P/C agents often have reviewed contracts and leases in conjunction with writing Contractual Liability coverages. In many cases, agents will advise clients to reject hold-harmless clauses which place undue hardship on them. Yet insurance agents themselves may be in the grip of hold-harmless clauses, which could lay immense financial burdens on them, even if they are totally innocent of any wrongdoing. We refer to the producer or general agent (GA) contracts of some-not all! -- Life carriers. Unfortunately, some of these carriers are among the best-known career or brokerage companies and, even worse, agents often aren't aware of the poisonous clauses until it's too late and they're sued.
Review every Life contract! Hunt for potentially dangerous provisions in these contracts just as carefully as you do in your best client's contracts.
Here's one such clause, lifted from a GA contract: 'Agency shall indemnify and save Company harmless from any and all expenses including lawyer's costs and damages resulting from unauthorized acts or transactions by it, its appointees, employees, or other persons under its supervision.'
Further, the contract states, 'In the event of breach of this agreement by Agency, Company shall be entitled, in addition to any claim for damages, (i) to obtain enforcement by way of injunction (including temporary or preliminary injunctions) and (ii) to terminate Agency's entitlement to any future renewal commissions, whether or not vested.'
Those two sentences can crash a career. Consider what they say about an innocent sequence such as this:
You deliver a Life policy and it's later discovered that the company failed to include a copy of the supplemental smoking questionnaire. Company rules state that the agent should check the policy before delivery for completeness. That omitted smoking questionnaire causes the company to lose a lawsuit. Since the company could claim the agent's act to be 'unauthorized,' albeit innocent, the agent could be liable for all legal costs and damages, and in addition be terminated and lose all commissions, despite being vested.
This is grossly unfair, of course; it's outrageous. But agents have signed such contracts and worse ones, blithely unaware of the noose around their necks.
Here's another skewed clause, quoted in its total context because it might be unbelievable if seen in fragments:
'Agent/Broker agrees to indemnify and hold harmless the Company (of New York) and the GA against any and all liability, loss, damages, costs, or expense which the Company or the GA may suffer as a result of claims, demands, costs, or judgments against them arising from any act or transaction by the Agent/Broker or persons employed by the Agent/Broker, in the sale or service of Company's insurance products. Act or transaction includes, but is not limited to, fraud, misrepresentation, deceptive practices, negligence, and errors or omissions by the Agent/Broker in the sale or service of Company's insurance products. Agent/Broker shall defend any claim, action, suit, or proceeding which may be brought against Company and/or the GA and all expenses, costs, and attorneys fees incurred in connection therewith shall be paid by Agent/Broker.'
Notice that here (as in the first example above), the agent doesn't have to be negligent to be hanged by the contract. The first example calls for the agent to commit an 'unauthorized' act, certainly a flimsy shield for an agent because practically any act may be arguably unauthorized. But the second example goes even further; it states that as long as the agent did anything -- 'any act'-then he or she is potentially on the hook.
Take a simple example of potential abuse of an agent. The agent writes a Life application, the applicant states that he's a nonsmoker, the policy is issued and delivered, and the insured dies 18 months later in an accident totally unrelated to his smoker status. The company denies payment because it learns that the applicant was in fact a smoker when he said he wasn't. (Many companies are now adopting this posture on such claims; see story on page __.) The estate of the insured sues the company.
According to the language of the producer's contract, the agent may be in the direct line of fire, even if he or she wasn't named in the lawsuit. The agent may be forced to pay for court and lawyers' costs incurred by the company, win or lose. Usually the companies win such cases, but they may lose if, for example, the smoking questionnaire was omitted from the policy and the agent failed to notice the omission. In such a case, the agent could be forced to pay the judgment as well, and also be terminated and lose all vested commissions.
One of the hold-harmless clauses quoted above came in an agent's mail as an addendum to existing contracts. It did not call for the agent's signature or acknowledgment; directions stated simply that the clause should be attached to the contract. Ironically, that agent received it just after having suffered through several months of that company's gross mishandling of an application with a series of home-office blunders. Irate, the agent called the company counsel, who agreed that the clause was extreme but explained that the company had been hit as the deep pocket on claims which the company believed were agents' faults, and the company reacted with the strong hold-harmless language. The agent countered that if his applicant had died during the company's long mishandling of the application, the agent would have had to pay costs and damages although he had not been at all negligent. The company lawyer agreed to moderate the language of the hold-harmless clause 'soon.' That was nearly five years ago. No change was ever received by the agent, who no longer sends business to that company.
Abusive producer contracts are not rare; they are the norm. We have examined hundreds of contracts and have seldom found one without at least one punitive clause regarding hold-harmless, vesting, or termination. Some contracts, of course, are less harmful than others. Some can be negotiated and amended. Some can be lived with if these clauses are identified up front. But some are so punitive of the agent and, in many cases, of the policyholder as well, that they should not be accepted by any agent, Life and P/C agents associations should make members aware of them, and regulators should not permit them.
WHAT IT MEANS TO YOU
Read each Life producer and/or GA contract carefully, with a sharp eye for all the ways an agent might be harmed. Then discuss those contracts with the company. Also inform the local agents association of the abusive clause.
Shedding light on potential pitfalls will make them easier to avoid and lead to their eventual improvement or abolishment. Reasonable discussions about such clauses with each party recognizing the concerns of the other and with cooperative rather than adversarial attitudes, will lead to mutually comfortable contracts. Fair contracts serve both parties better.