KC2 - Elements of a Broker Contract

Question 1

Granting Authority

Answer 1

This clause authorizes the broker to act as an agent (in the legal sense) to the insurer.
It sets out what the broker can do without asking the insurer’s permission;
indicates any limitation in the relationship (e.g. the authority may be terminated if the brokerage’s license is suspended or terminated);
and specifies the types of business the broker can bind.

Question 2

Billing Procedures

Answer 2

This clause specifies the methods of invoicing clients - Broker Bill/Direct Bill
Broker Bill
+ Brokerage controls billing
+ Can invest premiums between collection and remittance (30, 45, or 60 days)
- Cost of bookkeeping and collection
- Potential for bad debts
Direct Bill
+ Broker not responsible for collection
+ Broker has less work
+ Broker needs fewer accounts receivable staff
- Loss of interest on premiums
- Documents mailed directly to insured, leaving broker out of the loop
Hold Harmless Agreement for errors in accounting.
Oblige the insurer to refer to client to brokerage if contract is cancelled.

Question 3

Commission Schedule

Answer 3

• Usually attached to agency contract as an addendum, lists the lines of insurance written and the rates of commission payable by line.
  Negotiable and varies, review carefully.

Question 4

Termination (Cancellation)

Answer 4

Specifies the notice period required for cancellation of the contract by either party. Longer = Better More time to transfer, underwrite, process new policy.
States who is responsible for notifying the insureds. Ensure hold harmless agreement in place if onus is on the insurer.

Question 5

Agency Expenses

Answer 5

Most agency contracts oblige brokerages to pay their own expenses.
Insurers often assist brokers with expenses - joint advertising, financial support for broker website, offer training courses for members of the brokerage.

Question 6

Ownership of Expirations

Answer 6

This specifies who owns the expirations, and therefore, who has the right to sell the book of business.
Key element in the valuation of the brokerage.
Also establishes who has control of documents, such as inspections, surveys, applications, and rate books, among others.