Binder agreements are regularly entered into by insurance agents or brokers who are seeking to offer insurance on behalf of the insurer.
A party that holds a binder will perform certain functions for and on behalf of the insurer including issuing policies and handling administration including variations, endorsements, cancellations, and claims.
Beyond the operational considerations of rating the risk, pricing premiums, issuing the policies and handling claims, there may be traps for the unwary. So what are our top five commercial tips for negotiating binder agreements?
1. Servicing Rights, Client Data and Intellectual Property
Where you are servicing clients under a binder, the binder agreement needs to be clear about who owns the client servicing rights. Specifically:
If this is left unclear or ambiguous, the insurer may attempt to keep the clients and seek to invite renewal from the client portfolio even though you have brought them into the relationship (and the goodwill in the client base should remain with you). Imposing reasonable commercial constraints which prevent the insurer from directly contacting the clients is important.
You also need to ensure that you have permission to use the client’s personal information and any other data which allows you to provide services to them. It’s important to make sure that:
If you are developing or creating intellectual property under the binder agreement (e.g. you have drafted the policy wording), you have developed trade marks (registered or unregistered), or you have invested in customer transaction portals or risk management initiatives which are unique, the binder terms should:
2. Profit share
Many binder agreements have a ‘profit share’ component. Ensure that you understand the profit share commission under the binder and that you have access to all of the information you need to confirm your profit share. This is an area where there are often disputes about what has been agreed and it is worth having a lawyer review the drafting of the profit share calculation to make sure it accords with your commercial understanding.
The binder agreement needs to:
3. Scope of the authority
The scope of the authority under the binder must be appropriate for the services that the binder holder will provide.
Ensure you know what your rights are in relation to:
Generally it is the insurer’s obligation to make sure a binder holder acts within the scope of their authority so there is incentive for both parties to make the scope clear, precise, and covers all of the necessary services.
4. Representations and warranties
When entering into any agreement, you will have to rely on the other party’s representations, which is why these are expressly included in the relevant contract.
At a minimum, each party should be required to make representations and warranties that:
Do some groundwork at the beginning of the relationship to make sure that when things end, there is an orderly end to the relationship which minimises the impact on clients and your business.
You should consider:
Once the binder has been terminated:
The easiest way to manage these issues is to ensure that a ‘run off period’ is built into the contract, to allow the binder holder to continue acting under the binder until the policies expire. This avoids the risk that the clients will be left exposed. However any run off period must take into account things like the insurer or the binder holder losing their authorisations or other events like insolvency that may impact the ability to continue servicing clients.
If you need support reviewing, drafting or negotiating binder agreements, get in touch – we’d be happy to help.