Factors to Consider Seriously During Insurance Agency Acquisition
The sale and purchase of an insurance agency accompany unique accountabilities and risks, which do not apply to other sectors or even insurance entities. There is a lot of cautiousness to consider while drafting the agreement. Besides, regulatory challenges will also need serious considerations, when you are planning to buy or sell an insurance agency.
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The insurance agency acquiring process is subjected to less regulatory analysis. Only a few jurisdictions like Texas need pre-closing notification. Even when there is an ancillary change of control [like change of director or an officer] associated with the insurance agency it is exposed to regulatory needs, especially when the agency holds an all-state license.
The majority of states need agencies to file annual cybersecurity documents and a proper practice review, which determines if the requirements are adhered to fairly.
A potential insurance agency buyer will possibly need to understand the licensing needs. Resident or non-resident, which licenses exactly is necessary? In general, an agency has to hold a company license from where the agency solicits, negotiates, and sells insurance. License is a necessity even if the agency acts as a wholesaler in the state through intermediary insurance assignments between an insurance company and a retail insurance broker.
The potential insurance agency buyer needs to confirm that all the needed licenses are not expired and have correct lines. It is because many states need the insurance agent to carry licenses for lines like title, health, or life. However, if the buyer desires to transform the corporate into an LLC after purchase, it can be accomplished via corporate conversion laws. There will be no need to re-apply for the agency licenses.
Individuals comprise independent contractors or employees of the agency. These individuals need to have their licenses and cannot borrow their co-workers or resident director or officers’ licenses. There has to be responsible personnel [insurance producer] liable for the agency’s actions and holding the same insurance lines and licenses as the agency.
Ownership of customer accounts, policy expiration, and exclusive provisions
If the rule of an agency is to retain rights to its insurance customer’s accounts and expiration then the potential purchaser can get severely affected if the agency grants the account ownership rights to some other entity. Even if the selling agency is bound under purchase agreement the customers are people and have their rights to work with anyone they prefer. This is an aspect that will need thoroughness because it can limit future business opportunities.
Violation of fiduciary obligations associated with a premium trust account can turn out to be damaging for the buyer. Consider successor liability concerns carefully in the purchase agreement because states often differentiate in respect to the responsible party.
You can see how insurance agency acquisition offers several unique issues and challenges that need serious consideration for the buyer or the seller.