Maximize Insurance Brokers’ Performance Through the Brokerage Service Agreement

By Barron S. Wall and Karen Wallace Walter

E-mail Story Print Story

Many brokers are reluctant to disclose what portion of the premium goes to their firm and try to avoid broaching a subject that may cause the client to question the commission rate. In reality, however, the percentage of commission is as negotiable as the coverage and terms of the policy are. As long as the insurance buyer is savvy enough, what a broker is paid, and what he actually does for the client prior to and during the policy year, can be clarified by means of a brokerage service agreement.

A brokerage service agreement should be an important component of any risk management plan establishing the specific duties to be performed by the broker and changing compensation from a commission to a fee-based structure, or at least identifying the commission to be paid. Paying the broker a fee, instead of a commission, takes the compensation question out of the equation when the broker is negotiating premiums and coverage. No longer enticed by higher premiums that generate higher commissions, the broker can focus on obtaining the best coverage for its client at the lowest premiums.

A brokerage service agreement should include the following provisions, which help measure the services offered against the cost of providing them.

• An insured can interview, in advance, the broker’s personnel that will be assigned to the account and identify them in the agreement in order to ensure a certain level of expertise and hourly rates commensurate with expectations.
• An insured can set timelines and schedules for the broker’s completion of specific goals, such as when the renewal strategy and proposals are to be presented; when and how frequently claims information is to be provided; and when claims review meetings should be held.
• Brokers should be required to undertake complete audits of the insured’s policies to ensure they comply with the terms agreed upon at binding. By requiring in the agreement that the broker audit the policies within a specific time frame, and follow up with the carriers to obtain corrective endorsements, an insured can be assured that the policies are complete and accurate.
• Brokers should be held accountable for their acts and errors. The agreement can require the broker to carry and disclose its own errors-and-omissions insurance with stated limits. The agreement can even incorporate other monetary incentives or penalties for the broker based upon the desired level of performance. In dire situations, the agreement may also empower the insured to suspend or terminate the broker’s services.
• Brokers should be held to a high level of service quality. Most brokers will not seek enhanced coverage endorsements, higher limits, or expanded coverage terms where there is no premium or commission attached to such a request. Policy language and coverage terms are changing constantly, and the best brokers immediately seek newly available enhancements on their insured’s behalf. Most brokers will do nothing to change, augment, or amend a policy after it is bound or before it is next renewed, unless there is a premium attached.

Language requiring constant monitoring of insurance coverage term changes and requests for augmentation can be added to a brokerage service agreement so a broker cannot sit idle from policy period to policy period. Instead, the broker should rise to a higher level of professionalism, placing the client’s coverage interests at the forefront, regardless of the incentive of earning extra commissions.

• Brokers should maintain the confidentiality of the client’s personal information. An insured may be required to share with the broker confidential nonpublic information, such as merger and acquisition plans, product introductions, projected revenues and earnings, and ongoing litigation. Disclosure to the public or unauthorized use of such information could have dramatic negative consequences. The agreement can identify how such information is to be handled, and dictate terms requiring the strictest confidentiality of the insured’s information.
• Many insureds remit their premiums to the broker rather than to the insurance company directly. If there is a transmission delay or misappropriation of funds by the broker, the insured may find that coverage has been cancelled.

A provision in the agreement that permits the insured to audit the broker’s accounts and records or, preferably, that authorizes the insured to make premium payments directly to the insurer, can provide assurance that the funds flowing through the broker are properly accounted for.

• Other provisions can be incorporated into the brokerage service agreement, such as specific intervals at which the insurance coverage is to be marketed, a timetable for updates on the insurance marketplace, or provision of updated claims information even after the termination of the brokerage relationship.

Although a broker may resist signing such an agreement, there is no reason that the parties’ expectations and compensation should not be put in writing. The insured’s concern should not be focused on the broker’s reaction, but instead on the benefits of having such an agreement. Ultimately, the insured and the broker are well served by having executed a carefully drafted brokerage service agreement.