Background Paper on Pool Sponsorship and Administrative Agreements

Note. The sources of comments and information in this paper are not revealed herein; however AGRiP may be able to facilitate direct communication with a commentator or pool officials, or provide additional information on a request basis. In many instances the information from the original source is paraphrased.

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Comments from a former pool administrator. “While I was employed at a pool, we separated from the association. We moved to separate rented office space 4 years later, and in another 9 years we moved to our own property. After a “national association” gathering of association officials, we were asked to provide $100,000 a year so that the association could expand their training program. The Board agreed for one year, until we found out they had trained fewer people that year than in the past. When we refused to continue the “donation” without some accountability, our board chairman was told by the association president that the pool would give them the money with no strings attached “or else”. When the pool did not continue the “donation” the association accepted a $1 million fee (10 years at $100,000 each year) to “endorse” our major liability program competitor. At one point we lost 40% of our liability accounts to them (but improved our loss experience and fund balance through these losses). At one time the competitor developed a competing health pool that used our documents verbatim and rates exactly 5% less than those set by the pool. The competing health pool failed after three years. I personally contacted the five original “incorporators” of the Interlocal Agreement for the “new health pool” and discovered that they were not even aware of the nature of the agreement the association director had asked them to sign. At the end of ten years, the carrier walked away and non-renewed all the business – leaving the association high and dry! The association now has an Employee Benefits Consulting arrangement with a consultant who just coincidentally tells all the pool’s members that they can get them a better deal.”

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Excerpts from “Notes” in the annual financial audit of a municipal pool that is administered by employees of the association. In January 2000, the Pool loaned $1,250,000 to the Association for use in the purchase of an office building. The note had a maximum term of 20 years and bore interest at a rate equal to the one-year U.S. Treasury Bill, adjusted annually. During 2001, the Pool reached an agreement with the Association wherein the note receivable was canceled in exchange for fixed, prepaid rent for a period of 20 years in the Association’s building. In addition to the cancellation of this note plus accrued interest of $74,375, the Pool made an August 2001 cash payment to the Association in the amount of $1,498,690. As a result of this transaction, the Pool recorded prepaid rent in the amount of $2,823,065 to be amortized over 20 years.

The Association provides substantially all of the Pool’s operational, management, and administrative services in exchange for an administrative fee based on a percentage of earned premiums (believed to be about 28%). Total administrative fees under the agreement amounted to $1,506,702 and $1,110,230 for the years ended June 30, 2001 and 2000, respectively.

The Pool participates in a marketing agreement with an insurance agency owned by the association, which provides that the Pool pay a commission for member accounts marketed or services by the insurance agency. Commission expense under the agreement was $372,854 and $96,542 for the years ended June 30, 2001 and 2000, respectively.

The Pool’s directors’ and officers’ insurance provides coverage for the Association board members. Also, certain trustees of the Pool are directors for the Association.

In August 2001, the Pool transferred $489,280 to the Association. This transfer represented reimbursement for monies paid by the Association for start-up costs of the Pool in the years 1985-87, plus imputed interest on those monies through the date of transfer.

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Excerpts from a 1998 Administrative Services Contract between the state municipal league and an “independent” pool that provides coverages for cities and other local governments.

  1. Services to be Provided. The Association agrees to perform the following personal and professional services for the Pool: employee benefits services, legislative liaison, general assistance with marketing by providing exhibit space at the Association’s annual conference and space for articles and advertisements in the Association’s publications, reasonable ex officio representation on the Association’s board of directors, presentations at the Association’s regional meetings, joint sponsorship of training seminars, intervention with specific cities and city officials on behalf of the Pool, and such other services as may be mutually agreeable to both parties. The Association’s executive director will report to the Pool’s board of trustees at least annually concerning the services provided to the Pool. The Pool’s executive director will report to the Association’s board of directors at least annually concerning the activities of the Pool.
  2. Grant of Non-Exclusive License. The Association grants a non-exclusive license to the Pool to use the Association’s name in its name during the term of this agreement. Such right shall include the authority to use the Association’s name in all bulletins, letterheads, procedures, supplements, forms, advertising matter, devices, marks, and slogans used by the Pool in connection with the business and operations of the Pool. The Pool shall not allow or authorize any other party to use the Association’s name or logo. The Association agrees that it will not grant authority to use its name to any other pool whose purpose it is to provide workers’ compensation, property, or liability coverages to cities within the state and other local governments while this Agreement is in effect.
  3. Compensation. (a) For services provided in Section 1 and the license provided in Section 2 of this Agreement, the Pool will pay the Association $700,000 annually. Payment will be made in 12 equal installments. (b) For any other services provided by the Association or by the Pool to the other shall be payable as set forth in a separate contract for such services or payment monthly within 30 days of receipt of a statement of services. As long as the Association’s services provided to the Pool exceed the Pool’s services provided to the Association, the Pool shall maintain a deposit with the Association equal to one month’s average bill, based on the average bill for the previous six months with such deposit amount to be recalculated during January and July of each year. The required deposit will be adjusted on February 1 and August 1 of each year by the Pool, increasing its deposit or the Association returning excess amounts on deposit on that date. Deposits shall be the amount determined by using the above calculation rounded to the nearest higher $1,000.
  4. Self-Insurance Services. Upon request by the Association, the Pool will afford the Association coverage under the Pool’s Liability Self-Insurance Plan and the Pool’s Property Self-Insurance Plan. Further, upon request by the Association, the Pool will provide the Association coverage for workers’ compensation benefits under the Pool’s self-insurance plan. Any and all contributions payable to the Pool by the Association for providing such coverage shall be paid in accordance with the terms and provisions of the separate agreements between the Pool and the Association, which extend and provide such coverage. Any such coverage provided by the Pool to the Association will be provided on the same terms and conditions as the Pool provides such services to its Members.
  5. Investment of Association Funds. The Pool shall allow the Association to combine a maximum amount of $2,000,000 with the Pool’s funds to be invested under the terms and conditions of the Pool’s investment policy.
  6. Printing Services. The Association will provide printing and mass copying services to the Pool. The Pool will compensate the Association for such services in accordance with the rates established by the Association for similar contract printing.

NOTE. This pool may also have “endorsement” or “sponsorship” arrangements with other organizations representing constituent municipal entities.

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Agreement between a county association and a pool. (Excerpts from preamble) The Association (hereinafter referred to as “Licensor”) is a not-for-profit whose membership includes local governments within the state and the Pool (hereinafter referred to as “Licensee”) is engaged in the business of selling or arranging for various benefit programs to members of the association, school divisions and other eligible entities and desires to provide its services by use of the name and logo of Licensor.

The Licensor is willing to allow the Licensee to make its Services available to Members and others using the Licensor’s name and logo in various marketing, advertising and promotional materials and otherwise, subject to the terms and conditions set forth in this agreement.

Full Text of Agreement

In consideration of the mutual promises and obligations of the parties, all in accordance with the terms and conditions hereinafter set forth, the parties hereby covenant and agree as follows:

  1. LICENSE TO USE NAME AND LOGO.

Subject to the terms and conditions of this agreement, Licensor grants to Licensee an exclusive license to use Licensor’s name (including any trademark, trade name, service mark, or collective mark, as well as any abbreviations or initials representing such name), logo, letterhead, symbols and designs (collectively the “Intellectual Property”) as may be necessary or useful in connection with Licensee’s promotion, sale, sponsorship, administration or conduct of its services to the Members of the Licensor and others(the “Licensed Use”). Licensee shall at all times devote its best efforts to ensure that its use of the rights granted to it under this Agreement shall not adversely affect the reputation or good will of Licensor. Such license and rights shall be used for no other purpose than the Licensed Use.

  1. RELATION OF PARTIES.

Each party expressly disclaims any intention to create a partnership or joint Venture. Nothing in this Agreement shall constitute making either party the agent of the other. In all matters relating to this Agreement, Licensee and Licensor shall be acting as independent contractors. Neither party's employees are employees of the other under the meaning or application of any federal or state tax laws, unemployment or insurance laws, worker's compensation laws, or otherwise. Each party assumes all liabilities or obligations imposed by any one or more of such laws with respect to its own employees.

  1. RESPONSIBILITIES OF LICENSEE. Licensee shall at its own expense:
  1. Develop an overall marketing plan and design all marketing, advertising and promotional Material for its services.
  2. Offer to each Member and others, without obligation, consultation, as Licensee deems appropriate, on its services, and provide coverage for those Members and others who qualify for purchase of its services.
  3. Licensee shall not offer other products or Services to Licensor's Members without the prior written approval of Licensee.
  4. Promote its services annually with advertising as Licensee deems appropriate with the approval of Licensor. The expense of any general mailing or advertising will be borne by the Licensee.
  5. Meet with the Licensor periodically as reasonably necessary to:

1)Review the status and progress of the Services and provide Licensor with statistics and information that may be reasonably requested by Licensor about the services including, but not limited to, written premiums, account activity, number of participants, and statistics on other specific promotional or marketing activities. Licensor will have the option of receiving this data electronically from Licensee.

2)Provide information about incurred losses, expenses and premium rates or other rates for the Services as reasonably requested by Licensor, to the extent such information is not reasonably deemed by Licensee to be confidential. Information includes, but is not limited to, the amount paid and reserved for each claim, date claim incurred, date of settlement and description of the cause of claim, but it may not include, among other information, the identity of the claimant or the insured member presenting claims or other information reasonably deemed to be confidential.

3)The foregoing statistics and information shall be provided at no charge to Licensor in periodic progress and status reports as the parties may agree. Licensee further agrees to provide free consultation to Licensor on matters including but not limited to other possible member offerings, marketing strategies, member surveys, and all staff support functions in which Licensee may have expertise.

4)Develop additional marketing methods and activities, subject to Licensor's approval.

  1. Purchase advertising space, as Licensee reasonably deems appropriate, in publications, including magazines, newsletters and direct mail.
  2. Provide risk management educational services to insured Members and others, as Licensee reasonably deems appropriate.
  3. Not materially change in any way the terms and conditions of the Services without the prior written consent of Licensor.
  4. Assume the entire cost and responsibility of underwriting, premium billing and collection, computer facilities, policy/certificate processing and issuance, service requests, claims handling and payment, and any and all other costs related to the administration and management of the Insurance Program (including any and all legal requirements applicable to such activities).
  1. RESPONSIBILITIES OF LICENSOR. Licensor shall:

A. Recommend and promote on an exclusive basis Licensee’s Services to the Members and others.

B. Provide Licensee with a periodically updated membership list, which Licensee shall use only in connection with the promotion, sponsorship and administration of the Services Program authorized herein. Licensee shall treat the membership list as proprietary information under Paragraph 8 below, regardless of whether such list is marked as "proprietary" or “confidential." The membership list shall remain the exclusive property of Licensor. Licensee shall use the list only for the limited purposes contemplated herein and shall not duplicate or use such list or permit any other party to use such list for any other purpose whatsoever. Licensee shall not copy the membership list. Licensee shall keep the list secure, and shall not disclose, transfer, release, or use the list or any information contained thereon, in any way, or permit any agent, contractor, or third party to do so, except on Licensor's written direction or with Licensor's written consent.

C.Meet with Licensee periodically (as needed) to review the status and progress of the Insurance Program, premiums and number of participants or other matters as requested by Licensee.

  1. ANNUAL PAYMENTS
  1. In consideration of the license and rights granted to Licensee hereunder during the Term of this Agreement, Licensee shall pay to the Licensor fees ("Fees") in the amount of 1.5% of the pooled premiums actually received by Licensee for property, general liability and automobile coverage, .5% of health and benefits contributions and .5% of standard workers’ compensation premiums, reduced by any amounts refunded upon cancellation of any policy or certificate. Amounts to be paid to Licensor shall be subject to the availability of funds from (the Pool)). If the funds are not available from such entities then use of the license must cease until funding is restored. Licensee agrees to pay such Fees to Licensor quarterly; amount is due no less than 45 days following the end of each respective quarter.
  2. In addition to any other reports herein, Licensee agrees to submit to Licensor by August 31st of each year an annual report on the Fees paid for the previous policy year of the Term, including the total amount of all premium payments received in the previous policy year, an enumerated list of all individual premiums paid by policyholders with all their names and addresses and the term of each insurance policy, and the name and addresses of all outstanding premiums for which a balance due remains. The first such annual report submitted by Licensee shall cover the period from the date of execution of this Agreement to June 30th; thereafter all annual reports will cover the policy year from July1st to June 30th.
  1. INDEMNIFICATION
  1. Licensee shall indemnify and hold harmless Licensor, its directors, officers, agents employees, volunteers, and all other representatives, from and against any and all loss, damage, liability, claims, costs, causes of action, or any other expense arising out of or in any way resulting from any acts, errors or omissions of Licensee or the Underwriter, or their directors, officers, agents, employees, or any other representative of Licensee or the Underwriter, in connection with or in anyway related to the Services which are the subject of this agreement (to the extent not attributable to any acts, errors or omissions on the part of Licensor). This indemnity shall include, but not be limit to, any loss, damage, liability, claims, costs, causes of action, or any other expense under any local, state, or federal insurance law, unfair trade law, consumer protection law, or any other law or regulation applicable to the Insurance Program. This indemnity shall also include all actual damages and reasonable expenses incurred by Licensor in defending itself, court costs, reasonable attorney's fees, and all other related expenses.
  2. Licensor shall indemnify and hold harmless Licensee, its trustees, directors, officers, agents, employees, volunteers, and all other representatives, from and against any and all loss, damage, liability, claims, costs, causes of action, or any other expense arising out of or in any way resulting from any acts, errors or omissions of Licensor or its directors, officers, agents, employees, or any other representative of Licensor, in connection with or in any way related to the Services which are the subject of this Agreement (to the extent not attributable to any acts, errors or omissions on the part of Licensee or its Underwriter). This indemnity shall include, but not be limited to, any loss, damage, liability, claims, costs, causes of action, or any other expense under any local, state, or federal insurance law, unfair trade law, consumer protection law, or any other law or regulation applicable to this Insurance Program. This indemnity shall also include all actual damages and reasonable expenses incurred by Licensee in defending itself, court costs, reasonable attorney's fees, and all other related expenses.
  3. Licensor and Licensee shall each notify the other within 30 days of any claim or potential claim asserted against them that they become aware of relating to the Services which are the subject of this Agreement.
  1. TERM.

The initial term of this Agreement shall be for a period of five years beginning July 1, 2004 and ending June 30, 2009, unless terminated earlier as hereinafter provided (the "Term"). This Agreement shall automatically renew for another five year period unless one party gives the other written notification of its intention not to renew at least ninety (90) days prior to the end of the initial term or subsequent term.