Who Owns Your Life Business?

The book of Life/benefits business springing from your P/C business can be as valuable as, or even more valuable than, your P/C book. For this reason alone, identifying who owns that book under all conditions is important.

Two parties might challenge your ownership: Life producers and Life carriers.

Too often, P/C agency principals have gone to court, spending countless hours and tens of thousands of dollars fighting to retain ownership rights to a book of insureds originally belonging to the P/C agency. What went wrong? Generally, the P/C principals introduced their clients (by in-person referral or through use of agency data and lead-sharing) to Life/benefits producers with-out a clear, written agreement spelling ownership, nonpiracy, and noncompete provisions. Sometimes after years of happy cooperation, the Life/benefits producer may leave and take all or some of the shared clients. What went wrong was the lack of a contract governing control of the book of business.

Bypassing a formal contract is easy. The time and expense required to put one together and the probability that most local lawyers won't understand insurance well enough to draft an appropriate contract, boilerplate paperwork usually won't suffice, are discouraging factors. And to delay formalizing a contract is also easy, especially when business is waiting to be written and all parties want to get started.

But it is not easy to endure the pain and expense when things go wrong. Who better than insurance people should realize that things can go wrong? Every policy handled is based on the actuarial certainty that things will go wrong. And just as owning an insurance policy is worthwhile even if things never go wrong, so is a contract worthwhile even if it's never put to a test.

At the very least, get a letter of agreement between the P/C and Life/benefits parties, with a definite date set to formalize the agreement with a contract. If your Life/benefits operation is a separate corporation, then that corporation should have such contracts with its Life producer(s).

Contracts are necessary regardless of how close, trusting, or loving a relationship exists between the P/C and Life principals. That includes close family members. Consider, for example, that when a party dies, the executor and/or lawyer for the deceased is obliged to pursue all possible avenues that might benefit the estate's interests. Failure to do so might prompt a lawsuit against the executor or lawyer. The contract, then, is not an adversarial instrument. On the contrary, it formalizes the good relationship that the parties want to build; it's a tool to work for mutual benefit. If differences are to develop, airing them up-front at contract time is much better than years later, when they are messier to iron out.

Sometimes differences arise from a Life agent's exaggerated appraisal of his or her value, uniqueness, and role to the agency. He or she may claim that no one else could write the business as effectively.

For example, at the annual convention of the Million Dollar Round Table (MDRT) several years ago, I interviewed the then-president of the National Association of Life Underwriters. I asked the president about lawyers' and certified public accountants' (CPAs) advice on Life insurance purchases. 'What qualifications do they have?' he scoffed. 'How many lawyers or CPAs are Chartered Life Underwriters (CLUs) or Chartered Financial Consultants (ChFCs)?

They are not experts in insurance. They are not qualified.' I suggested that some CPAs specialize in financial planning as a recognized specialty, some have earned the Certified Financial Planner (CFP) designation, and some lawyers specialize in estate planning and have advanced degrees in it. But he refused to back down. 'I say that Life insurance agents are more qualified than lawyers and CPAs when it comes to insurance,' he stated.

Many P/C agency principals may have been dazzled by similar displays of self-confidence by Life agents, to the point that they may have 'given away the store' in the contract or waited too long for positive results.

The same MDRT convention featured a speaker advising Life agents about how to set up a working relationship with P/C agencies. He made some good points, but then dropped this bomb: He recommended establishing a separate Life corporation so that, in his words, ' . . . not being an employee of the P/C corporation, you (the Life agent) don't need to sign a noncompete clause.' That is a high-handed sign that the Life agent, in this speaker's view at least, is superior to the P/C agency from which he wishes to get business. It grants no recognition of the value of a book of business to the P/C agency that developed that business.

Such arrogance and professional snobbery aren't usually displayed, but they often underlie a Life agent's approach to a P/C relationship. Life agents' conventions lean heavily on how unique and important Life agents' work is. A certain amount of this is useful, but it should not prevail in their relationships with P/C firms. A good P/C agency geared to Life production is far rarer than a good Life producer. The relationship between them should be balanced, mutually beneficial, and mutually appreciative.

Avoiding disagreements about commission or account ownership, commission splits, and other aspects of the book of business is important.

The other claimants to your book of Life business could be the companies you and your Life associates selected to write the business. Some companies have written their producer contracts in ways that give them free access to the agency's insureds in the event of the agent's termination. Each producer's contract should be carefully studied for termination clauses and the consequences of termination.

Many P/C agencies have Life business written through outside agents. Sometimes such agents are contracted with a general agent (GA), not with a Life company, and termination of the outside GA (or of the agent) could wrest the client from your agency.

In any case, if Life business is written under a contract that can lead to nonaffiliated Life agents calling on your insureds, then you are risking the loss of those accounts. After all, such Life agents can bring their own P/C associates to try to take away the entire line.

Our advice is to examine your (and all your Life associates') producer contracts carefully for hidden traps. You should not put your accounts at risk to have Life written.

Ultimately, the insured really 'owns' the placement of his or her business. But the insurance records of each account and the access to the clientele are recognized as valuable assets. They should be protected.

A recent case in the Florida courts may be important to agents. The case involves a physician who had a contract with a health maintenance organization (HMO), International Medical Centers (IMC), which went defunct. Humana, a nation-wide chain of hospitals that offers HMOs, bought IMC. In 1990, the doctor moved to another HMO and took 167 patients with him. Humana cited a clause in the contract requiring that the doctor pay $700 for each patient, payable even after a one-year noncompete clause expired.

The doctor sued in Dade County Circuit Court and won. Humana appealed. The state court of appeals ruled in favor of the doctor, finding that 'patients are not the property or chattel of an HMO.' The case may be appealed to the Florida Supreme Court.

There are clear parallels with the carrier-agent-policyholder relationship. Generally the carrier should not be able to claim an agent's insureds as its 'property or chattel,' and agents should not sign contracts that could lead the carrier to make such a claim.

With few exceptions, the P/C agency and/or its principals should own the Life business derived from that agency. It can agree to split renewal commissions after a Life agent's termination, but ownership should clearly be in P/C hands.

Subscribers may send photocopies (no originals, please) of Life contracts (with a maximum of two per subscriber) for a brief 'clause-spotting' overview, free of charge. Dave Goodwin, who consults and serves as an expert witness on Life agent contracts, will highlight potentially troublesome clauses, so that you may explore the clauses further. He will not offer personalized comment or discussion.

With the producer contract, enclose a long, self-addressed, stamped envelope. On your letterhead, write 'Free clause-spotting' and the name and title of the person requesting this service. Allow two to three weeks for a response.

Send the contract to: