Agent Agreements: 10 Rules for Avoiding Trap Doors
Agent Agreements: 10 Rules for Avoiding Trap Doors

Agent agreements. You have read at least 25. You might have signed that many. Standard, boring lawyer drivel, right?

Not if you are in a legal fistfight with your administrator. Words matter.

Perhaps you have never been in a legal scrape with an administrator, so the wording of your agent agreement has not been tested. If your administrator cancels you, pays your commission to another agent, or allows your dealer to go direct, the wording of your agent agreement will become extremely important. Does your agent agreement have trap doors?

As agent lawyers since 2003, we have been representing agents all over the country in cases against administrators. We’ve seen lots of trap doors.

What’s a “Trap Door” in an Agent Agreement?

Any wording in an agent agreement that might allow an administrator to take any part of the sales pipeline that you built is a “trap door.” Here are some common situations that reveal trap doors.

Your administrator is purchased by a company that has a direct sales force. The new owner decides that the independent agents have to go.

A big competing agent with the same administrator hires a kid with a personal relationship to your biggest dealer’s son. The kid undercuts you by $30 per contract. You are out.

Your biggest dealer convinces the administrator’s new management team to let them go direct. You are out.

The regional vice president of sales — the one you have been required to introduce to your dealers — just became an agent himself. He walks into your stores with your pricing and steals the business.

Your dealer asks your administrator to disclose your markup. The administrator does, and the dealer demands a new agent at a lower markup; your administrator agrees.

An Administrator’s Great Temptation

Agents can be tempting prey for sales pipeline poachers.

Sales pipelines do not magically appear. They are built by agents grinding it out day by day, week by week. You are working prospects, dealing with rejection, making cold calls, servicing stores, and slowly adding volume. An agent does this work for no pay and no expense reimbursement. Only when the sales pipeline starts to pump out deals does the agent begin to slowly recoup the investment of time and money.

Once the agent has done the years of work to build a sales pipeline, administrators have what

they want: dealers selling their products. Dealers have what they want: products to sell and employees trained to sell them. There is an immense temptation to cut the agents out and take their commissions. If an administrator, other agent, or even a dealer is intent on taking the agent’s commissions, there is nothing that will stop them from trying — nothing, not even the perfect agent agreement. However, with a solid agent agreement, sales pipeline poaching can be stopped.

What can I do to protect myself?

Insist on good wording in your agent agreements. Good wording can head off a world of trouble. Based upon what we have learned litigating lots of agent agreements, we have come up with 10 rules for better agent agreements:

Don’t rely on verbal or email promises, no matter who said it or who wrote it. Agent agreements have what’s called a “merger clause,” which states that the agent agreement itself constitutes the entirety of the deal between you and your administrator. This clause wipes out all the promises and assurances the administrator made to you prior to you signing the agreement, even those that were in writing. If you’ve agreed on something, put it in the agent agreement.

If you are acting inconsistently with the agent agreement and your administrator is fine with it, make sure this is reflected in a written amendment signed by both parties. Let’s say that two years after you signed your agreement, they told you that you could write business in Colorado, but your agreement only authorizes you to write in Arizona. Agent agreements contain an “only written amendment” clause. This means if they tell you verbally or in an email that you can do something that is inconsistent with the contract, they can later recant because it was not an amendment, signed by both parties. So, insist that they amend the agreement to include Colorado or reassign them to a different agent.

Make sure your agent agreement clearly addresses what happens to your commissions if you are terminated by your administrator. Most administrators say they will pay post-termination commissions, but their agreements are fuzzy on this point. Even if you think you are safe on post-termination commissions, look for four sneaky lawyer tricks.

First, the “product swap,” for which your agreement specifies you get paid on “ABC” VSCs but they side-step paying you by substituting a rebranded “CBA” VSC program in your stores. Second, they include a provision requiring that you be “currently servicing” as a condition to commission payment, but then they refuse to allow you to keep servicing your dealers on their behalf after your termination. Third, they insert an “assigned-dealer” restriction on post-termination commissions and claim all of your dealers were “assigned” to you. Last, beware of “for cause termination” restrictions on post-termination commissions, in which case simply being late with a report or some other trivial matter could lead to a “for cause” termination.

Above all, make sure that you have clear language in your agreement that requires your administrator to pay you commissions even after termination of the agent agreement. They would not have the business without you. Remove the temptation for them to fire you and keep your commissions or pay them to someone they like more than you.

The “choice of law” provision matters. Agent agreements typically have a provision that says a certain state’s law controls. You can bet the administrator has a reason for designating that state and it is not to make you happy.

For example, an agent agreement might require the court or arbitrator to follow Nebraska law, even if you are doing business in Florida and your administrator is in Chicago. Nebraska law does not allow for punitive damages. This means that an arbitrator or jury cannot punish the administrator even if the administrator does something that makes them angry. Before you sign an agent agreement with a specific choice of law provision, ask the administrator why it chose that state and determine whether this creates an unlevel playing field.

The “venue” provision in the agent agreement matters. Venue determines where you will go to resolve any dispute. Even if you do all your business in Florida and the administrator has a regional guy in Florida, the agent agreement could require you to bring a lawsuit in a Utah court. This means that even if the administrator breaches the contract, you have to go all the way to Salt Lake City to file your lawsuit. They’re hoping they can make it hard enough that you won’t even bother to try to sue them.

Because of these clauses, we typically fight administrators in their backyard. Even better, though, is if you  can fight them where you do business and where your dealers are.

Make sure you understand what you are getting into with arbitration if your agent agreement requires it. Arbitration is normally quicker and less formal than a lawsuit, but it’s often terribly inconvenient and forum fees are often exorbitant. Arbitration has advantages and disadvantages.

Make sure the “agent of record” provision will not allow a competing agent with the same administrator to undercut you. Once you have that dealer group up and going, other agents with the same administrator will be tempted to profit off of your hard work. The agreement should specify that the administrator must seek your consent before it re-directs the commission on any active accounts.

Make sure your payment terms are clear and you have the pricing discretion you need. When the administrator describes to you how you get paid and how pricing works, make sure the contract is in accord. Normally, if you have a problem here, you will figure it out very quickly. But a good rule of thumb is to ask that the language regarding payment terms be made so clear that your friend who is not in the industry could understand it. Also, make sure they will keep your pricing confidential.

Beware fancy lawyer talk. If you are confused about any of the wording in the agent agreement, ask them to clear it up. For example, the agent agreement may say something like this:

“Agent will use its best efforts to solicit, market and sell Acme Insurance Co.’s products or programs within the territory in Schedule A. The agent will comply with such rules, regulations, manuals, policies, guidelines, rates or instructions as Acme may prescribe verbally or in writing, and which Acme may revise.”

Here, terms like “best efforts” and “prescribe verbally” are vague. Does “best efforts” mean first out of the bag or exclusive? Why would they want you to agree to make everything they might “prescribe verbally” in the future a part of the contract? One thing is for certain: The administrator’s lawyer had something in mind. Get rid of vague, undefined terms.

Make sure that the “change of control” clause will not hinder your ability to sell your agency. If someone walks in with a backpack full of cash and offers to buy your agency, it will be a bummer if you have to go get permission from your reluctant administrator. Here is a typical “change of control” clause:

“Non-assignability: Representative agrees not to assign his rights under this agreement without the other party’s prior written consent and any attempt to make an assignment in violation of this article is void.”

This clause essentially gives your administrator a veto, or even a pretext to cancel you if they think the new owner will move business to a different administrator. Make sure you are comfortable with your ability to sell your agency if you so desire.

Aren’t Agent Agreements ‘Take It or Leave It’? 

No. When our clients present our suggested amendments to administrators before signing, administrators frequently are willing to make changes. Obviously, the more they want you, the more they will be open to your suggestions. If you do not even bother to ask for better wording, you will never get it. Give it a try. Even if they say “No,” you will be on notice of where you stand, which is far better than running blind.

So let’s say that, after reading this article, you pick up your agent agreement and discover that your right to post-termination commissions is murky at best. What to do? This is tricky. This requires a case-specific strategy. It is probably best not to write an email in which you say that the wording is ambiguous, which could be used against you later. There are ways to shore up bad wording after the fact.

Whatever it takes, you have to stand up and fight for your business. You built that sales pipeline with blood, sweat, tears and lots of nights in cheap motel rooms over many years. If a poacher tries to steal even one dealer, defend your turf. Most administrators figure you will just roll over and go away. Frequently, that is what agents do. They just chalk it up to experience and figure they can never win a fight against someone who took their commissions.

It does not have to be this way. The agent’s story is compelling. When they hear how you built your sales pipeline, judges, juries, and arbitrators will typically compensate for lost commissions with or without rock-solid language in your agent agreement. However, with solid language, the poacher is less likely to try to take it from you.