Your Contract
Dirk Beamer,
Like industry leader State Farm, the Allstate Insurance Company has built its business historically on a platform of “captive” insurance agents who devote their time exclusively to selling and servicing Allstate products. Years ago, Allstate broke ranks with its chief competitors by allowing its agents the opportunity to sell the “economic interest” in their agencies to third parties. In 2013, the Farmers Group of Insurance Companies announced a similar model. While the Allstate Exclusive Agency Agreement presents a unique and potentially valuable opportunity to prospective agents, it contains fine print that warrants close attention.
Here are five key points prospective agents should consider:
1. 90-Day Termination without Cause. Allstate reserves the right to terminate the Exclusive Agency Agreement for any reason – or for no reason – upon providing 90 days notice. While in theory agents still have the right and opportunity to sell their “economic interest,” they may have little time to do so. And the value of this interest may be compromised if the agent is forced to conduct a fire sale. Some agents lament that they were assured they would never be terminated without “cause.” Regardless of what may have been said, the contract plainly speaks to 90-day termination without cause, and Allstate plainly can and does exercise that option regularly.
2. Sales are at Allstate’s Discretion. While the contract permits agents to sell to third party buyers, it stipulates that Allstate has exclusive discretion to approve or disapprove such a sale. Inevitably, this shrinks the potential market. Worse, it can lead to mischief if local management meddles in the negotiations between the selling agent and the buyer. While Allstate announces certain criteria from time to time that will determine whether an outside buyer is “qualified,” those criteria change regularly and are not uniformly followed.
3. Termination Payments are Not Guaranteed. Currently, Allstate offers a termination payment (TPP) to outgoing agents who, for whatever reason, do not sell to a third party. The termination payment is roughly equal to one and a half times the agent’s annual commission income, and it is paid out over twenty-four (24) months following termination. The termination payment itself is often smaller than the market price for the economic interest of the book of business, but it does at least provide some hedge for the agent unable to locate a buyer acceptable to Allstate, with one exception. There is a five-year vesting requirement for all new policies written by “start-up” agencies. A start-up is either a scratch agency, or one that purchased less than 750 policies. Unfortunately, the Exclusive Agency Agreement does not guarantee that Allstate will continue its practice of providing termination payments. Agents investing in an agency face the risk that – when they are ready to cash out – Allstate will not approve a proposed sale and will no longer offer termination payments.
4. The Agreement Itself is Subject to Constant Change. The Allstate R3001 Exclusive Agency Agreement is 11 pages long. The Agreement includes the following provision: “Agency acknowledges that it has reviewed the Supplement, EA Manual, and Agency Standards and that it has an ongoing responsibility to review all changes to the Supplement, EA Manual and Agency Standards issued by the Company and agrees to be bound by them.” Collectively, the referenced documents contain hundreds of pages of rules. Allstate modifies these documents routinely. In effect, Allstate takes the position, “We can unilaterally modify the Contract at any time, and you agree in advance to be bound by those changes.” So not only should potential new agents read the fine print, they should also get out a crystal ball and forecast any additional fine print Allstate may wish to add in the future.
5. Commission Rate is Not Guaranteed. Pursuant to the R3001 Agreement, “The sole compensation to which Agency will be entitled for services rendered pursuant to this Agreement will be the commissions as set forth in the Supplement, as may be amended from time to time.” Historically, Allstate offered ten (10%) percent on new P&C insurance business. In 2011, Allstate announced a new variable commission plan under which commissions would drop as low at eight (8%) percent but would increase to eleven (11%) percent for highly competitive agents. In response to serious agent pushback, Allstate lessened the blow by putting the floor at nine (9%) percent instead of eight (8%) percent. How long that will hold remains to be seen.
An Allstate Agency represents a significant investment of time, money, as well as mental and emotional energy. Interested candidates must conduct a serious and careful examination of all aspects of the proposed arrangement. A great place to start is a conversation with existing Allstate agents and/or the staff at the National Association of Professional Allstate Agents, Inc.
Dirk Beamer serves as General Counsel to NAPAA and helps NAPAA track legal issues of interest to its members. NAPAA has provided this update for informational purposes only. The contents should not be construed as legal advice or an endorsement from NAPAA or its attorneys, and NAPAA expressly disclaims any such advice.
Winter 2013/2014 Exclusivefocus