LEGAL OUTLINE FOR CALIFORNIA INSURANCE AGENCIES
TABLE OF CONTENTS
INTRODUCTION
CHAPTER ONE: FORM OF ORGANIZATION
CHOICE OF A LEGAL FORM OF AGENCY OPERATION - PROPRIETORSHIP, CLUSTER OF INDIVIDUALS, PARTNERSHIP, OR CORPORATION
1.1 Some possible objectives of owners in choosing the form of agency organization and perpetuation
1.2 Form of organization of agency
1.2.1 Sole proprietorship
1.2.2 Unincorporated Cluster of individual agencies
1.2.3 General partnership
1.2.4 Ordinary business corporation or C corporation
1.2.5 Subchapter S corporation
1.2.6 How to hold stock or expirations
1.2.7 Combining corporation with individual ownership of expirations
1.2.8 Combining corporation and partnership
1.2.9 Combining corporation and ESOP
CHECKLIST FOR CHOOSING A FORM OF ORGANIZATION
OTHER READINGS
CHAPTER TWO: CONTRACTS
2.1 Contracts every agency should consider
2.2 Producer contracts
2.2.1 Employee or independent contractor
2.2.2 Compensation
2.2.3 Who owns the expirations, name & good will
2.2.4. Covenants not to compete
2.2.5 Protecting expirations and other trade secrets
2.2.6 Severability clauses
2.2.7 Termination of contract
2.2.8 Alternate dispute resolution
2.3 Buy-sell or other agreements to cover if the owner dies prematurely, becomes disabled, or leaves
2.3.1 Individual producer agreements with agencies covering purchase of book of business on retirement
2.3.2 Buy-sell agreements for corporate shareholders, and partnership retirement agreements for partners
2.3.3 Life insurance funding
CHECKLIST FOR PRODUCER AGREEMENTS
CHECKLIST FOR BUY-SELL AGREEMENTS
ADDITIONAL READING
CHAPTER THREE: STATUTORY DUTIES OF INSURANCE PRODUCERS
3.1 Regulation by Insurance Department and other governmental bodies
3.2 Trust accounts
3.3 Record retention
3.4 Unfair practices and antitrust violations
3.5 Placing insurance
3.6 Other regulations
CHECKLIST ON ADMINISTRATIVE MATTERS
CHAPTER FOUR: LITIGATION, LIABILITY INSURANCE, AND DISPUTE RESOLUTION
4.1 Risks posed by litigation
4.2 Claims by clients for errors & omissions and related matters
4.2.1 Theories of recovery
- Breach of contract
- Professional negligence
- Deceit
- Other theories
4.2.2. Fact situations leading to claims
- Failure to obtain available coverage
- Failure to inform when coverage not available
- Misstating facts in the application or misstating coverage
- Failure to advise what coverage the client should get
- Placing coverage with an insolvent carrier
4.2.3. Steps to take to avoid claims
4.2.4. Steps to assist in defense of claims
4.2.5. Alternatives to having the Errors & Omissions Carrier conduct the defense
- Seeking defense and indemnity by agent from his carrier
- Getting the client the coverage he wants
- Coverage in policies other than E&O policies
- Appointment of independent 'Cumis' counsel when there is a reservation of rights and defense counsel can affect the outcome on coverage
4.3 Business claims
4.3.1. Trade secret claims
4.3.2. Employment claims
4.4 Incorporation
4.5 Alternate dispute resolution
4.5.1. What is alternate dispute resolution?
4.5.2. Different options for dispute resolution
4.5.3. Contracts lending themselves to alternate dispute resolution
4.6 Liability insurance
4.6.1. Errors & omissions coverage
4.6.2. Commercial general liability coverage
CLAIMS AVOIDANCE CHECKLIST
ERRORS & OMISSIONS INSURANCE CHECKLIST
OTHER READINGS
CHAPTER FIVE: TRANSFERRING AGENCY INTERESTS BY SALE, ETC
5.1 Objectives of buyers and sellers of agencies
5.1.1. Price
5.2 Overview of tax aspects of the transfer
5.3 Commission splits after retirement or leaving agency
5.4 Sale of shareholder's stock in corporation
5.5 Sale of assets - expirations and good will
5.6 Allocation of part of the payments to a covenant not to compete, consulting agreements, & interest; use of deferred compensation, etc.
5.7 Merger or other combination with another corporation
- Potential advantages of a reorganization
- Potential disadvantages of a reorganization
5.8 Partnership retirement agreement
5.9 Funding retirement internally with qualified or unqualified retirement plans
- Qualified pension and profit sharing plans and IRA's
- Unqualified plans
5.10 Sale of stock to an Employee Stock Ownership Trust
- Potential advantages of an ESOP
- Potential risks of an ESOP
5.11 Sale to a charitable remainder trust
5.12 Protecting buyer's and seller's interests after the transfer
- Investigating the buyer
- Investigating seller
5.13 Protecting seller by retaining a security interest
5.14 Protecting buyer by covenants, etc.
5.15 Contracts with agency after retirement
5.16 The bottom line
CHECKLIST FOR SALES
ADDITIONAL MATTERS CONCERNING MERGERS
ADDITIONAL MATTERS FOR PARTNERSHIPS
ADDITIONAL MATTERS FOR ESOPS
ADDITIONAL MATTERS FOR USE OF CHARITABLE REMAINDER TRUSTS
ADDITIONAL MATTERS FOR SECURITY AGREEMENTS
CHAPTER SIX: TRANSFERS TO THE NEXT GENERATION
6.1 Durable powers of attorney in case of disability
6.2 Transfers to the next generation
6.3 Basic death tax information
- Unified credit against estate and gift taxes
- Annual gifts that are gift tax free
- Deduction against generation skipping tax
- Effect on income taxes - basis step-up
6.4 Wills, trusts, and gifts
- Wills and testamentary trusts
- Living trusts
- Gifts
6.5 Reallocating partnership interests
6.6 Producing new accounts in a new entity
6.7 Uses of life insurance
CHECKLIST ON ESTATE MATTERS
CONCLUSION
KEY QUESTIONS FOR THE AGENT TO ASK
- Should I incorporate if my business is not already incorporated, and should I (and can I) elect subchapter S? See paragraphs 1.2.4-1.2.5.
- Should I join other owners in a cluster, partnership or corporation, or should I operate independently? See paragraph 1.2.2.
- Should the corporation own the expirations, or should individual shareholders or a partnership hold them? Should I own stock in the corporation, or should a partnership hold it? See paragraphs 1.2.6-1.2.7.
- Do I have producer agreements to protect my expirations, protect against wrongful termination suits, etc.? See paragraphs 2.2.3-2.2.4.
- Should my producers have ownership interests in the business, or in deferred compensation? See paragraphs 5.3, 5.8.
- Have I used a checklist for E&O purposes? See Claims Avoidance Checklist.
- Have I taken steps to avoid business and employee litigation to the extent possible? See paragraphs 2.2.3-2.2.8, 4.3, 4.5.
- Is my insurance coverage adequate, or are there gaps that I should cover? See paragraph 4.6.1-4.6.2.
- Does someone hold a durable power of attorney to act for me in dealing with the agency, my assets, and my doctors, if I become disabled? See paragraph 6.1.
- Is someone available to buy the business on my retirement, disability, or death? See paragraphs 2.3,
- Will I dispose of my interest internally or externally through an outside buyer? See paragraphs 5.3-5.11.
- Will I be getting the best tax result on the agency's purchase or disposition? If I am buying, will I have adequate cash flow to meet the payments? See paragraphs 5.2, 5.16.
- Do I want to try to defer taxes on a merger or sale? See paragraphs 5.7, 5.10.
- Do I have a durable power of attorney or other means to be sure someone can quickly act for me if I am disabled? See paragraph 6.1
- Do I have a will, trust, or gift giving program that adequately covers my agency should I die? See paragraphs 6.3-6.4.
- Is my life insurance held in a form that will avoid unnecessary death taxes? Is it held in a form to accomplish the purposes I bought it for? See paragraph 6.7.