WHAT CAN CONTRACTS DO FOR YOUR COMPANY?

Contracts with producers, TPAs and other third party contractors can protect and improve your company, but only if you cover all the bases.

The best contracts in the industry are usually ahead of their time. For instance, two years before Gramm-Leach-Bliley or the HIPAA privacy acts were passed, one company already had written privacy language into their producer contracts. Not only was the producer expected to protect and preserve the company’s information, but also to make efforts to protect all personal information of their customers. Now, that type language is fairly common, but at the time, it was leading-edge.

Currently, producer contracts vary widely in scope and content, ranging from a typical 3 page document to 14 or more. Much of the difference may lie in the depth of language for each section, but contracts differ from each other even more in what is included and excluded as general topics. Broker dealer contracts already cover much of these concepts because of regulatory requirements.

The following sections are recommended for the most thoroughly protective contracts, from the prospective of market conduct compliance. This is not an exhaustive list, and doesn’t contain such things as commissions and arbitration. However, it contains things that are missing from many contracts across the industry. Some may not be applicable to all situations, and the company’s attorneys will certainly have opinions on the validity of each. However, TO strengthen your compliance program, protect your company and improve performance from third parties and independent contractors, check these ideas out.

A.  Ethics Commitment. This idea has been mentioned in prior issues of CLEARView, and will continue to be a Best Practice recommendation. If the company does not have an ethics statement, including producer conduct expectation, then write one. Many companies combine concepts such as those from the Million Dollar Round Table organization and the Insurance Marketplace Standards Association into one document. The commitment doesn’t have to be written within the contract, but can be an addendum that is signed off on during the pre-contract negotiations.

B.  Disciplinary Actions for Violations. Although many companies have shied away from putting this type of information in the contract, many other companies have embraced it as a way to make it very clear to the producer what behavior will be expected and what will be punished.

C.  Privacy. As mentioned above, many companies have for years had language in their contracts about protecting the confidentiality of the company’s information. However, the company must instruct those they have relationships with, to make every effort to provide physical and conceptual protection for every facet of their customer’s information. In fact, agency manager contracts can include the requirement that the manager conduct audits and physical checks to ensure the privacy mandates are being followed consistently.

D.  Complaint Handling. Your company should already have a standard for the field about handling complaints they receive and for responding to requests for information about a complaint received by the home office. The best place to communicate that first is in the contract. By contract, then, the producer either signs off on the instruction to send all complaints into the home office, or to notify the home office for assistance in responding. Additionally, have producers sign off on a commitment that they will respond to the home office regarding a complaint within X number of days. Having agency managers sign off on their commitment to make sure that the producer fulfills his or her commitment will give the company additional leverage.

E.  Advertising Limitations. This section is found in almost every contract in the industry, but because it is not in every contract, it is mentioned here. Your producers are either allowed to produce their own advertising pieces or they are not, so, again, the best place to tell them the first time is in their contract with the company. Beyond that, include the restriction that advertising must be approved in writing by the company before its use, whether the producers have created it or want to use previously approved, home-office created material. According to the American Council of Life Insurers (ACLI) Model Advertising Law for life and annuities, you must also remind your producers at least annually about your advertising review policy along with the worst possible disciplinary action you will take for violations of that policy. If you haven’t told them in the contract what your expectations are, this “reminder” may be a surprise to them.

F.  Company Standard Regarding Replacements. Of course, the issue of inappropriate replacements is not directly regulated by law for all lines of business. For producers who sell the products which foster this concern, it is important for the company to emphasis its stance regarding it. Common language for the standards of replacement often includes use of the term, “in the best interest of the customer.” Going further can help emphasize your ethical position by encouraging or requiring needs based selling, needs analysis, fair and complete comparisons, and so on. In fact, the company can take an even stronger stance regarding all sales for appropriateness, not just replacement sales.

G.  Privacy Notices. There may be some instances that the company will contract with a third party to send out the annual privacy notices required by Gramm-Leach-Bliley or HIPAA. The contract involved needs to be very clear as to expectations, and the company’s requirement to pre-approve the notice, as appropriate.

H.  Other Responsibilities. Often used in an agency manager’s contract or a supervisory broker/dealer contract, this section will delineate specific responsibilities such as training, supervising and monitoring producers. Ethical market conduct requires companies to provide training, establish supervision and then monitor sales activity. If the company can contractually push some of those duties down a level, the company’s resources have some relief. The key to pushing down training, supervising, and direct monitoring, for instance, is that the home office still needs to monitor to make sure those responsibilities are carried out in the field. Monitoring is typically done through overview reports, open-door policies for complaints and compliance/ethics issues, and consistency in disciplinary actions.

This list is a summary of what’s out there in the industry, but most companies do not include all these items in their contracts. You may want to consider adding more of these clauses at the next contract revisions. Then, as part of your company’s ongoing improvement, consider keeping an eye on the regulators’ horizon, so your company stays ahead of their curve in contractual commitments.