the brokers’ role and let
the broker handle things like solicitations of bids from insurers, post negotiation policy delivery, back and office policy
administration but allow the insureds to tell the insurers what the insureds actually do (in person and in the insurance applications)
to get a much better understanding of the insured company thus reducing risk in the minds to the insurers and potentially
reducing policy premiums. This sort of thing is being done by insureds like Whirlpool, Wolter Kluwers, Brinker International,
Caesars Entertainment, and others.
An insured could potentially reduce broker spend by: (1) doing a “convergence” of brokers to the insured’s
top few brokers so that those brokers become the insured’s preferred providers potentially
granting the insured better discounts including volume discounts;
(2) using some variation of the Whirlpool, Wolter Kluwers, Brinker International, and Caesars Entertainment approach so that
the brokers’ role is somewhat redefined to allow value-add discussions between the insured and insurers to improve the
insurers’ understanding of what the insured does so as to reduce premiums; (3) starting a preferred partnership program/initiative
with some of the insured’s top brokers and insurers to solicit their creative ideas to reduce insurance costs; (4) enhancing
the broker services agreement with selected brokers to reduce costs [such as prohibiting broker premium commissions and passing
through insurer’s rebates and contingent commissions to the insured] and concurrently improve broker services and quality;
(5) capping annual premium increases; (6) using a RFx or Questionnaire; (7) reducing irrelevant or repetitive coverage; (8)
adopting/maintaining a consistent safety plan; (9) adopting health-specific changes to the work place; (10) increasing workforce
training; (11) removing undesirable risks; and (12) creating/implementing a disaster plan.
Include a partnering provision with brokers to proactively help discover mutually beneficial ways to improve the broker relationship
as well as to discover ways to further enhance communication, innovation, technology improvements, performance, risk-reduction,
continuous improvement, and spend / cost savings with brokers.
60. Don’t “assume”. Put it in writing.
The goal of business insurance
broker services agreements is to facilitate a win-win relationship between your entity and your insurance brokers. This
Business Insurance Broker Services Agreement Checklist is not exhaustive. Every insurance brokerage engagement arrangement
for broker services has some unique aspects that may not be addressed in this checklist. However, if you routinely use
this checklist as one of several resources when you review a business insurance broker services agreement, you will be pleasantly
surprised with the large number of substantive, material, risk reduction, performance improvement, and cost-savings
issues that will be surfaced for proper resolution.
About The Author
JOHN (“JOHNNY”) E. MILLER, a Texas and Missouri
attorney, is a contracts management consultant who has worked in contracts management for many companies in the last 30 years.
He is a member of the Greater San Antonio Chapter of NCMA. Send comments about this article to firstname.lastname@example.org.
 Hutchinsontraylor.com, “Claims Made vs. Occurrence Form”, http://www.hutchinsontraylor.com/files/Claims-Made_vs_Occurrence_Liability_Form.pdf , accessed January 22, 2009