Too often when interviewing a prospective “expert” lawyers are led astray by the insurance executive who “has worked in the insurance business for over 25 years” or by the CPA who “has testified on many valuations.” BE AWARE – neither may be up to the task. As an attorney going to trial on an insurance valuation matter you want to know your prospective expert’s response to at least the following questions.

• How many times have you testified on an insurance (agency or company) valuation?
• Of those times, what percentage was for the plaintiff and what percentage was for the defendant?
• Have you ever been excluded by a court? If so, why?
• Have you ever been appointed by the court as an independent expert?
• What percent of your income is based on expert testimony on insurance valuation issues?

Adapted from “Factors to Consider When Hiring an Expert,” an article by Donald May (Marks Paneth & Shron LLP):

Moat Associates has created a business valuation tool  that can be used to estimate the value an independent insurance agency, whether large or small.

• Do you need a valuation estimate for legal or perpetuation planning?
• Are you curious about the value of your insurance agency in today’s market?
• Are you wondering about how to possibly value and price your insurance agency for sale?
• Or are you thinking about buying another agency and want to get an idea of its value before planning an offer?

While free business valuation software will not take the place of an insurance valuation expert, it can give you a good general idea of what your business is worth. This business valuation calculator is designed as a research tool only to provide insurance agency business owners with a free and confidential instant business valuation result that can be used to help determine an approximate valuation. This business valuation calculator is designed as a self-help research tool.

Why Try Free Business Valuation Software?

Simple estimators of an Insurance Agency’s value can be useful.

• Our business valuation calculator offers a simple calculator as an alternative to the 1.5 times “rule of thumb” which is regularly misapplied.
• While you need not identify yourself or  your agency, those who ask will receive a response that offers “indicators” for improving  the value of your business.

A free and simple valuation calculator is limited and should only be used as an  estimate of value. Free online services are not intended to replace a full business valuation.

• Any “simple” methodology can be terribly incorrect because, of necessity, it relies on a “simple” (i.e., limited) set of data.
• Hidden behind one year’s financial results are a multitude of factors that can greatly affect an agency’s real value.
• Significant among mitigating factors, but far from being all inclusive, are:

i)                    Effect of revenue trends;

ii)                  Underwriting performance;

iii)                 Concentration of business within a few accounts or specialty lines of business;

iv)                Source(s) of new sales;

v)                  Reliance on one or two employees;

Our  Business Valuation Methods Work

Notwithstanding the above comments, our Insurance Business Valuation Estimator brings together one year’s data regarding the factors that most often have the greatest affect on an Insurance Agency’s Value.

• True Size
• Reasonable Owner Compensation
• Efficiency
• Profit Margin
• Tangible Balance Sheet Values
• Working Capital

The resulting business valuation estimate will reflect a general application of standard valuation methodologies to the information you submit and may change substantially based on a comprehensive review of your operations and a complete discussion of your financials. For a complete valuation of your insurance agency, please consider contacting Moat Associates.

Spotting Trouble on the Horizon

When Lending Implement a Regular, Knowledgeable Follow Up

Inherent in the establishment of appropriate covenants and conditions should be acceptance of regular financial and operational reviews. These might be as frequent as quarterly in marginal loan situations or when trouble has been spotted. Such reviews should include not just the agency’s financial results but at least annually the owner’s personal financials whether or not personal assets have been pledged against the loan.

Operational aspects should include:

• the maintenance at all times of a fully funded premium trust account,
• insurance company loss experience,
• a comparative review of new and renewal experience,
• employee turnover
• numerous issues related to the agency’s book of business and major customers.  For example, is a changing underwriting climate affecting the agency’s larger accounts and are major accounts receiving favorable treatment regarding payment of their accounts.

Additionally at least once a year the review should be on-site. While many professional lenders feel that given the financials to review is enough, nothing can make up for the opportunity to meet with key employees and sense the level of morale and management support evidenced by the staff.

Identify any Failure to Separate Premium Trust Funds from Working Capital

The leading cause of insurance agency failure is the failure of the agency owner (and lenders when involved) to recognize that the cash on deposit in the agency’s account(s) is not all available to meet operating needs or loan maintenance. The nature of the independent agency interface with its carriers (insurance companies) generates a substantial flow of fiduciary funds in the nature of prepaid premiums. Notwithstanding laws and regulations to the contrary, many agency owners take advantage of this “float” to fund daily operating needs – both business and personal. Failure to distinguish the nature of available cash and monitor the maintenance of premium trust funds regularly leads to agency financial problems.

Spot An Emphasis by the Owner(s) on Building a Life Style Ahead of the Business

Running a close second in generating financial problems within an agency is the owner whose past, success has led him to regard the agency as a means to an end rather than an end in itself. One leading expert among agency consultants characterized this as the “Gucchi, Pucci, Porsche Syndrome.” It is manifested in the increasing size of the personal “perks,” the abundance of “toys” and non-business assets all funded by the agency. Occasionally it finds expression in an ever more demanding involvement in “ego-rewarding” community, social and political positions. One may even find the unusual situation where the owner(s), in the belief that they are being creative, use the agency for tax deferral/avoidance/evasion schemes that ultimately cause huge personal problems. Obviously the independent agency business is entrepreneurial in nature. Usually an agency is dominated by a sole proprietor. As a result lenders should not be surprised to find many, occasionally unusual, owner/executive benefits. The issue is to find reasonableness in each situation when making the loan and monitoring the resolution of excesses during the period the loan is outstanding.

Don’t Rely on Contingent Commissions to Support the Agency’s Expense Base or the Loan

Contingent commission income is exactly that – contingent

It is true that a history of growth and underwriting profit for the agency’s principal carriers augurs well for the continuation of contingent commission income. Nonetheless, one or two losses or the non-renewal of one or two of the agency’s larger accounts can mean a sharp, sometimes very sharp, drop in contingent commission income.

Realistically, the agency’s expense base, including owner compensation, should be covered by non-contingent income. This becomes particularly important when profits are needed to fund loan principal and interest payments.

Maximizing Asset Value

Unfortunately the occasional loan to an independent agency results in default or a breach of one or more of its covenants. If the initial valuation was thorough, the loan terms reasonable and the problem spotted in timely fashion, then the loss, if any, should be minimal.

Even those few instances where the owner(s) has depleted the agency’s assets, whether through irresponsible management or fraud, he/she was not able to dissipate even half of the fair market value of the firm. While there are probably no “secrets” for achieving a successful workout, the nature of the independent insurance agency business offers options, strategies and certain requirements for success that may not be present in other workout situations.

Determine the REAL Cause of the Problem

It should go without saying, but the first, and probably most important step, is to identify the cause of the problem.

Only with such knowledge can you recommend and implement specific solutions to minimize future damage and constructively protect the existing assets. Lacking an intimate knowledge of the insurance agency business many lenders and their workout specialists fail to see the real cause of a problem. Thus their responsive actions are unsuccessful in bringing about initial stabilization and ultimate success.

For example, exorbitant and increasing write-offs of customer receivables may not necessarily be a “collection problem” but rather a “selling problem.” In the desire to bring in new commission revenue an agency may make payment deals with customers, or to assure renewal of a large customer the agency may “finance” premium payments out of its own capital or, worse, premium float. Similarly, the invasion of premium trust funds may indicate personal requirements rather than excessive agency expenses. A drop-off in agency income may not be detected if the sources of that income are not understood thus responsive action that eliminates key people may be exactly the wrong response.

Determine where the Agency’s Value Resides and Take Steps to Protect and Enhance It

Owing to the nature of GAAP accounting as it applies to the independent agency business (and of course to many others), the agency’s book value generally grossly underestimates the fair market value of the agency. The reason lies in the fact that an insurance agency’s expirations (customer list), from which it derives its inherent value, remains unbooked. Accordingly, in any workout situation it is imperative to quickly appraise that value and initiate steps to protect, not diminish, it. In most agencies, there are several quite separate sources of value. The most common distinctions are between: property/casualty and life insurance commissions; personal lines and commercial sales; commodity and specialty products; standard sales and endorsed or program sales; and, owner versus brokered accounts. As one might expect there are even combinations of these. Each is likely to have a different value, each is likely to contribute differently to the agency’s profits, management problems and opportunities and each is likely to demand a different workout strategy. Almost always the successful plan involves identifying the best of these opportunities and implementing a plan that allows the agency to stay in business and preserve, restore or enhance its value.

Seek the Support of the Agency’s Key Markets and Personnel

Assuming that the book of business, or significant portions of it, can be shown to have “profitable” loss ratios, then the insurance companies that underwrite those portions are likely to want to continue to receive the premiums. As a result, many will work with you to help preserve the agency or its underlying assets. They can do this in several ways. Among the helpful responses that we have been able to negotiate are: delaying and spreading out payment of amounts due under the accounts current; advancing commissions, especially any contingent commissions that can be expected; making loans against secured assets and, occasionally, even providing cash, guaranteeing loans or temporarily increasing commissions in exchange for an increased share of the agency’s profitable business.

Obviously the nature of the appeal to the carriers and their responses will reflect the kind and severity of the problem and the opportunities that may inure to them. In any troubled situation it is important to motivate the agency’s key staff. The loss of sales personnel can exacerbate the production problem, notwithstanding the existence of non-compete agreements. The loss of knowledgeable service people can immediately affect relationships with significant commercial accounts and even the agency’s major insurance companies. In most instances conveying an understanding of the problem and the solutions being implemented will engender the confidence needed for these people to support the rehabilitation plan. Occasionally modest bonus programs will result in immediate positive responses. In rare cases “stay-put” incentive agreements, ownership options, raises or promotions may be required. As in any workout situation, appeals to vendors, lessors and other creditors based on a reasonable plan can result in support.

Liquidate All or Part of the Insurance Agency

While it should be considered a last resort, the sale of the agency or some of its expirations may be necessary. Unfortunately in the haste to limit the loss or achieve a quick recovery many such sales prove disappointing and actually result in worsening the chances for increased, if not full, recovery. The market for the purchase of insurance agency expirations is an active and substantial one. Assuming that the subject agency is not located in the “far boondocks” or does not have a poor underwriting history, then immediate opportunities will exist for recovery through a sale of the agency or some or all of its assets. Unfortunately it is this immediacy that causes the problem. In the rush to get something on the record, many workout specialists, lacking knowledge of the industry, fail to find the right buyer or negotiate the best deal terms.

The independent insurance agency business has been, is, and should continue to be, an excellent source of loans for commercial banks, insurance companies and other lending institutions. Blessed by an increasing base of prospects, an economy that demands insurance, social and economic inflation that increases premiums the insurance industry has seen a half a century of uninterrupted growth in premiums.

Compensated by commissions based on these premiums the independent agent has enjoyed a unique opportunity for growth in both his/her agency’s income and its value. While the last twenty years have seen marked shrinkage in the number of independent insurance agencies, the primary cause has been a continuing pattern of mergers resulting in fewer but, overall, larger average sized agencies. Among insurance companies and industry experts this trend is expected to continue. It is this merger activity and the resulting larger agency that provides lenders with the opportunity to build a portfolio of highly profitable, mid-size ($500,000 to multi-million dollar) loans and insurance companies with the opportunity to access sources of larger premium sales.

Given a business with consistent and generally increasing cash flows, substantial off-balance sheet value and a marketplace hungry to absorb the weak or fallen, why have so few professional lenders been why have some agency owners and their lenders suffered losses? For those fearing current losses, where are the opportunities for recovering their investment? This article will offer a dozen suggestions for the lender interested in building a loan portfolio in this market, the insurance company that sees support for agency acquisition as a premium growth opportunity and lenders and agency owners sensing or experiencing financial trouble.

1. To make Good Loans to Independent Insurance Agents

Rethink Classic Loan Lending Standard:

Most conventional lenders are hesitant to make loans to the independent insurance agent because they fail to see the hidden value in such a borrower.

Steeped in a culture that emphasizes asset backed loans and lacking an understanding of the independent agency business most lenders fail to see the hidden, yet substantial and tangible, value in an insurance agency. This trepidation is increased when faced with a lack of audited financials, a typically small reported net worth, a business often reliant on a single individual and the number of agencies seen to be “going out of business.” For the lender willing to look past these misunderstood indicators, the independent insurance agency or broker offers an excellent opportunity to build a successful loan portfolio. For those that take the time to learn about this market they will find that the true value of the agency exceeds, most often far exceeds its book value. Furthermore, there is, in most cases, a ready market for the purchase of the agency or its principal asset, its book of business (known generally as its “expirations” and recognized as its customer base).

Understanding this combination of hidden value and recovery opportunity should give even the most conservative lender confidence in the security of its loan principal.

Undertake a Sound Business Valuation

The basis for a sound valuation of an independent insurance agency or broker is an understanding of the insurance agency business. While it is true that the Four Cs of good lending are operative (Capital, Cash Flow, Capacity and Character) one is best advised, at least initially, to seek the support of a person or firm with an expertise in such a valuation. Most lenders quickly learn that there are no reliable “rules of thumb” for making an insurance agency valuation and, probably more troublesome, many quality agencies, appear to violate most basic lending requirements.

Consider:

• The typical independent insurance agency functions, quite successfully, reporting a book value (shareholder’s equity) well below the amount of the loan being requested.
• Many independent insurance agencies that have grown through a successful acquisition program report negative net tangible worth.
• Many independent insurance agencies continue, and have done so for long periods of time, with minimum, even negative, working capital.
• Most independent insurance agency owners enjoy total compensation that appears excessive because it equals or exceeds the salary of the presidents of the very banks from which it seeks a loan.

True, conventional appraisal factors will be the foundation of a sound valuation. However, each must be considered in the context of this specialized business.

• To what extent does the subject insurance agency’s growth reflect the insurance industry cycle?
• While ageing of receivables is well within generally accepted standards, does detailed analysis suggest anything worrisome about how the agency actually sells business?
• Representing large, well-known insurance companies is commendable but do recent loss ratio trends within the agency or marketplace signal trouble?
• Are increasing profits really sustainable?
• Is there a market for this agency or its book of business if the agency should get into trouble with its loan?

A failure to evaluate these and many similar questions correctly can lead to a deficient valuation opinion, a questionable loan or a lost opportunity through an inappropriate denial.

While not generally included in a regular fair market valuation a valuation done to support a loan request should include specific analysis and commentary regarding exit or recovery opportunities for the subject agency. While rather unusual, nonetheless there are situations where the economic value of an agency will be difficult to achieve. These arise for many reasons among which are: the agency’s location; its size – depending on its marketplace, “bigness” as well as “smallness” can be a problem; its emphasis on a specialty product or line of business; the industry cycle and even its personnel policies, especially salary levels.

Know the Purpose of the Loan

Notwithstanding a sound valuation, the purpose for the loan should affect the ultimate lending decision.

In this writer’s experience the owners of independent insurance agencies most often seek loans for one of the following four reasons:

• to fund an acquisition
• to finance an improvement in the business’ operations or facilities
• to solve a unique cash flow need that has arisen
• to finance a family emergency

Fortunately, the desire to fund an acquisition is the most predominant reason for seeking outside financing. These should be, and have proved to be, the easiest, the largest and the most successful loans to make. The opportunity to perfect a security interest in the value of the combined agencies should provide a margin of security well above the amount of the loan. The most common risks associated with loans made to support acquisitions arise from the “merger” experience, or lack thereof, of the acquiring agent, and the adequacy and appropriateness of the valuation, pricing and terms of the acquisition itself.

Loans made to finance an improvement in the business’ operations or facilities are of a nature common to most commercial lending institutions. Most typically they involve the purchase or improvement of the office facilities (real estate) or the purchase and installation of computer hardware and systems. Here again, the “hidden” value of the agency is usually greater than the value of the loan thus the burden of the valuation falls on a careful assessment of the sustainable earnings capacity of the subject agency. Loans for the purchase of real estate while few, involve a wealth of significant issues well beyond those related to the accurate valuation of the agency itself but typically within the experience of most commercial lenders.

Occasionally agents seek financing to overcome cash flow problems arising within the agency or to fund personal or family necessities or emergencies. In the case of the former, understanding how the agency developed a cash flow problem and differentiating its need for fiduciary cash from operating cash are critical both to the granting of a loan and to the steps needed to make the loan successful. While unattractive on the surface, these loans can be made successful, particularly if the lender carefully appraises the value of the agency and takes adequate steps to perfect its security interest therein. Loans for college or to pay for uninsured medical emergencies occasionally arise and, subject to their size compared to the value and sustainable earnings expectations of the agency are not beyond doing successfully.

Establish Covenants and Conditions Appropriate to the Insurance Agency Business

The covenants and conditions related to the loan will tend to fall into two broad categories: those that are “typical” lender protections and those that follow the purpose of the loan and reflect issues germane to the insurance agency business.

Among the plethora of general covenants will be found:

• access to regular financials and tax returns, the usual cover ratios
• limitations on owner/executive compensation including bonuses and “perks,”
• maintenance of minimum working capital
• timely payment of principal and interest
• limitations on certain purchase expenses
• limitations on the sale of assets (especially expirations)

Among the covenants that should be considered when making loans to independent insurance agents are:

• access to annual insurance company premium and loss ratio reports,
• details of all amounts,  both direct and indirect, paid to owners or members of their families,
• timely payment of accounts current or bordereau obligations (payments to insurance companies),
• maintenance of trust funds separate from working capital funds,
• immediate notification to the lender in the event of the loss of either of its two largest accounts or insurance companies.

As one might expect the individual characteristics of each agency, especially those that rely on specialty products, programs or markets, may dictate the need for special covenants.

Continue Reading with Business Loans for the Independent Insurance Agent Part 2: Spotting Trouble on the Horizon

The Sarbanes-Oxley Act , also known as Sarbox or SOX, was passed in July 2002 in response to the rash of real and perceived failures in corporate governance and financial disclosure. Its primary emphases were to enhance the quality and transparency of corporate disclosure and force changes in the auditing of publicly traded companies. These objectives were achieved in a number of ways by the passing of the Sarbanes-Oxley Act.

SOX corporate governance guidelines include:

• An increase in the direct responsibility of senior corporate managers for the quality of their company’s financial reports and disclosures.
• An increase in the audit committee’s independence from the company and its responsibility regarding the company’s auditors.
• Limitations on the types and nature of services that auditors can provide to a publicly traded, audit client.
• The creation of an independent Board to oversee auditing practices regarding publicly traded companies.

While there was an initial corporate outcry, particularly about the expense of compliance which is proving valid, corporate attitudes generally have shifted. As corporations investigated and implemented responses to the Sarbox Act, they are recognizing that compliance can result in improved processes, both financial and operational, increased efficiency better and more timely planning information and that more transparency enhance access to capital and capital at lower cost.

A Brief Sarbanes-Oxley Act Overview

The following is intended as brief overview of the Sarbanes-Oxley Act and not as a detailed summary or commentary on the Act or its intentions. Specifically, the items selected are intended for consideration by those involved with and responsible for a public company’s internal governance and generally ignore the Sox’s efforts at limiting the actions of analysts and investment bankers.

The SOX Act increases the direct responsibility of senor corporate managers for the quality of their company’s financial reports and disclosures.

Among other things, the Sarbanes-Oxley Act:

1. Requires the Chief Executive Officer and the Chief Financial Officer to certify that the company’s financials fairly present the company’s financial condition.
2. Requires forfeiture and return to the company of any bonus, stock or option compensation received in the twelve months following a misleading financial statement that subsequently results in a restatement.
3. Requires accelerated reporting by insiders – such transactions must now be reported by the second day following the transaction
4. Requires the company to report all off-balance sheet transactions.
5. Requires that if the financials contain any pro forma disclosures they must be more straight-forward.
6. Requires that all annual reports filed with the SEC include a statement by management asserting that it is responsible for creating and maintaining adequate internal controls and assessing the effectiveness of these controls.
7. Requires a statement as to whether or not the company has adopted an ethics code for senior financial officers and if not, why not.
8. Precludes corporate loans to officers and / or directors.
9. Requires that an attorney who is aware of a material violation of the law must report it to the senior attorney or the company’s Chief Executive Officer. If the person on notice does not move to fix the violation, the attorney must report his findings to the audit committee or the board of directors.
10. Establishes a new federal crime for securities fraud, the Corporate and Criminal Fraud Accountability Act of 2002, which includes a lengthy prison term upon conviction.

The Sarbanes-Oxley Act makes the audit committee more independent of the company ad increases its responsibility regarding the company’s auditors.

Among other things, the Act:

1. Requires that all audit committee members must be independent directors and not affiliated with the company other than in their capacity as directors.
2. Makes the audit committee directly responsible for the appointment, compensation and oversight of the work of the auditors.
3. Requires that audit committee members must have free reign to interview and question auditors without the company’s executive officers being present.
4. Requires that the audit committee develop procedures for addressing complaints regarding the audit process.
5. Requires that the audit committee include at least one competent financial person.
6. Bars members of the audit committee from accepting consulting fees from the Company.

The Sarbanes-Oxley Act limits the types and nature of services that auditors can provide to a publically traded, audit client.

Among other things, the Act:

1. Precludes an audit firm providing the following non-audit services to a publicly traded client contemporaneously with the audit including:
   1. Bookkeeping or other services related to the accounting records or financial statements of the audit client;
   2. Design or implementation of the financial information systems;
   3. Appraisal or valuation services, fairness opinions or contributions in kind;
   4. Actuarial services;
   5. Internal audit outsourcing services;
   6. Management functions or human resources;
   7. Broker dealer, investment advisor or investment banking services;
   8. Legal services and expert services unrelated to the audit;
   9. Any other service that the Board determines by regulation is impermissible.
2. If a service offered by the auditors to the company is not on the list then the auditors must seek pre-approval of the audit committee.
3. Requires that the coordinating partner and reviewing partner must rotate at least every five years.
4. Requires the auditors to discuss with the audit committee:
   1. any and all specific accounting disputes that it may have with management;
   2. all critical accounting practices or policies being implemented or changed;
   3. all alternative treatments of financial information within GAAP that have been discussed with management.
5. Precludes an audit firm approaching or taking as a client a public company that has hired as the CEO, CFO, Controller or chief accounting officer, or person in an equivalent position who left the audit firm within one year preceding the audit.

The Sarbanes-Oxley Act creates and independent board to oversee auditing practices regarding publically traded companies.

Among other things, this new Board, The Public Accounting Oversight Board, will:

1. Be responsible to the SEC.
2. Have supervisory powers over the audit process of publicly traded companies. Thus it is not intended to conflict with state regulation and supervision of accountants serving private clients.
3. Be made up of five persons each appointed for a five year term by _________ .Two of whom will be CPAs and three of whom cannot be CPAs
4. Be funded by fees from all publicly traded companies thus better assuring its independence from the accounting industry.

Commentary

By Peter H. Bickford

[Editor’s Note: Peter H. Bickford is an independent counselor and arbitrator to the insurance and reinsurance markets, with particular focus on dispute resolution, solvency, regulatory, agency and operational issues. In addition to being a practicing attorney for over 30 years, he has been an officer of both a life insurance company and of a broker oriented property/casualty insurance and reinsurance facility with line responsibility for contract and claims operations. He is an ARIASUS. certified arbitrator and umpire.

Copyright 2007 by the author. Response articles to this commentary are welcome.]

Arbitration has been a recognized standard for resolving disputes in the insurance industry for centuries, evolving from the need for global commerce to be able to rely on standard business practices and the prompt resolution of disputes.¹ Over the past several decades, arbitration has become the preferred means of resolving disputes between insurers and their reinsurers. In this period the number of full-time reinsurance arbitrators, along with the number of law firms, consultants, and other experts specializing in this field, has skyrocketed.² The arbitration boom has also begun to take hold in other areas as well, such as between insurers and commercial insureds and between insurance companies and their agents, with many insurers now including an arbitration clause in their standard producer or agency agreements. However, this expansion of the arbitration process beyond the reinsurance arena has its critics, and creates special problems for agencies that need to be considered. In his excellent article on the commercial history of arbitration and insurance,³ Richard E. Stewart, Chairman of Stewart Economics, Inc., observed that:

“. . . the feeling of many today [is] that insurance arbitrations work best when the dispute is between two members of the same insurance-merchant class (that is, reinsurance arbitrations) rather than between parties of different classes (that is, primary disputes between insurers and lay people).”

In reinsurance disputes, where the parties are considered to be of the same merchant class, the process generally protects both sides equally. It is this level playing field that has provided the basis for the success of arbitration between insurers and reinsurers.⁴ However, arbitration as a means of resolving disputes between insurers and agencies is an imperfect solution tilted decidedly toward the insurer. This disparity is highlighted by the result of a recent arbitration in a dispute between a carrier and the program manager of a small but growing and profitable specialty program. ⁵ A review of this case provides some valuable insights into the arbitration process and exposes some dangers that producers, agencies and program managers should consider carefully when disputes arise with their carriers.

The Facts Of The Case

The insurance agency had created, marketed and managed a small specialty program. After several years of growth and profitability, the agency found itself in need of a new primary carrier to replace an insolvent one. A replacement carrier was found, but it insisted on its form of producer agreement and a personal guaranty by the agency’s principal.⁶ The company form of producer agreement included an arbitration clause. To recognize and protect the agency’s economic and ownership interest in the program, a “letter of intent” was also entered into between the agency, the new carrier and the reinsurer. Even though the program was growing and profitable, and fully supported by reinsurance, the new carrier abruptly terminated the agency after two years because the program was not large enough for it. The agency sought an extension to give it time to secure yet another new carrier. The request was flatly denied.

In addition, the carrier failed to provide complete loss runs and other reports needed by the agency to secure a new carrier. As a result, the agency was not able to obtain a new carrier except on a producer rather than on a program manager basis, and only after the loss of a significant portion of the agency’s business. The agency lost over three-quarters of its business in the first year after the termination, which it claimed was a direct result of the insurance company’s improper conduct.

After termination, the agency continued to service the business written through the carrier, but the carrier continually failed to provide timely reports, including reports to the reinsurer necessary for the determination of the agency’s profit share. To resolve these issues and to seek compensation for the damage done to the agency and the program, the agency commenced an arbitration proceeding against the carrier pursuant to the arbitration provisions of the agency agreement. The arbitration provisions called for a board of arbitration (or panel) consisting of an arbitrator chosen by each party with the two arbitrators selecting a third arbitrator, or umpire. The agency chose a person experienced in agency issues, and the carrier designated a retired executive of a direct writing reinsurer. The arbitrators then selected as umpire a lawyer with mostly reinsurance experience but who purportedly had brokerage and program business experience.

The agency presented two witnesses at the hearing:⁷ the principal and the intermediary that negotiated the original arrangement, including the letter of intent, and who sought to obtain a new carrier for the agency after the termination. The intermediary, an independent third party, corroborated all the basic elements of the testimony of the principal. The carrier presented five witnesses, none of whom having had any day to day dealings with the program or the agency until well after the termination. In other words, the corroborated testimony of the agency’s principal was unrebutted.

A slam-dunk for the agency! Wrong!

The Arbitration Award And Dissent

An award signed by two of the three arbitrators was issued denying all claims. As is customary in the U.S. reinsurance arbitration world, no reasons were given for this result. The third arbitrator, however, issued a dissent stating that the majority of the panel had ignored the facts, the custom and practice of the insurance/agency industry and the law, and presented a detailed reasoned analysis of the case and the errors of the majority.⁸ In the cover letter forwarding the award to counsel, the umpire stated that the dissent was “incomplete and misleading” but gave no explanation for that statement. Even without an explanation from the majority why it failed to hold the carrier accountable, agencies and program managers can learn some valuable lessons from this case thanks to the rare written analysis by the dissenting arbitrator — an analysis that should be required reading for any agency. Foremost among these lessons are the traps and pitfalls in the arbitration process that should give agencies pause in accepting arbitration as an equitable basis for resolving disputes with carriers.

Is Arbitration Unfair To Insurance Agencies?

The most obvious disparity between the insurance agency community and the insurance companies is economic. For all but a few exceptions, the companies have far greater resources to bring to bear on a dispute. This economic disparity, however, would be present in any forum for resolving disputes, including litigation, so it is understandable that most agencies would consider arbitration the smarter and safer alternative to litigation because of the perceived benefits of time and cost of arbitration over litigation. But there are other more subtle differences and prejudices in the system as it exists today, and these differences should be recognized and considered by the insurance agency community. Among these differences are:

• Arbitration clauses in use today are, for the recognize the differences between reinsurance and agency relationships;
• The rules of conduct of arbitration proceedings — including such things as audits, discovery, confidentiality, and the like — have evolved substantially from reinsurance disputes.
• The available community of arbitrators is composed primarily of reinsurance experts with very little experience with or knowledge of agency operations, practices and expectations;
• Many reinsurance oriented arbitrators hold themselves out as qualified to resolve disputes involving agency operations, practices and expectations — including issues of ownership, renewals, transferability and other general standards of practice — when their knowledge of and direct experience with these issues is remarkably lacking; and
• The lawyers and experts supporting the arbitration process are also substantially reinsurance oriented because that is where the work is found.

These very real and consequential differences were evident in the arbitration described above, and a brief review of these issues may help give agencies a better understanding of what they may expect in the arbitration of a dispute with a carrier.

Why Worry About The Arbitration Clause?

Small or mid-sized agencies have limited if any ability to negotiate the terms of their agreements with carriers, but even the larger agencies that may have such negotiating ability generally accept the arbitration clause as presented to them. Resolving disputes at the time of entering into a relationship with a carrier is unlikely to be anywhere near the top of the list of concerns. Besides, the arbitration clause provides a simple means of resolving disputes without litigation and by persons experienced in the insurance business. So what could be bad about that? The arbitration clauses found in most agency agreements are modeled on clauses that have evolved in the reinsurance business over the past several decades. The most significant provision affecting agencies is the usual requirement that arbitrators must be current or retired executives of insurance or reinsurance companies. To give the appearance of fairness, some companies have added “or agencies” to this requirement. As discussed below, however, this may be of

little comfort to agencies when it comes to ensuring a knowledgeable and impartial panel. Another common problem with the language is that companies usually designate that the location of the arbitration will be where their main offices are located, often forcing a local agency to travel to a foreign jurisdiction to pursue its claims. Similarly, the provision may call for the application of the laws of a jurisdiction other than the jurisdiction in which the agency conducts its business, placing it at a disadvantage in presenting its local customs, practices and expectations.⁹

The main issue for agencies asked to accept an arbitration clause is to make sure that it provides a reasonable method for the selection of a panel with knowledge of and experience with agency business, and that the process called for in the clause will not be unduly burdensome.

Of course, the clause itself cannot ensure this result.

Should Reinsurance Arbitrations Define All Insurance Industry Arbitrations?

The answer would seem to be an obvious “of course not.” But the booming reinsurance arbitration business has exerted tremendous influence over other insurance industry disputes. Nowhere is this more evident than in the development of “professional” insurance arbitrators and the standard forms and codes of conduct that have emerged.

An example of this growth and development is the development of organizations like ARIAS-U.S., a not-for-profit corporation with a stated objective of “promote[ing] the improvement of the insurance and reinsurance arbitration process for the international and domestic markets.”¹⁰ ARIAS-U.S. was founded in 1994 and has grown from a few dozen members to over 600 members today, including insurance and reinsurance companies, law firms, consultants and mover 300 certified arbitrators, including the author.

In just twelve years of existence, ARIAS-U.S. has developed standards of practice and forms that are used in many if not most insurance and reinsurance arbitrations in the U.S. today. What could be so bad about such standardization for disputes between carriers and agencies?

The issue is not standardization; the issue is the reinsurance imprimatur that this standardization brings to non-reinsurance arbitrations. Most significantly, the growth of the reinsurance business has brought about a boom in the growth of reinsurance arbitrators that has exposed the dearth of arbitrators with knowledge of and experience with agencies and their business.

Historically, arbitration clauses in reinsurance agreements have called for arbitrators to be current or past officers of insurance or reinsurance companies, or some variation of that requirement. Over the years the pool of arbitrators has developed from this requirement, with most active arbitrators having been former company — whether primary or reinsurance — executives. There are exceptions with broker experience, but most of them come from the reinsurance intermediary community. Active, professional insurance arbitrators with direct agency experience are few and far between.

The Insurance Agency’s Agency’s Dilemma

The typical reinsurance dispute, even if large sums are at stake, are generally not life or death propositions for the companies. Even without a written explanation of an award, its designated arbitrator can brief the losing party on the reasoning after the fact; and with the award being confidential it can live to fight another day even on the same issue. For agencies, however, the resolution of a dispute can be far more consequential, and often can mean the difference between success and failure of its business.

Consider, therefore, the dilemma facing an agency arbitrating a dispute over a make or break ownership issue with its carrier: The carrier designates as its arbitrator a person who was an underwriter with a direct writing reinsurance company, and who has a long résumé of reinsurance arbitrations. The agency picks an arbitrator with a background in agency business, but who has limited arbitration experience. In reviewing lists of potential umpires, the agency is unable to find experienced arbitrators with any significant agency experience, and it ends up settling on several people that appear to have some experience dealing with agency or program business. The carrier, on the other hand, has no problem presenting names of “qualified” umpires, all of whom spent their careers with insurers or reinsurers. The final choice comes down to a coin flip and crossed fingers.

The seeds of extreme disappointment for the agency in this process are obvious as the agency in the subject case learned.

What Can Agencies Do To Help Level The Playing Field?

Knowledge of the dangers of the arbitration process as it exists today may give agencies some ability to minimize the inequities in the process. The selection of arbitrators qualified to consider the unique issues involved in agency disputes with carriers is one of — if not the most — crucial events in the process. Some possible steps an agency can take to achieve some level of fairness in the arbitrator selection process include:

If the agency has any negotiation ability with its carrier, it could seek to:

• Include a contractual requirement that arbitrators must have defined agency experience; or
• Include some intermediary step in the dispute resolution process such as: requiring mediation before arbitration;
• or agreeing on a particular individual or position — such as the head of a neutral trade group — to select a qualified umpire if no agreement can be reached between the other arbitrators.

If the carrier refuses to negotiate changes to its standard form, the agency must try through the vetting process to ensure that the arbitrator candidates have significant actual experience with agency issues.

• Insist on “reasoned” awards. In other words, require that the arbitrators give a written explanation for their award. In the U.S., however, reasoned reinsurance awards are rare, and generally require both parties to agree to require panels to issue reasoned awards.
• Do not agree to confidentiality of the process. Confidentiality is common in reinsurance arbitrations, but in disputes between agencies and their carriers, confidentiality is often just one more way that carriers can hide their indiscretions in a system already tilted in their direction.

While most qualified arbitrators will decline to serve as an umpire on issues for which they have limited experience or pre-set positions, the agency needs to weed out candidates who — through ignorance or hubris, or both — believe they know everything about everything. Because panel awards generally do not have to be reasoned, and because the grounds for overturning awards in court are very limited,¹¹ it is remarkably easy for a panel to hide a prejudicial or improper award behind the screen of “unreasoned” awards, limited ability to challenge, and confidentiality.

This underscores the importance of the rare issuance of a dissent — unbound by confidentiality — in the subject case.

In the longer term, however, agencies need to recognize the shortcomings of the process and to take joint and concerted actions, separately and through their trade organizations, to expand the pool of qualified and available arbitrators knowledgeable on agency issues, and to make this pool available to the arbitration process as an alternative to the existing pools. If the brokerage and agency community can develop a significant alternative pool to the predominantly reinsurance oriented pools, this development could also spur a change in attitude about the process by carriers, and increase the expertise of the supporting groups— including the law firms and consultants looking to arbitrations as a significant source of their business — on agency issues.

Conclusion

A judge once told me in all sincerity that the best lawyer in the world is no match for a mediocre judge. That truism becomes more glaring in arbitration where the arbitrators do not have to explain their decisions and the standards they can apply are far more subjective. It is therefore essential for insurance agencies faced with resolving a dispute with a carrier through arbitration to be as diligent as possible in finding arbitrators knowledgeable about their business and not predisposed — through background, experience or economics — towards the carriers. Tilting the playing field towards “even,” however, is no easy task.

Endnotes

• 1. For an excellent article on the evolution of arbitration and insurance, see “Arbitration and Insurance Without the Common Law” by Richard E. Stewart, ARIAS-US Quarterly, Third Quarter 2004, Volume 11 Number 3.
• 2. For example, ARIAS-US, established in the mid- 1990s, has over 600 members, insurance and reinsurance companies, law and accounting firms and consultants, and has certified over individual 300arbitrators. The Reinsurance Association of America also provides a directory of over 200 arbitrators.
• 3. Footnote 2, supra.
• 4. Even in reinsurance arbitrations, however, there have been increasing criticisms of the process. Th ese criticisms are focused primarily on the increasing cost, length of time and evolution towards litigation proceedings of the arbitration process.
• 5. See the Arbitration Award and Dissent dated December 7, 2006 in The Garn Group, Inc. v. Arch Insurance Company, available in Mealey’s Litigation Report: Insurance, Jan. 30, 2007, Doc. #03-070130-021Z.
• 6. The guaranty allowed the company to sue the principal even if there was an unresolved disagreement with the agency over the amount owed. The company successfully sued the principal under the guaranty before the commencement of the arbitration described in this Commentary. This use of the guaranty to circumvent addressing the agency’s claims is another issue of the uneven playing fi eld between insurance companies and agencies. However, that issue is separate from the topic of this article.
• 7. The author of this article was counsel to the petitioner in this arbitration. The proceeding was not subject to a confidentiality agreement.
• 8. See footnote 6, supra.
• 9. Because most arbitration clauses state that the arbitrators are to apply custom and practice in the business, the inclusion of applicable law provisions arguably adds an unnecessary and confusing mixture of law and practice to the proceedings.
• 10. For more information on ARIAS-US, see its web site at www.arias-us.org.
• 11. For example, the grounds for vacating an arbitration award under the Federal Arbitration Act [9 USCA §10(a)] are limited to:
• (1) where the award was procured by corruption, fraud, or undue means;
• (2) where there was evident partiality or corruption in the arbitrators, or either of them;
• (3) where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced;
• or
• (4) where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.

STOP, just for a moment, and answer a serious question: 

If you had been hit by a bus last night, what would have happened to the business of your insurance agency?

• If you aren’t sure, you need to do some Perpetuation Planning
• If you imagined uncertainty, even chaos, for your family and your employees, you need to do some Business Succession Planning.
• If you realized that there would be an immediate and possibly substantial loss in the insurance agency’s value, you need to do some planning.
• If you have planned for such a contingency (or you just don’t care) you need to read no further.

Insurance Agency Perpetuation Plans

Advisors, consultants and your peers call your response to this question “Perpetuation Planning.”   In its simplicity, this is misleading.  What you need to plan is how and for whom to preserve your insurance agency’s value when a “triggering event” happens.  And one will happen to you.

Think about it.  We sell insurance every day “in case’ things happen to our clients and friends.  But one, and possibly more than one, “triggering event” – disability, death, retirement, WILL HAPPEN TO YOU.  Why not take a few moments and begin to think about the effect on your insurance agency and those that depend on its survival.

Getting Started on Perpetuation and Business Succession Planning –Getting started on a realistic plan for your insurance agency succession and perpetuation is so easy that you can begin planning while drinking your morning coffee.

Had you and that bus collided last evening, what do you really want to have happen to the value represented by your insurance agency? What is important for your family to be able to carry on the family business? What would happen if you had to put your insurance agency up for sale?  Take a single sheet of paper and answer the following questions, briefly, explicitly and, most importantly, “selfishly.”

• In the event of my death, it is important that —-

• In the event I became disabled, it is important that —-

• When I retire, in ____ years, it is important that —-

Obviously, your answers will change over time as the agency grows and prospers, as your family situation changes and as you age.  However, these progressions only mandate that your “perpetuation plan” cannot be cast in stone and must be reviewed and updated at frequent intervals over time.

So, tomorrow morning over coffee, start writing down your personal “Wish List” for the future of your insurance agency.   Only when you understand what you really want regarding your agency and the value it represents can you begin to develop an appropriate perpetuation plan. And if your plan is to be successful, then you must be “hard nosed” and “selfish,” (OK, self interested) about what you want for your insurance business should death, disability and retirement happen.

Key Issues for the Perpetuation and Succession Planning Process:

Now that you have your plan objectives, it might be useful to know a couple of basic principles about “perpetuation and succession” planning that I have learned over the years.  I have numbered them all “1” because they are of equal importance in the planning process.

1)      “Terms” are more important than “Price” or your Insurance Agency’s “Valuation.” The most accurate, fair and agreed upon valuation/price will fail if the terms of your “plan” or transaction are not reasonable and comprehensive.

• Reasonable – in terms of payment amounts and payment period for if you ask for too much, too soon you are assuring default.
• Comprehensive – in terms of the controls, limitations and obligations that are imposed on the transferees. These people are not stepping into your shoes; they are becoming debtors.

1)     Family Business Succession Planning: “Internal” transactions almost always result in the lowest values. Transferring the insurance agency ownership or control to family members and / or employees are the more difficult to negotiate if one is seeking optimum values.  Both family members or employees expect to be treated “better than others” and employees will always suggest that their contribution has been important to the agency’s success and thus should be taken into consideration (even though, it is hoped, that they have been fairly paid for their efforts)

1)     Good Perpetuation Planning Incorporates a Succession Plan: Your Perpetuation Plan is the equivalent of an “all-events” Succession Plan.  Your perpetuation plan must, at all times, be consistent with other agreements and documents, such as your Will and Estate Plan. Otherwise your perpetuation plan will cause confusion rather than be of value to yourself, your heirs and employees and possibly others.

Perpetuating Factors and Best Practices

To successfully implement your plan you are going to have to deal with several important issues.  Among the more important are the following.

Valuation of Your Insurance Agency

Quality insurance agency valuations are expensive.  Furthermore, a full-blown valuation at this stage in your planning process, while it may have its uses, is likely an unnecessary expenditure.  For most agency owners at the beginning of the process there are two options:

• First, simply be practical – estimate your value.  Keep in mind that 99% of all agencies are worth more than one times “commissions” and less than two times “commissions” – which should not suggest to you that the average agency is worth one-and-a- half times “anything.”  “Good” agencies are worth more.  “Poor” agencies less.

• Second, see if someone with valuation experience will give you a good estimate based on thorough analysis but without doing a full written report. Avoiding a full blown written report should substantially reduce the cost.

Regardless of the option you choose having a reasonably accurate valuation is a necessary starting point.  Without one it is difficult to plan your funding requirements or anticipate discussions with possible transferees.

Transfer Business Ownership of the Insurance Agency

Perpetuation / Succession planning will almost certainly involve the transfer of ownership of your insurance agency.  In this regard there are three primary options: i) Family members; ii) Employees; or, iii) Other agencies.  Each has its advantages and drawbacks thus a few brief comments may be useful.

Perpetuating the Family Business:

While it might be great to have the third generation own and run the insurance agency, if your son or daughter aren’t already in the agency, enjoying it and want insurance as a career, planning a transfer to them in the event of death or disability is unreasonable at best and absurd at worst.  Situations where the family member simply doesn’t want to be in the business or is incapable of running it will only disappoint everyone.  Owners who endeavor to force their fantasies on a family member are only looking for disappointment.  Still worse, such fantasies result in sharply diminished employee morale and increased turnover among the better members of the staff.

Business Succession to Employees:

Occasionally, only very occasionally in my experience, is this choice realistic.  Sure, you have one or more deserving, respected employees. However, if your effective Office Manager can’t produce new business then the agency will likely falter.  If your best producer can’t manage the office staff you’ve created a weakness.  If you are thinking of going this route, caution is recommended.

Making Plans to Sell your Insurance Agency Externally

Given the size and location of your insurance agency, it may be prudent to explore “partnering” a mutual perpetuation solution.  While the planned transfer of ownership and control to another insurance agency may not be appealing initially, it can have several advantages.  First, it is the likely result if you haven’t done any planning so far better to plan this result “on your own terms.”

Funding for a Pre-Planned, Third Party Perpetuation Transaction:

The choice of funding vehicle and sources will be dictated by many things.  Obviously, if the results of your run-in with that bus last evening were death or disability, then clearly the existence of adequate life or disability insurance would have been a perfect choice.  Purchased by the corporation on a key man basis they could be structured to gain tax advantages while providing the agency with funds to contribute toward the objectives of your plan.  On the subject of insurance, Business Overhead Expense insurance is often worth the expense as a part of your planning.

Over the years I have been successful in getting occasional direct help from an agency’s leading markets – especially where the insurance company’s book of business is large and historically profitable.  More often, companies have been willing to provide third party guarantees, either directly or through a bond, to banks that would assume the burden of collection – particularly in the event of delinquency.  In these instances a quality valuation is imperative as is something more than a Compiled financial statement from your accountant.  Your lawyer should be able to help you convince either the insurance company and / or the lender that they will have additional security by perfecting a security interest on the agency’s expirations.

Over the years, many agents have found that structuring a transaction, conditioned on a triggering event” with another insurance agency makes sense. Whether it is a “two-way” agreement between agencies of similar characteristics in the same market or a one-way agreement with a larger agency a pre-planned, third party transaction will often ease the transition and result in the best business valuation.

Professional Advisors and Consulates for Perpetuation Planning

Unless you are an insurance agency that is large enough to be staffed with experienced, credentialed professionals you will require professional valuation advice along the line.  But, the first step is to build YOUR simple perpetuation and business succession “wish list.”

Understand, however, even a “simple” plan is likely to involve a number of complex issues and agreements. Thus, business “Perpetuation and Succession” planning will involve dealing with one or more of your accountants, lawyers and even “experts.”   When the time comes to retain someone, take the time to get the right person.  Don’t simply turn to someone with whom you have been working over the years or who says “I can do that.”

A couple of suggestions for selecting and using advisors for your perpetuation planning.

• Don’t select “expertise” based primarily on his/her hourly rate.  Very often, the right advisor understands the problem and its solution based on experience and his “hours” will be few.  Less experienced counsel must often spend time “researching” thorny issues, not always to arrive at the correct answer, thus his hours will add up.

• Once you are ready to retain professional help, you may find it practical and often time and money saving, to sit down with all of your advisors at the same time.  In this way, the details for implementing your plan can be worked out so that all agree, not only what is to be done but who will do it. This will minimize, if not eliminate, overlapping efforts and expense.

• Don’t ignore the involvement of your lead markets.  Many companies offer expertise in these areas.  Even if their assistance is not available, their awareness of your plan may enhance your relationship and in the case of those looking for an external solution they may well be of considerable help.

Plan for Your Business Continuity

If you don’t have the time or the inclination to develop even a simple plan for the perpetuation f your business and it’s successful succession, then understand this.  A plan of some sort for the end of your insurance business already exists. You may not like it, or how it deals with you, your family or your preferred employees, but it will do so.  And, in the absence of your wishes the results can devastate your insurance agency and its value.    So, get started in the morning over your coffee – it is that easy.

The business valuation of an insurance agency or insurance brokerage requires an in-depth knowledge of the internal workings of an agency and a wide-ranging understanding of the insurance agency environment. Most insurance agency valuation reports are vulnerable because the “expert,” lacking close experience with the insurance agency business, has relied extensively on general information and standard text book valuation methodologies.

Issues Affecting a Defensible Insurance Agency Valuation

Daubert and Frye

Rule 702¹was amended in 2000 to expand Daubert² by providing that a witness may only testify if: i) the testimony is based upon sufficient facts or data; ii) the testimony is the product of reliable principles and methods; and, iii) the witness has applied the principles and methods reliably to the facts of the case. The result is that Daubert standards have become the law in federal courts and over half of the states regarding all expert testimony.³ An expert testifying to insurance agency valuation is at risk when failing to show that his facts, data, principles and methodologies are grounded in insurance and not simply found in general business references.

Support for Critical Assumptions

Unfortunately, data related specifically to the operation of privately-held insurance agencies is minimal at best and too often flawed. Accordingly, valuation data used to support key assumptions should be specifically cited as to source and reviewed for appropriateness.

Business Valuation Concerns: Discount for Lack of Marketability (“DLOM”)

Arguably this the most important discount in any company valuation. In insurance agency valuations it is probably the one most easily attacked. Lacking experience in the business and, in particular, knowledge of insurance agency acquisition activity, most generalists use broad statistical data. My experience is that in most instances, the result is to exaggerate, often substantially, the DLOM.

Common Methodology Mistakes in Insurance Agency Valuations

Determining Sustainable Earnings – Normalizing Earnings

A technique used by many evaluators to determine the business’ sustainable earnings is to average earnings over a recent period. “Averaging” doesn’t do it. Obviously, internal revenue and expense trends, whether upwards or downwards, are significant. So too, are many external factors such as the underwriting/pricing cycle and the local economy. And of course, pro forma adjustments, especially assumptions regarding owner/employee compensation for which there is little public data, and adjustments for one-time revenues and expenses, need careful scrutiny.

Use of Inappropriate Valuation Methodologies

Many classic methodologies simply don’t apply when valuing an insurance agency or brokerage. Price to Sales ratios is particularly inappropriate if the expert should reference premiums as the sales factor.  Price to Sales based on commissions has long been recognized as a means of expressing value but not for calculating value. Price to Book ratios fail to have any validity primarily because accounting principles ignore the intangible value of the agency’s book of business. As a result, the appropriateness of each proposed methodology employed must be assessed.

Ownership (Control) of Expirations

The foundation for any insurance agency or brokerage value is its commission renewal income. This requires an understanding of the nature of the business entity and the issue of control and/or “ownership” of the expirations.

Please see our selected list of  most recent insurance cases completed by Moat Associates.

¹ Federal Rules of Evidence
² Daubert v. Merrell Dow Pharmaceuticals, Inc., 43 F.3d 1311 (9th Cir.1995)
³ The Frye standard remains the law in jurisdictions including, but not limited to, California, Florida, Illinois, New York and Pennsylvania. Under Frye, the only relevant criterion was whether the technique had been generally accepted within the relevant scientific community.

B.A., J.D., C.L.U., F.L.M.I.

Dcmoat@msn.com

47 Guski Road                                                               9 Huquein Court

Red Hook, NY 12571                                                    Bluffton, SC  29909

914.466.3711                                                                 843.705.2851

Douglas Moat has over forty-five years experience in insurance and financial services sales and management including twenty years as a private consultant. Formerly, Executive Vice President, The Home Group; Director – Financial Services Corporate Staff, ITT Corp.; Vice President, USLIFE Corp. and President of USLIFE’s mutual fund subsidiary; Vice President, The Glens Falls Group and the National Life Assurance Company of Canada. Mr. Moat is a member of the New York Bar.

He is an extensive writer, speaker, and expert witness on insurance topics. Mr. Moat served on the Board of Directors of the Frontier Insurance Group, Inc., and until 2001 the Insurance Federation of New York.

Professional Experince

2001 to Present.  Founder & Chairman, MOAT & ASSOCIATES, LLC. The firm offers consulting services on a selective basis regarding insurance agencies and companies including: arbitration and mediation; expert witness and litigation support; valuations and fairness opinions; workouts and assistance in the management of troubled insurance operations.

1986 to 2001. Founder & Chairman, THE MANHATTAN GROUP, INC. an investment banking and consulting organization providing services to insurance companies, agents and brokers, and others engaged in the insurance industry.

1981 – 1986. President, RUSSELL MILLER, INC. OF NEW YORK, a specialty investment banking and consulting firm specializing in services to insurance and insurance related businesses, including, among other things, appraisals of privately-held retail agencies, mergers and acquisitions, and strategic and business planning.

1980. Executive Vice President, THE HOME INSURANCE COMPANY.

1972 – 1980. Director, Financial Services, ITT Corporate Staff, ITT CORPORATION. Oversaw the 22 world wide insurance (life, property and casualty) and financial services companies owned by ITT. Coordinated the post-acquisition activities of The Hartford Insurance Companies into the ITT management system. Supervised numerous aspects of insurance company financial analyses including pricing assumptions, reserve adequacy, asset quality and participated in numerous subsequent mergers, acquisitions and divestitures.

1967 – 1972. USLIFE CORPORATION, Vice President of the parent company and President of its mutual fund operations. Participated in the evaluation and negotiation of several life insurance and consumer finance acquisitions.

1956 – 1967. Secretary, THE GLENS FALLS INSURANCE COMPANIES – The Glens Falls Insurance Group. Established a life insurance operation in the United States for the National Life Assurance Company of Canada.

Educational Background

• Doctor of Jurisprudence – Fordham Law School, 1972
• Bachelor of Arts (Political Science & Economics) – University of Toronto, 1952
• Chartered Life Underwriter (Canada)
• Fellow in the Life Management Institute

Represenatitive Cases

• Expert Witness – McGehee and Nobles v. Catalanotto and State Farm Insurance Companies, 2010 Retained by Plaintiffs to establish the relationship between State Farm and one of its independent contractor agents. LOUISIANA
• Mediator & Expert – Dewitt Stern Gutman Imperatore, Inc. 2009 Retained by parties to recommend settlement of an outstanding obligation arising from the acquisition of a foreign specialty insurance agency. NEW JERSEY & NORW
• Expert Witness – Kathleen Wigle v. John Wigle. 2009 Retained by Plaintiff to testify regarding the value of Association Group Insurance Administrators, Inc. CALIFORNIA
• Expert Witness – James Dougherty v. Otterstedt Agency, Inc. 2008 Retained by Plaintiff to testify regarding the value of a minority interest in an independent insurance agency and to the value of lost income. NEW JERSEY
• Arbitrator – Relmark Program Managers v. ACE Insurance Companies 2007 Retained as an Arbitrator by Plaintiff. PENNSYLVANIA
• Arbitrator – The Garn Group v. Arch Insurance Company. 2006 Retained as an Arbitrator by Plaintiff. NEW YORK
• Expert Witness – Ziemba v. The Doctors’ Company. 2005 Retained by Plaintiff to testify regarding alleged wrongful termination. Court of Common Pleas, PENNSYLVANIA
• Expert Witness – Volpari v. Farmers Insurance Companies. 2004 Retained by the plaintiff, an insurance agent. Superior Court, Alameda County, CALIFORNIA.
• Expert Witness – Bellevue v. Prudential Insurance Company. 2004. Retained by Jack Bellevue to testify to issues related to alleged improper acts following his retirement / termination. National Arbitration Committee of the National Association of Securities Dealers Dispute Resolution, Inc., San Francisco, CALIFORNIA.
• Expert Witness – Frontier Insurance Group, Inc. v. Ernst & Young, L.L.P, 2003. Retained by Resolution Trust, an appointee of the Bankruptcy Court on behalf of creditors and others to testify regarding alleged negligent actuarial practices. FEDERAL DISTRICT COURT, NEW YORK.
• Expert Witness – Patricia Adkins Insurance Agency, Inc. et al v. State Farm Insurance Company. 2004. Retained by plaintiffs regarding custom and practice in the insurance industry and specifically the confidentiality aspects of expiration data. Superior Court, Sacramento County, CALIFORNIA.
• Expert Witness – Thyroff v. Nationwide Insurance Company. 2004. Retained by Lou Thyroff to testify as to the termination rights and damages related to plaintiff’s termination by Defendant. Supreme Court, NEW YORK.
• Expert Witness – State Farm Insurance Companies v. Pyorre & Weir. 2003 Retained by Messrs. Pyorre and Weir regarding custom and practice in the insurance industry and specifically the confidentiality aspects of expiration data. Superior Court, Medocino County, CALIFORNIA
• Expert Witness – Medical Group Financial Services, Inc. v. United States Life Insurance Company. 2002. Retained by Medical Group Financial Services to value damages related to an alleged improper termination. Federal District Court, MASSACHUSSETS.
• Expert Witness – Sykes v. Sykes. 2002. Retained by E. Sykes to appraise the fair market value of his insurance holdings in connection with a marital dissolution. Supreme Court, NEW YORK.
• Expert Witness – John Testa v. Intermarket Insurance Agency. 2001 Retained by John Testa to value damages related to an owner’s interest in an agency. Arbitration. NEW YORK
• Expert Witness – Reliance Insurance Companies v. Brownstone Brokerage Agency. 2000 Retained by Reliance National to value damages related to a converted book of business. Arbitration. NEW YORK.
• Expert Witness – International Space Brokers v. Aon/Le Blanc de Nicolay. 1999 Retained by International Space Brokers to value the ownership interest in International Space Brokers held by Le Blanc de Nicholay in connection with an arbitration. VIRGINIA.
• Expert Witness – Saul Alberto Krivopisk v. American Life Insurance Company. 1998. Retained by Herrick, Feinstein LLP, counsel to Saul Krivopisk, as an expert on insurance industry business customs and practices in connection with an arbitration. NEW YORK.
• Expert Witness – Runyon v. Runyon. 1997-1998. Retained by Diane Runyon to appraise the fair market value of her husband’s life insurance business in connection with a marital dissolution. NEW JERSEY.
• Expert Witness – American Advantage Insurance, Inc. v. Ameritech Corporation, et al. 1997. Retained by Schoone, Fortune, Leuck, Kelley & Pitts, S.C., counsel to American Advantage, to appraise the damages suffered by American Advantage and its principals as the result of its advertisement having been omitted from the Yellow Pages section of the Milwaukee telephone directory in June 1995. WISCONSIN.
• Expert Witness – William J. Hourigan, et al. v. CIGNA Corporation, et al. and consolidated cases. 1996. Retained by Putney, Twombly, Hall & Hirson, counsel to CIGNA, as an expert on insurance industry business customs and practices. NEW JERSEY.
• Expert Witness – Volunteer Firemen’s Insurance Services, Inc., Arthur J. Glatfelter Agency, Inc., et al. v. CIGNA Property and Casualty Insurance Company, et al. 1996. Retained by O’Melveny & Myers, counsel to CIGNA, as an expert on insurance industry business customs and practices. PENNSYLVANIA.
• Expert Witness – ABCO Insurance Agency, Inc. et al. v. Royal Insurance Company of America, et al. 1994 – 1996. Retained by the Royal Insurance Company of America to provide an independent opinion as to the amount of damages sustained by ABCO Insurance Agency, Inc. if basis for the damage claim by ABCO were to be found, and to provide a summary assessment of the damages claimed by ABCO, as rendered by Castellini Insurance Services. NEW JERSEY.
• Expert Witness – Jardine Insurance Brokers San Jose, Inc. v. Rick Prentice, et al. 1996. Retained by Coblentz, Cahen, McCabe & Breyer, attorneys for Jardine Insurance Brokers, to consider the value of Jardine Insurance Brokers San Jose, Inc., on or about July 15, 1994 and on or about April 30, 1995 and to provide an opinion as to the loss to Jardine resulting from the loss of business volume and staff during the same period in connection with litigation. CALIFORNIA.
• Expert Witness – The Home Insurance Company and Professional Liability Underwriting Managers, Inc. and Bertholon-Rowland Corporation. Arbitration. 1995. Retained by Bertholon-Rowland Corporation to prepare and render an appraisal of the value of certain assets of Bertholon-Rowland as well an an assessment of the damages sustained by Bertholon-Rowland as a result of certain actions by The Home Insurance Company and affiliates. NEW YORK.
• Expert Witness – Avon Group, Inc. v. Crum & Forster Underwriter Group, et al. 1995. Retained by United States Fire Insurance Company to provide a summary assessment of the damages claimed by Avon and an independent opinion as to the amount of the damages sustained by Avon, if a basis for the damages claim(s) was to be found. NEW JERSEY.
• Expert Witness – Putterman v. Putterman, 1995 and 1996. Retained by Carolyn Putterman to appraise the fair market value of her husband’s life insurance business in connection with a marital dissolution. NEW YORK.
• Expert Witness – Prager v. Prager. 1994 and 1995. Retained by Lawrence Prager to appraise the fair market value at several dates of his wholesale insurance business in connection with a marital dissolution. NEW JERSEY.
• Expert Witness – American Federal Group, Ltd. and Dennis A. Herman v. Barnett Rothenberg, 91 Civ. 7860 (SWK). 1995. Retained by Saiber Schlesinger Satz and Goldstein, counsel to Barnett Rothenberg, to appraise the fair market value of the operations of American Federal Group, Ltd. as of November 1991 in connection with litigation. NEW YORK.
• Expert Witness – Bender v. Bender. 1995. Retained by Joel Bender to appraise the fair market value of his life insurance business in connection with a marital dissolution. NEW YORK.
• Arbitrator – Douglass Financial Corporation adv. Ranger Insurance Company. 1995. Retained by Douglass Financial Corporation, a general insurance agency, to serve as arbitrator in connection with a contractual dispute. CALIFORNIA.
• Expert Witness – Moss v. Moss. 1990 – 1995. Retained by the Supreme Court of the State of New York to appraise the fair market value of Alvin Moss’ insurance interests in connection with a marital dissolution. NEW YORK.
• Expert Witness – Tulsa General Insurance Agency, Inc. v. CIGNA Reinsurance Company. 1994. Arbitration hearing. Retained by CIGNA Reinsurance Company to appraise the fair market value of Tulsa General Insurance Agency, Inc. in connection with litigation. OKLAHOMA.
• Expert Witness – Estate of Bernard F. Gilroy v. Gilroy, Kernan & Gilroy, Inc. 1994. Retained by Bond, Schoeneck & King to appraise the fair market value of Gilroy Insurance in connection with a shareholder dispute. NEW YORK.
• Expert Witness – Miller v. Miller. 1993. Retained by Lynne C. Miller to appraise the fair market value of B. B. Miller & Company, Inc., an insurance agency, in connection with a marital dissolution. NEW JERSEY.
• Expert Witness – Theo Heller v. Versatile Insurance Programs Corp. 1992. Retained by Versatile Insurance Programs and Steven Brenner and Robert Heller to appraise the fair market value of the stock of Versatile Insurance Programs Corp. held by the Estate of Eliot Heller, in connection with litigation. NEW YORK.
• Expert Witness – Karpinski v. Karpinski. 1990. Retained by Andrew Karpinski to appraise the fair market value of Burkar Associates, Inc., and Apple Insurance Associates, Inc., insurance agencies, in connection with a marital dissolution. NEW JERSEY.
• Expert Witness – Anthony J. Antenucci and The Joseph J. Cervone Agency, Inc. v. Stephen J. Sipos & Sons, Inc., 1990. Retained by Stephen Sipos as an expert on insurance agency business practices. NEW YORK.
• Expert Witness – Alvarez v. L. James Cordle; Dependable v. Alvarez; Dependable v. Morales; Dependable v. MACG and Gustafson; Dependable v. Poe. 1989. Retained by Poe & Associates, Inc., an insurance broker, to assist in defense against a fraud allegation. FLORIDA.
• Expert Witness – Miller v. Cook & Miller. 1989. Retained by Clifford Miller to appraise the fair market value of Cook & Miller International Ltd., in connection with litigation. NEW YORK.
• Expert Witness – Shalom Brokerage, Inc. v. Nassau Insurance Company. 1988. Retained by Shalom Brokerage to appraise the fair market valuation of Shalom Brokerage, in connection with litigation. NEW YORK.

The following is a representative list of cases and assignments in which Mr. Moat has participated as an expert witness, arbitrator or mediator.  The list excludes instances where he was retained but the case was resolved by settlement or judicial order prior to a formal report being issued.  No formal inventory having been maintained the list is intended to be representative of the situations for which Mr. Moat has been engaged and the diversity of jurisdictions in which he has worked but must not be considered complete.

• Expert Witness – McGehee and Nobles v. Catalanotto and State Farm Insurance Companies, 2010   Retained by Plaintiffs to establish the relationship between State Farm and one of its independent contractor agents.  LOUISIANA
• Mediator & Expert – Dewitt Stern Gutman Imperatore, Inc.  2009  Retained by parties to recommend settlement of an outstanding obligation arising from the acquisition of a foreign specialty insurance agency.  NEW JERSEY & NORWAY
• Expert  Witness – Kathleen Wigle v. John Wigle. 2009  Retained by Plaintiff to testify regarding the value of Association Group Insurance Administrators, Inc.  CALIFORNIA
• Expert Witness – James Dougherty v. Otterstedt Agency, Inc. 2008  Retained by Plaintiff to testify regarding the value of a minority interest in an independent insurance agency and to the value of lost income.  NEW JERSEY
• Arbitrator – Relmark Program Managers v. ACE Insurance Companies 2007 Retained as an Arbitrator by Plaintiff.  PENNSYLVANIA
• Arbitrator – The Garn Group v. Arch Insurance Company. 2006  Retained as an Arbitrator by Plaintiff.  NEW YORK
• Expert Witness – Ziemba v. The Doctors’ Company. 2005  Retained by Plaintiff to testify regarding alleged wrongful termination. Court of Common Pleas, PENNSYLVANIA
• Expert Witness – Volpari v. Farmers Insurance Companies.  2004  Retained by the plaintiff, an insurance agent.  Superior Court, Alameda County, CALIFORNIA.
• Expert Witness – Bellevue v. Prudential Insurance Company. 2004.   Retained by Jack Bellevue to testify to issues related to alleged improper acts following his retirement / termination.  National Arbitration Committee of the National Association of Securities Dealers Dispute Resolution, Inc., San Francisco, CALIFORNIA.
• Expert Witness – Frontier Insurance Group, Inc. v. Ernst & Young, L.L.P, 2003.  Retained by Resolution Trust, an appointee of the Bankruptcy Court on behalf of creditors and others to testify regarding alleged negligent actuarial practices.  FEDERAL DISTRICT COURT, NEW YORK.
• Expert Witness – Patricia Adkins Insurance Agency, Inc. et al v. State Farm Insurance Company. 2004.   Retained by plaintiffs regarding custom and practice in the insurance industry and specifically the confidentiality aspects of expiration data.  Superior Court, Sacramento County, CALIFORNIA.
• Expert Witness – Thyroff v. Nationwide Insurance Company. 2004. Retained by Lou Thyroff to testify as to the termination rights and damages related to plaintiff’s termination by Defendant.  Supreme Court, NEW YORK.
• Expert Witness – State Farm Insurance Companies v. Pyorre & Weir. 2003  Retained by Messrs. Pyorre and Weir regarding custom and practice in the insurance industry and specifically the confidentiality aspects of expiration data.  Superior Court, Medocino County, CALIFORNIA
• Expert Witness – Medical Group Financial Services, Inc. v. United States Life Insurance Company. 2002.   Retained by Medical Group Financial Services to value damages related to an alleged improper termination.  Federal District Court, MASSACHUSSETS.
• Expert Witness – Sykes v. Sykes. 2002.  Retained by E. Sykes to appraise the fair market value of his insurance holdings in connection with a marital dissolution. Supreme Court, NEW YORK.
• Expert Witness – John Testa  v. Intermarket Insurance Agency. 2001 Retained by John Testa to value damages related to an owner’s interest in an agency. Arbitration. NEW YORK
• Expert Witness – Reliance Insurance Companies  v. Brownstone Brokerage Agency. 2000 Retained by Reliance National to value damages related to a converted book of business. Arbitration. NEW YORK.
• Expert Witness –  International Space Brokers v. Aon/Le Blanc de Nicolay. 1999 Retained by International Space Brokers to value the ownership interest in International Space Brokers held by Le Blanc de Nicholay in connection with an arbitration. VIRGINIA.
• Expert Witness – Saul Alberto Krivopisk v. American Life Insurance Company. 1998. Retained by Herrick, Feinstein LLP, counsel to Saul Krivopisk, as an expert on insurance industry business customs and practices in connection with an arbitration. NEW YORK.
• Expert Witness – Runyon v. Runyon. 1997-1998. Retained by Diane Runyon to appraise the fair market value of her husband’s life insurance business in connection with a marital dissolution. NEW JERSEY.
• Expert Witness – American Advantage Insurance, Inc. v. Ameritech Corporation, et al. 1997. Retained by Schoone, Fortune, Leuck, Kelley & Pitts, S.C., counsel to American Advantage, to appraise the damages suffered by American Advantage and its principals as the result of its advertisement having been omitted from the Yellow Pages section of the Milwaukee telephone directory in June 1995. WISCONSIN.
• Expert Witness – William J. Hourigan, et al. v. CIGNA Corporation, et al. and consolidated cases. 1996. Retained by Putney, Twombly, Hall & Hirson, counsel to CIGNA, as an expert on insurance industry business customs and practices. NEW JERSEY.
• Expert Witness – Volunteer Firemen’s Insurance Services, Inc., Arthur J. Glatfelter Agency, Inc., et al. v. CIGNA Property and Casualty Insurance Company, et al. 1996. Retained by O’Melveny & Myers, counsel to CIGNA, as an expert on insurance industry business customs and practices. PENNSYLVANIA.
• Expert Witness – ABCO Insurance Agency, Inc. et al. v. Royal Insurance Company of America, et al. 1994 – 1996. Retained by the Royal Insurance Company of America to provide an independent opinion as to the amount of damages sustained by ABCO Insurance Agency, Inc. if basis for the damage claim by ABCO were to be found, and to provide a summary assessment of the damages claimed by ABCO, as rendered by Castellini Insurance Services. NEW JERSEY.
• Expert Witness – Jardine Insurance Brokers San Jose, Inc. v. Rick Prentice, et al. 1996. Retained by Coblentz, Cahen, McCabe & Breyer, attorneys for Jardine Insurance Brokers, to consider the value of Jardine Insurance Brokers San Jose, Inc., on or about July 15, 1994 and on or about April 30, 1995 and to provide an opinion as to the loss to Jardine resulting from the loss of business volume and staff during the same period in connection with litigation. CALIFORNIA.
• Expert Witness – The Home Insurance Company and Professional Liability Underwriting Managers, Inc. and Bertholon-Rowland Corporation. Arbitration. 1995. Retained by Bertholon-Rowland Corporation to prepare and render an appraisal of the value of certain assets of Bertholon-Rowland as well an an assessment of the damages sustained by Bertholon-Rowland as a result of certain actions by The Home Insurance Company and affiliates. NEW YORK.
• Expert Witness – Avon Group, Inc. v. Crum & Forster Underwriter Group, et al. 1995. Retained by United States Fire Insurance Company to provide a summary assessment of the damages claimed by Avon and an independent opinion as to the amount of the damages sustained by Avon, if a basis for the damages claim(s) was to be found. NEW JERSEY.
• Expert Witness – Putterman v. Putterman, 1995 and 1996. Retained by Carolyn Putterman to appraise the fair market value of her husband’s life insurance business in connection with a marital dissolution. NEW YORK.
• Expert Witness – Prager v. Prager. 1994 and 1995. Retained by Lawrence Prager to appraise the fair market value at several dates of his wholesale insurance business in connection with a marital dissolution. NEW JERSEY.
• Expert Witness – American Federal Group, Ltd. and Dennis A. Herman v. Barnett Rothenberg, 91 Civ. 7860 (SWK). 1995. Retained by Saiber Schlesinger Satz and Goldstein, counsel to Barnett Rothenberg, to appraise the fair market value of the operations of American Federal Group, Ltd. as of November 1991 in connection with litigation. NEW YORK.
• Expert Witness – Bender v. Bender. 1995. Retained by Joel Bender to appraise the fair market value of his life insurance business in connection with a marital dissolution. NEW YORK.
• Arbitrator – Douglass Financial Corporation adv. Ranger Insurance Company. 1995. Retained by Douglass Financial Corporation, a general insurance agency, to serve as arbitrator in connection with a contractual dispute. CALIFORNIA.
• Expert Witness – Moss v. Moss. 1990 – 1995. Retained by the Supreme Court of the State of New York to appraise the fair market value of Alvin Moss’ insurance interests in connection with a marital dissolution. NEW YORK.
• Expert Witness – Tulsa General Insurance Agency, Inc. v. CIGNA Reinsurance Company. 1994. Arbitration hearing. Retained by CIGNA Reinsurance Company to appraise the fair market value of Tulsa General Insurance Agency, Inc. in connection with litigation. OKLAHOMA.
• Expert Witness – Estate of Bernard F. Gilroy v. Gilroy, Kernan & Gilroy, Inc. 1994. Retained by Bond, Schoeneck & King to appraise the fair market value of Gilroy Insurance in connection with a shareholder dispute. NEW YORK.
• Expert Witness – Miller v. Miller. 1993. Retained by Lynne C. Miller to appraise the fair market value of B. B. Miller & Company, Inc., an insurance agency, in connection with a marital dissolution. NEW JERSEY.
• Expert Witness – Theo Heller v. Versatile Insurance Programs Corp. 1992. Retained by Versatile Insurance Programs and Steven Brenner and Robert Heller to appraise the fair market value of the stock of Versatile Insurance Programs Corp. held by the Estate of Eliot Heller, in connection with litigation. NEW YORK.
• Expert Witness – Karpinski v. Karpinski. 1990. Retained by Andrew Karpinski to appraise the fair market value of Burkar Associates, Inc., and Apple Insurance Associates, Inc., insurance agencies, in connection with a marital dissolution. NEW JERSEY.
• Expert Witness – Anthony J. Antenucci and The Joseph J. Cervone Agency, Inc. v. Stephen J. Sipos & Sons, Inc., 1990. Retained by Stephen Sipos as an expert on insurance agency business practices. NEW YORK.
• Expert Witness – Alvarez v. L. James Cordle; Dependable v. Alvarez; Dependable v. Morales; Dependable v. MACG and Gustafson; Dependable v. Poe. 1989. Retained by Poe & Associates, Inc., an insurance broker, to assist in defense against a fraud allegation. FLORIDA.
• Expert Witness – Miller v. Cook & Miller. 1989. Retained by Clifford Miller to appraise the fair market value of Cook & Miller International Ltd., in connection with litigation. NEW YORK.
• Expert Witness – Shalom Brokerage, Inc. v. Nassau Insurance Company. 1988. Retained by Shalom Brokerage to appraise the fair market valuation of Shalom Brokerage, in connection with litigation. NEW YORK.