Author: Chris Boggs​
IIABA

Point: Carriers should honor an insured's Agent of Record requests and not allow the incumbent agent to refuse the request because of a “special" contract or agreement with the carrier. 

Can an insurance carrier and its agent hold a client hostage? Short of any statutory prohibition, the answer appears to be yes.

Without a law to the contrary, the contractual agreement between an insurance carrier and its agent appears to allow for “special consideration" regarding the recognition and acceptance of an agent of record (AOR) request. But does this ever actually happen?

A member agent contacted the VU recently with this exact issue. The insured wanted to maintain its relationship with the insurance carrier but no longer desired to work with the incumbent agent due to poor service, missed exposures/coverage and various other reasons.

The insured knowingly and willing completed, signed and delivered an AOR request to the insurance carrier naming a new agent. The carrier refused to act upon the AOR stating that the incumbent/losing agent had a “preferred" contract meaning that the carrier could accept the AOR only if the incumbent agent agreed to the change. Guess what, the agent wouldn't agree to the change.

Even though the insured has no desire to do business with the agency, they are stuck. This “preferred treatment" contract allows the agent to hold the insured hostage simply because the insured desires to keep the relationship with the carrier.

Should a carrier and its agent conspire to hold a client hostage? Apparently not every agency or carrier sees the obvious answer as “NO"!!

First, while the practice may be legal, it seems unethical. Forcing a business relationship upon an insured when the client no longer desires to do business with one of the parties is a question of ethics. It is unethical for the company to refuse to accept a reasonable and legal request from their insured – you know, the party with whom they have contracted to provide coverage. The ethical agent would step aside and the ethical carrier would agree to the change when it becomes clear the insured no longer wants to do business with that particular agent. 

Secondly, the agent contractually represents the insurance company, acting as the “go between;" but the agent is NOT a party to the insurance contract, meaning the agent has no privity of contract. The common law doctrine of privity of contract provides that a contract cannot confer rights or impose obligations arising under it on any person or agent except the parties to the contract. There is likely nothing in the insurance policy (insurance contract) that states the carrier can override the insured's desire regarding the agent of record simply because of a separate agreement between the carrier and the agent.

This, holding the insured hostage is not only unethical, it appears to violate contract law.

Lastly, holding the client hostage is just bad business practice. The agent is accomplishing nothing beyond creating bad will and is angling for a major errors and omission (E&O) loss. Likewise, the carrier is placing a wall between itself and the insured.

From an E&O perspective, if the agent misses anything and a loss is not covered or not covered in full, the hostage if far more likely to sue than if there was a good relationship between the agent and the insured. And the insured may even look for reasons to sue. Keeping that commission may cost the agency dearly in the future – unless they do everything perfectly.

Also, why would the insured want to do anything more than meet the minimum policy requirements if the carrier won't honor its wishes. The carrier is creating an adversarial relationship that could result in long battles and even charges of bad faith in the future.

Ethical, legal and business issues aside, the real reason the agent and carrier should honor the insured's request – it's simply the right thing to do. Rarely does an insured leave an agency unless there is some level of dissatisfaction that cannot be repaired or a change in relationships. Why would you want to stay in a defective relationship and make both sides miserable? Eventually both the agent AND the carrier are going to lose the business if they fail to do the right thing.

In January 2015, the Independent Insurance Agents and Brokers of New York (IIABNY) adopted an AOR policy statement essentially stating that the client's interest should come before the agent's interest. This is known as altruism. Altruism is a mark of the true professional. IIABNY's statement reads:

Independent insurance agents and brokers believe that their client's interests should always be placed above the individual interest of the agent/broker. Agents and brokers are challenged to exceed their client's expectations; to deliver the highest quality insurance products and services in the most cost-effective, efficient, responsive and professional manner. Clients choose and retain their agent/broker based on competency, qualification, resources, relationships, performance and the level of trust and confidence that's established prior to, and earned throughout, the agent/broker's appointment.

Client expectations may not always be met - for a variety of reasons - and as business relationships evolve, an agent or broker's appointment as a client's authorized insurance representative may be subject to change. Change can occur when a customer terminates via an Agent/Broker of Record Letter, their current agent/broker relationship. In a written notification to its insurer(s) a consumer can authorize new representation with another of a carrier's licensed agent/broker representatives. Not all insurers, however, are willing to recognize these changes and no uniform standard or regulation exists to protect consumer's interests. Similarly, an agent/broker has the right to decide when to engage or terminate a particular client or insurer relationship, and may do so without cause by providing timely notice.

Agents/brokers and insurers have an ethical obligation to address change in representation situations in a timely manner that is wholly consistent with the principle of consumer choice, and IIABNY supports this position. IIABNY rejects and opposes any agent/broker-insurer contractual or procedural requirements or protocol, which unreasonably limits or otherwise inhibits a consumer's right to change their appointed insurance representation at any time.

In New York State no law or specific regulation governing Agent/Broker of Record Letter situations exist, nor are there any specific notification requirements developed for the protection of the consumer. IIABNY believes that voluntary compliance with consistent industry standards is preferable to legislative action and establishes as its Board policy the following standards:

• The insurer should recognize an insured's request for change of agent/broker at any time during the policy period.
• As a courtesy the insurer should provide the incumbent agent/broker with 15-days written notice before processing the change request.
• The incumbent agent/broker should be allowed to provide the insurer a letter rescinding the change from the insured within that 15 day period.
• The agent/broker that initiated the policy should receive all the commission for the policy period, regardless of the date the agent/broker of record change takes effect. A carrier may choose to pay commission on an additional premium endorsement after the agent/broker of record change, as long as they apply that approach to all like situations.

IIABNY supports the consumer's right to choose and consistent standards for agent/broker of record notification. IIABNY encourages insurers to permit changes in representation at the policyholder's direction, including mid-term changes of agent/broker appointment, and to voluntarily adhere to consistent standards as outlined above.

Beyond IIABNY's policy statement, a major national insurance carrier recently codified its AOR standards stating that all AORs will be honored at renewal. Yes, it appears the incumbent agent has the opportunity to gain a rescinding AOR; but if that attempt fails, the agent assigned via the AOR takes over at renewal.

No authority exists in the VU to recommend or make policy statements on behalf of members or their carriers; the only grant of “power" extended to the VU is that of the printed word and any opinion it may influence. In light of this limited power, the VU's stance is that the insured is the only party to the contract that has the authority to assign an agent with whom the carrier has a contract. 

Author: David W. Walker, CIC
Mills & Sons Insurance

Counter Point: Decisions to abide by an insured's request to change agents via an Agent of Record rest with the insurance carrier because special considerations are allowable in contracts between carriers and their agents.

Every so often an issue seems to raise concerns within our membership, one of which being agent of record requests (AORs). Recently a Virtual University article (June 23, 2017) "Holding a Client Hostage," authored by Chris Boggs, broached this topic, taking a viewpoint of “ethics."

In the article the author leans to the idea that if an insured has signed an AOR form (ACORD 36) then he/she must be dissatisfied with the current agent/agency, and thus the only moral/ethical/right thing for the carrier to do is honor the request and transfer the account to the “new" requested agent/agency.

Questions: A.) Does this always happen? B.) And, if not, why not?

A.) The technical and practical answer to my first question is a resounding NO.

B.) Why? Because legally there are contracts (obligations) involved! In the real business world, the law allows for legal contracts and agreements to contain “special considerations." This certainly manifests itself in agency agreement contracts between insurance companies and agents/agencies. There are "preferred" contracts (agency agreements) out there, some of which certainly might and do include provisions that the carrier will not, or does not have to, reassign the “preferred agency's" accounts to another agent/agency, EVEN WITH the specific written request/authorization of the insured policyholder.

In Missouri – as in most jurisdictions – this is the case.

While the incumbent agency could always get (or attempt to get) a rescinding assignment in written form, by contract law, this certainly is not required if there is a preferred contract in place addressing AOR requests. Some of these preferred agreements might allow for the incumbent (preferred) agency to accept or allow for the transfer of the account, as Boggs' article so indicates would be the reasonable or right thing to do; however, the industry does not operate under “equity" law, but contract law, which is the reality in the real business world, and it's important to remember that the reasons for which a company may reject an AOR request are varied.  Absent a preferred contract, a carrier still has every right to deny a policyholder's AOR request, as Missouri state insurance laws regarding the same simply do not exist.

We all must remember that this subject matter is NOT a coverage issue. It IS, on the other hand, a marketplace concern!

In Missouri there are no statutes or directives from the Department of Insurance to fall back on or give guidance to carriers and agents as to how they should proceed when an insured wants to move his/her account(s); or, as more often is the case, where one agent/agency wants to “take over" an account. The reasons for which a consumer may sign an AOR are varied. Sometimes the consumer has unreasonable expectations from a claims standpoint and sometimes a consumer even gets questionable advice from a competing agent. There simply are no rules or laws, other than within the agency agreement contracts between insurance company A and agent/agency B, as to how policyholder transfers will be accomplished.

The lack of state statutes and regulations regarding AORs leave them to be virtually unregulated by any government agency, leaving the marketplace to determine the procedure by which they will be handled and in what manner. While many aspects relating to the insurance industry in the state of Missouri are addressed by state regulators, AORs are not one of those. Thus, carriers may then choose to honor the requests or deny the requests by the consumer, and determine the methods by which they do both. The bottom line is that there exists no legal basis by which carriers are held to be required to switch the agent or record on a given policy, upon receiving a request for the same from a consumer.

Arguments have been presented, within the referred to VU article, that:

1.) Even though the refusal to honor the transfer request may be legal, that it is not ethical.

OK, might be a good principle, but, in the real business world, are all transactions always viewed (by all parties) as being ethical?

2.) Failure to honor a written AOR request is a "bad business" practice on the part of the carrier.

What are the prevailing relationships between the company and the competing agents/agencies? What are their legal contractual obligations with the two agencies?

3.) It is “angling for a major E&O claim" or “placing a wall" between the insurance company and the insured, when the insurance company refuses to honor an AOR request.

The insurance company is contractually obligated to follow the agreement they have with each agency but, again, a company may decide not to honor an AOR request even absent an agency contract to the contrary.  This is a business transaction, not an ethical or moral process.

Let's look at the reality of privity of contract, the principle about who the parties are in the contract.

A .) The insurance contract (policy) is between the insurer (company) and the insured (policyholder). The agent/agency is simply the go-between for these two parties. The agent is NOT a party to the insurance contract and thus cannot require one party (the carrier) to do anything about a request from the other party (the insured).

Likewise, there is another contract to consider: the agency agreement between the carrier and the agency. Here the insured/policyholder has no privity to the contract and cannot legally require either the carrier or the agency to do something different than what is in their contract.

Remember: There is not any clause or provision in an insurance contract (policy) that says a carrier is obligated to transfer the assignment of who is going to service the policyholder; that requirement may or may not be in that separate contract between the carrier and the agency.

What also must be taken into account is the fact that an agent/agency may not have a contract with a specific company, thus rendering void any right a consumer believes he/she may have to place coverage through any agent with any company.

In conjunction with all this we should remind ourselves that it was us, the Missouri Association of Insurance Agents, that brought to ACORD the idea of developing a standardized form for the agent/broker of record change request. This was the brainchild of past president and former Insurance Person of the Year Pat Connell, and was presented to ACORD by recently retired CEO Larry Case. See the Missouri Agent magazine article in the December 1995 issue. ACORD 36 went into effect January 1, 1996. This standardized form includes applicable verbiage that should be used when requesting an AOR, but as we've mentioned in this article, the decision as to whether the request will be honored still rests with the carrier.

SOUND OFF: With both sides presented, what is your opinion? Please let us know by emailing VirtualUniversity@iiaba.net. 

Last Updated: January 5, 2018