A guest post from Dirk A. Beamer of Wright Beamer, PLC
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. Just this year, 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 buyers should consider:
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 the agent still has the right and opportunity to sell her “economic interest,” she may have little time to do so. And the value of her interest may be compromised if she 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.
Sales are at Allstate’s Discretion.
While the contract permits agents to sell to third party buyers, it reserves for Allstate 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 his 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.
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. 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.
The Agreement Itself is Subject to Constant Change
The Allstate R3001 Exclusive Agency Agreement is eleven pages long. The Agreement itself has not been modified since it was introduced in 1999. However, it includes the following provision: “Agency acknowledges that it has reviewed the Supplement, EA Manual, and Agency Standards and that it has on 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 a potential new agent read the fine print, she should also get out her crystal ball and forecast additional print Allstate may wish to add in the future.
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, and 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.
Dirk A. Beamer. Esq.
General Counsel, NAPAA & UFAA
Dirk serves as general counsel to the National Association of Professional Allstate Agents (“NAPAA”) and the United Farmers Agents Association (“UFAA”). Dirk has represented both associations and their membership in various lawsuits nationwide. In addition to litigation matters, Dirk regularly counsels NAPAA and UFAA concerning their business affairs, management and member concerns. Dirk works with agents throughout the country providing expert support in the sale or purchase of an insurance agency.
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