Carriers support the independent life brokerage agency system. As stated by one major Carrier in its promotional materials for consumers:

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1 CONTRACTS FOR THE INDEPENDENT LIFE BROKERAGE AGENCY By Steven John Fellman, GKG Law Washington, D.C. General Counsel, National Association of Independent Life Brokerage Agencies III. Chapter III: RESPONSIBILITY FOR ACTS OF THE PRODUCER A. The Relationship between BGA, Producer and Carrier NAILBA members wholesale life insurance products. Applications for insurance are solicited by producers. The producers are independent contractors licensed to sell life insurance products by the states in which they operate. Producers must meet state established educational requirements in order to be licensed. Generally, BGAs and Producers will enter into agreements where the Producer agrees to submit applications through the BGA and the BGA in turn agrees to forward the applications to the Carrier. In these agreements, it is specified that the Producer is an independent contractor and not an employee of the BGA. The agreements include terms regarding commission structures, legal compliance and limitations on the Producers rights to obligate the BGA. The agreements specify the responsibility of both the Producer and the BGA. In order to write for any Carriers represented by the BGA, the Producers must complete an application form provided by the Carrier. The form confirms that the Producer is properly licensed; will agree to comply with all relevant insurance laws; will not be authorized to bind the Carrier; cannot change the terms of the Carriers insurance policies; and that the Producer is an independent contractor. No Producer can submit a proposed policy to a Carrier until that Carrier has approved the Producer to write for that Carrier. Each Carrier provides Producers with the Carrier s book of rules and regulations and promotional materials regarding the products sold by the Carrier. In addition, Carriers have Web sites that Producers can access for additional information regarding the Carrier s products. Carriers support the independent life brokerage agency system. As stated by one major Carrier in its promotional materials for consumers: (Company s) products are distributed through a network of independent life brokerage agencies that represent the nation s premier life insurance providers. An agent will recommend (Company) when, in his or her professional opinion, our products are most appropriate for your personal or business life insurance needs. NAILBA The Voice of Independent Brokerage Distribution - 1 -

2 In this context, the Producer, the BGA and the Carrier work together. The Producer deals with the applicant and determines the applicant s needs. The BGA works with the Producer to find the best policy and the best Carrier to meet those needs. As independents, the Producer and the BGA have access to a broad range of policies from a diverse group of qualified Carriers. The Carrier provides the life insurance that gives the applicant the combination of security and death benefit that the applicant is seeking. This entire business model is well regulated by the states. The Carriers are regulated. The BGAs are regulated. The Producers are regulated. No Carrier, BGA or Producer can do business in any state unless they are licensed to do so. Yet even though the Carrier recognizes that both the BGA and the Producers are independent contractors, many Carriers require by contract that the BGA assume all responsibility for actions or failure to act by the Producers who submit applications through the BGA. Some Carriers require by contract that the BGA indemnify the Carrier for actions or failures to act by the Producers who submit applications through the BGA. Some Carriers require by contract that BGAs agree that Carriers can set off against monies owed to the BGA, any monies that the Carrier claims is due from the BGAs Producers. Finally, some Carrier contracts provide that if a Producer writing through a BGA breaches its contract with the Carrier (as an example violates a law or regulation), such action by the Producer is a breach of the BGAs contract with the Carrier and the Carrier may have the right to cancel its contract with the BGA for cause which may eliminate the right to receive residuals. As more Carriers begin to introduce language into BGA contracts which require BGAs to accept responsibility for Producers, BGAs have pointed out that it is unfair to require them to accept such responsibility as Producers are independent contractors. Although BGAs provide guidance to Producers and assist them in determining which life insurance products may be best for specific cases, BGAs have no control over the actions of Producers and have no ability to supervise the relationship between the Producer and the applicant. It is the Producer who deals with the applicant, from the initial contact until the application is submitted and ultimately a policy is issued by the Carrier. The BGA does not deal with the applicants on a regular basis. The BGA does not have the authority to bind the Carrier or decide whether a Carrier is going to issue a policy. The BGA provides technical assistance to Producers and processes applications to insure that all the required information has been obtained prior to submitting the application to the Carrier. Under such circumstances, why should the BGA accept full responsibility for the Producers? The answer to this question is simple. There have been a series of cases holding the Carrier responsible for the actions of the independent agents (Producers) who market the Carrier s life insurance NAILBA The Voice of Independent Brokerage Distribution - 2 -

3 products to consumers. In most instances, if a consumer sues the Producer and the Carrier alleging that the Producer has misrepresented some significant aspect of a life insurance policy, it is the Carrier not the Producer that will have the burden of paying any judgment because the Carrier has the financial resources to do so. As life insurance products become more and more sophisticated and as the regulatory environment applicable to life insurance transactions becomes more complex, the odds of Producer error increases. Some Carriers take the position that by serving as an intermediary between Carrier and Producer, the BGA must assume some of the risk associated with the transaction. Recognizing that as a matter of law, a consumer suing a Producer and a Carrier may not have a claim against the BGA which processed the application, Carriers have included language in BGA contracts pursuant to which BGAs are required to assume responsibility for Producers as a condition of obtaining the r ight to market the Carrier s life insurance products. B. Contract issues Set out below are four clauses found in current Carrier/BGA contracts under which BGAs are responsible for Producers. Example One CERTAIN DUTIES OF THE GENERAL AGENT You are responsible for the actions and performance of your employees in connection with this agreement. The Company may, from time to time, notify you of laws, governmental regulations and Company rules and regulations which may be applicable to your activities or the activities of producers who act through you. You agree to promptly communicate this information to your employees and producers, as appropriate. You agree to review policy applications submitted through you, and you agree to notify the Company if you become aware of actions by employees or producers which violate laws, governmental regulations or Company rules and regulations. You agree to notify the Company if you learn of the conviction of any of your employees or producers of any felony or other serious crimes. The Company agrees that it will not hold you liable for any matter of which you were not aware and of which you could not reasonably have been expected to have been aware in the normal course of your business activities. This is one of the most favorable clauses for BGAs that we have seen. Under this clause, not only does the carrier not require that you assume all responsibilities for the acts of your Producers, but the carrier specifically agrees that the BGA is not responsible for any act of a Producer of which it was not aware or of which it could not reasonably been expected to have been aware in the normal course of business. Example Two The General Agent shall indemnify and hold the Company, its present and former officers, employees and agents harmless against all civil liability, including attorneys fees and costs of investigation and defense incident thereto arising as a result of errors, omissions, negligence, NAILBA The Voice of Independent Brokerage Distribution - 3 -

4 misrepresentation, fault or wrongful action of the General Agent, its affiliates, Sub agents, and affiliates of such Sub agents, including failure to comply with any applicable federal law or regulation, state law or regulation, administrative or exchange rule or regulation, or rule of any applicable self regulatory organization. Under this clause the BGA assumes liability for all acts of its Producers and agrees to indemnify the Carrier from any liability resulting from errors, omissions, negligence, misrepresentation, fault or wrongful action of Producers including any attorney fees, cost of investigation or defenses. Example Three SUPERVISION In connection with this agreement, you are responsible for the performance of your employees and the activities of your Producers and solicitors as they relate to their contract with the Company. You agree to take all necessary steps to communicate the Company s rules and regulations to such persons, and to assure that they comply with such rules and regulations, as well as all other applicable laws and regulations. Under this section the BGA assumes the responsibility for all activities of its Producers. The BGA also agrees to communicate all the Company s rules and procedures to the Producers and assure that the Producers comply with such rules and regulations as well as all other applicable laws and regulations. Examp le Four This is a tremendous responsibility and should not be undertaken lightly. REIMBURSEMENT & INDEMNIFICATION You shall reimburse the Company and/or indemnify the Company for any loss including attorneys fees resulting from actions by you or your agents and for all costs, expenses and attorneys fees that the Company may incur in recovering from you or your agents any property or indebtedness belonging to or due the Company. You agree to indemnify and hold the Company harmless for any claim, loss, expense, cost or liability which it may incur resulting from you or your agents breach of the terms of the Contract or violation of any law or regulation or failure to comply with any court order. Should any claims or lawsuits be made by any third party against you or your agents, or the Company as a result of alleged wrong doing by you or your agents, then you shall hold the Company harmless from and indemnify it for any claim, loss, expense, cost or liability which it may incur defending the action and for any settlement or judgment resulting from such action. The Company may, at its discretion, defend or settle any such claim. The terms of this provision shall survive termination, as outline in Section XX. This is another example of a contract that makes the BGA fully responsible for the acts of its Producers. NAILBA The Voice of Independent Brokerage Distribution - 4 -

5 The BGA Contracts Manual does not constitute legal advice. The law governing interpretation of contracts and insurance regulations will vary from state to state. You should always consult with legal counsel with specific legal questions relating to your particular situation before signing any contracts. NAILBA The Voice of Independent Brokerage Distribution - 5 -