Risk Management Techniques for the Real Estate Industry:
Maximizing Your Broker's Performance: A Simple Contract Puts It All In Black and White
By Barron S. Wall, ARM, PMC and Karen W. Walter, Esq., ARM
ICA Risk Management Associates
Insurance prices are up, and so are broker's commissions!
You have surely felt the pain when paying your commercial insurance premiums in these past two years. But you may not be aware that those exorbitant insurance premiums are lining the pockets of your broker proportionately, and for no greater work than they did in the past! While your broker commiserates when informing you that your premium went up 100% to 500%, he would not generally expound that the brokerage business, thanks to you, has suddenly become a lot more profitable. Why? Because brokers are usually paid a commission that is a percentage of the premium.
Brokers tend to claim that either insurance regulations or their own agency rules forbid them from being compensated other than on commission, yet, if pressed, they will admit that the percentage of commission is as negotiable as the policy's coverage and terms. And, so long as you, the insurance buyer are savvy enough, performed work and the price that broker actually charges you prior to and during the policy year is entirely negotiable as well.
A Brokerage Service Agreement can include the following points, which will help you proactively manage the broker's activities:
• You can interview, in advance, the broker's personnel to be assigned to your account and identify them in the Agreement, which allows you to assure their level of expertise and hourly rates match your needs.
• You can set specific time-lines and schedules for what the broker is expected to accomplish. For example, the Insured may set specific dates by which the renewal strategy and proposals are to be presented, when and how frequently claims are to be reviewed, what loss control services (such as inspection of specific locations) are to be provided by the broker (or by the carrier), etc.
• Check those Policies! We have found that brokers often do not review insurance policies to assure they comply with the terms agreed upon when the insurance coverage lines were bound. By requiring the broker in the Agreement to audit the policies within a specific time frame after the policies are received, and to follow up with the carriers to ensure that correction endorsements are obtained, you can rest assured that the policies are complete and accurate.
• Make the Broker Responsible for His Acts (and Errors!) The Agreement can require the broker to carry and disclose its errors and omissions insurance with stated limits, which would put teeth into your ability to hold the broker to deliver the services contracted, and at the level promised. The agreement can even incorporate other monetary incentives/penalties for the broker achieving/failing to achieve the desired level of performance.
• Confidentiality of Sensitive Information. Very often, you may be required to share with the broker confidential non-public information, such as merger and acquisition plans, product introductions, projected revenues and earnings, ongoing litigation, etc. Disclosure to the public or unauthorized use of such information could have dramatic, negative consequences to you, the Insured. The Agreement can identify how such information is to be handled, be it at the broker's office or when transmitting to the insurance carriers involved, as well as including a confidentiality clause.
• Have the Broker Account for Your Money! Many policyholders remit their premiums to the broker rather than the insurance company directly. If there is delay or mismanagement by the broker, you may find, a little too late, that your brokers have not transmitted the premium in time resulting in cancellation/ non-availability of coverage, or have totally misappropriated your remittance. By incorporating a provision in the Agreement permitting you to audit the broker's accounts and records, and requiring the broker to preserve all pertinent records, you can ensure that the funds flowing through the broker on your account are all properly remitted and accounted.
• Other provisions can be incorporated into the Brokerage Service Agreement, such as establishing specific intervals at which the insurance coverage is to be marketed, the time frame for receipt of your policy, how often you should expect updates from the broker on the insurance marketplace, or provision of updated claims information even after the termination of the brokerage relationship.
A Brokerage Service Agreement should be an important component of your risk management plan by identifying your expectations of the broker, and imposing a contractual duty on the broker to provide those services. It provides you with the knowledge of exactly what you are getting for your money. Although you may encounter resistance from your broker when asking him to sign such an Agreement, he is no different from any contractor providing services to you, and there is no reason why the expectations and compensation should not be reduced to writing. Your concern should be on the benefits of having the Agreement, not on the broker's reaction. Ultimately, both the broker and you, the Insured, are better off being party to a well-drafted written Brokerage Service Agreement.
