An agent’s lifeblood, but will your contracts save you?
The world is a different place today. In the old days, agents focused on protecting their expiry rights from shippers and manufacturers stealing their ledgers. In many ways, these were the happy days.
The value of maturities has been diluted for a very long time. Two other rights have become important and arguably of equal or greater value to the more strategic brokers, shippers and technicians than they are today.
The first dates back more than 15 years, when a certain carrier sent letters to certain agents’ customers telling them that their agent’s appointment had been cancelled. This was a mass event and not specific to individual agency matters or trust money matters or anything like that. The airline just seemed to want to eliminate a large chunk of its agents. Also, the carrier went beyond notifying customers of the cancellation of an agency appointment and was quite proactive in encouraging those customers to transfer their business to certain other agents. The letters went out before the agents could contact their own customers.
If I remember correctly, the agents and agent associations protested and the carrier stated that the contract gave the agents “only” expiry rights and not exclusive communication rights. I believe the Texan coalition helped get this law changed in the next legislature.
It is unfortunate that many other states have not done so.
If carriers can communicate directly with customers regardless of the issue (obviously carriers must have the right to communicate regarding policy notices, renewals, etc.) they gain some power and value over expiration times. What do your contracts say?
Fast forward to a few years ago when some bright minds realized that the information in the renewals might be as important or more important than the expiry times themselves. Most of the agents I initially raised the issue with couldn’t figure out how Distinguish dates and expiry times. It is the data that is separable from the renewal of insurance and/or unrelated or of no use to the user of the data.
Who actually owns the data in your file? I’m not addressing the ownership of the flow, which is in fact a future cash flow, rather than the data points. I saw an interesting article saying that ownership of the data is not only between carriers and merchants, but possibly also between the owners of agency management systems. It’s an interesting trisection of the ceiling!
Do you have the right contracts with your carriers and suppliers? If you sell your agency, are you selling too cheap considering the buyer may be able to split the cash flow value of the renewal rights and data points?
It reminds me of a billionaire who sold his railroad but kept the right of way for communication lines.
The right of way was perhaps as valuable as the railroad. where is your protection
I have read a few hundred carrier contracts and it is worth reading these contracts before signing.
For a long time, the debate revolved around the possibility of a producer leaving an agency and taking on the former employer’s clients. Non-compete clauses were originally used, but so many courts have ruled that strict non-compete clauses are not fair, so a more balanced solution has been sought. This solution is usually some sort of non-piracy agreement, although trade secret agreements are probably a better solution.
However, all of these agreements were written from the perspective that the agency was more powerful than the producer. I remember that when a consultant was teaching me about producer contracts, I remembered that a certain design was ideal because the terms were identical and therefore fair.
However, the terms were not equal as the manufacturer could never afford to back out of the contract.
The tide has turned somewhat in the last 24 months. Producers can now afford to get out of contracts, and in many cases they have more money than agency owners. The difference is that a handful of companies have decided that the best way to grow is to take producers and pay for the resulting litigation, rather than just buying the books or regulating the producer while they sit out their contract . Some of these players have private equity funds.
From that perspective, let’s say you have a great producer deal written by the best lawyer. So what? Until you process the situation, even if you win, you are likely to lose. You just lose less.
I suggest that your lawyers rewrite your contracts to reflect this new development. I also suggest that agency managers think through the following question: If the contract can be broken, albeit unfairly, how do I keep my best producers (these opponents don’t want your worst producers) in my agency?
Various options could include an increase in remuneration. However, outright compensation increases often fall short of the promises made of property appreciation and upfront bonuses.
What else could work?
The number one solution is to institutionalize client relationships with others in the agency who have a stronger bond with the agency than the producer and therefore will not leave. This is a powerful risk mitigation strategy for many reasons, but especially for this risk.
Other factors concern the motivation of good producers. Again, ignore marginal and poor producers. Good producers are often motivated by resources that allow them to get more business, faster. These resources can include excellent staff, training, a specific carrier agency, specific value-added services, and specific marketing (also a way to institutionalize customer relationships).
In the past, some sort of deferred compensation plan became the equivalent of velvet handcuffs. Aside from the complexity and expense of creating plans that comply with 409A Treasury regulations, I still like this concept. If you have some form of vested or deferred compensation or phantom stocks or other versions and do not have the plan reviewed by a specialist tax attorney, do so as the penalties for non-compliance are huge.
Regular accountants are seldom adequately informed on this subject. These plans need more thought because for the first time I’m seeing some producers are willing to walk away.
As the world has gotten more complex, it pays to invest in experts who know what they are doing. The worst possible solution is to use ready-made contracts that you can find online, on an agent forum, or from your buddy. This is not a place to cut corners.
With every difficulty comes opportunity. The opportunity is for those who face these new challenges.