The foundation upon which the independent insurance agency system rests is the principle that the agent owns the expirations of business placed with the insurance carrier. Contracts between carriers and agencies usually restate this principle. Unfortunately, sometimes a carrier will try to find loopholes, to the agent’s detriment.
A Texas agency with two offices had an agency agreement with a major carrier. The contract authorized the agency to act as the carrier’s representative in “negotiating, servicing or effecting policies of insurance.” It listed the authorized lines of business as including fidelity and surety bonds. It also contained a typical ownership of expirations provision, stating “the ownership, use and control of all expirations, and all records applicable to business you have written with us, including your work product, shall be (the agency’s) exclusive property …”
In another provision, the carrier promised that it would “not knowingly take any action that could be construed as moving a policy from [the agency] to another agency without the written direction of the policyholder.”
During the seven years the contract was in effect, the agency placed a significant volume of surety bonds with the carrier. However, in late May 2017 one of the carrier’s field representatives visited the agency. Without giving them prior notice, he “removed the Agency’s powers of attorney and seals for the Agency’s authorization to write surety bonds” and terminated its authorization to write bonds for the carrier. Further, the carrier moved bonds the agency had written for its two largest customers to another of its agents, despite not having written consent from the customers. The court opinion does not explain what prompted the carrier to take this action.
The agency’s president immediately contacted the customers. One agreed to keep its business with the agency; those bonds were replaced. The other wished to keep its bonds with the carrier and moved its business to the other agency. The original agency claimed that the carrier’s action cost it $300,000 in commissions. They sued the carrier, alleging violations of both Texas law and the agency contract. The law required a carrier to give an agency six months’ notice of termination when the contract between the two had been in effect for more than two years.
The carrier asked the court to dismiss the suit, arguing that the law in question did not apply to surety bonds; a surety bond was not an “insurance policy” covered by the contract; and that the agency was only speculating as to the amount of the damages.
The judge ruled in the agency’s favor on all counts. He found that nothing in the Texas law that specifically made it not applicable to surety bonds. Regarding the carrier’s claim that the agreement applied to “insurance policies” and not “surety bonds,” he noted that the contract authorized only the sale of bonds and found that the ownership of expirations provision would be meaningless if it did not apply to them. He also found the requested damages to be valid.
This agency understood its contract with the carrier and the rights the contract gave it. They rightfully held the carrier accountable for its promises. It would have been easy for them to decide not to take on the expense and hassle of litigation and just move on. Instead, they chose the more difficult road of seeking compensation for a significant loss of revenue.
Many agencies view their carrier relationships as lopsided, with the carriers holding the upper hand. This case shows that, while an agency contract binds the agency to specific promises, the carrier must abide by its promises as well.
