Insurance agencies often ask us to help them with “tidying up” the insurance licensing or Secretary of State filings for a newly acquired or merged business entity. Unfortunately, sometimes we must tell them that’s not possible. Why? Because they haven’t bought the agency, they’ve only purchased some or all of its book of business. They have no legal standing to take any action that impacts the licensing or other regulatory filings for the other entity.
Confusion about what authority an M&A transaction does and doesn’t include can have serious consequences for an agency’s regulatory standing. It can also affect its ability to write new business and to service or renew existing policies. For new owners looking to recoup their investment, that can come as a nasty surprise! So, let’s take a closer look at the difference between buying an agency and a book of business and what each means for your compliance obligations.
Buying an Agency
First, you need to understand that agency licenses are tied to a business’s Federal Employer Identification Number (FEIN). If the terms of your contract to merge with or acquire another agency give you ownership of that FEIN, you can truly say you’ve bought the agency. Consequently, you can use, renew, or surrender any existing agency licenses. You can also apply for new insurance licenses using the agency’s legal name and tax ID. You will need to submit a Director & Officer Update, though, usually within 30 days of the new owners and/or executives taking office.
Likewise, at the Secretary of State’s Office, you’ll need to update the ownership and governance information on file. Often this can be done on the next annual or biennial return. In jurisdictions that don’t require returns, however, you’ll need to file a certificate of authority amendment. Once you’ve done so, you can make the required compliance and tax filings or withdraw the registration in a state where you’ll no longer do business. You can also apply for new registrations as a foreign entity in other jurisdictions.
Buying a Book of Business
If another party retains control of a FEIN—even if they aren’t actively doing business—you haven’t bought the agency, just its book of business. Again, you have no legal standing to take any action that impacts the licensing or other regulatory filings for the other entity. Instead, you’ll need to meet certain essential compliance requirements in your own right.
Business entity insurance licenses are tied to the FEIN. They ARE NOT transferrable. If you don’t control the tax ID, you cannot use, renew, or surrender any licenses associated with it. That means your agency will need appropriate licenses and lines of authority to service the existing policies. They need to be in effect before you solicit, negotiate, sell, or receive commissions on insurance policies. Filing an application isn’t enough!
If producers or brokers will transition to your insurance business, they can bring their licenses with them. (Individual licenses are tied to Social Security Numbers.) However, you will need to affiliate these individuals with your agency’s licenses.
Insurance companies appoint licensees under a selling agreement. While some carriers will contract with individuals, most selling agreements are under the agency’s name. If you have not bought the agency outright, those selling agreements generally are not transferable. (Even if you did buy the agency, review the terms of any contracts carefully to determine their assumability.)
If your agency already has a selling agreement in place with the insurer(s) needed to service existing policies, you will still need to appoint licensed individuals transitioning to your agency under your selling agreement. Even if they held an appointment with the same carrier previously, the terms of the contract between the insurer and your agency may be different. Additionally, double-check that your agency holds appointments in all the necessary jurisdictions.
If you do not have a selling agreement in place, you will need to contact the carrier’s licensing department to obtain one. (NOTE: Licensing in this sense does not refer to licenses to sell insurance products.) This can be challenging for an agency that doesn’t have a proven track record of production. Once the appropriate selling and producer agreements are in place, you can request appointments for licensees in the states needed.
Secretary of State’s Office Registrations
Like agency licenses, business registrations with the SOS are tied to the entity’s FEIN. If you meet the state’s definition of “doing business,” you will need to register with the Secretary of State’s Office and possibly the state Department of Revenue as well if you don’t already hold a certificate of authority there. This action can trigger a number of other compliance obligations such as annual/biennial returns, franchise tax payments, and foreign entity tax filings.
Name Use and DBAs
Although the various DOIs have their own rules concerning appropriate names for insurance business names and the use of “doing business as” names, issues over the right to use a particular name are more likely to arise when dealing with the SOS.
If the terms of sale include the right to use the name of the merged or acquired business, that entity must still surrender its control of that true legal name or DBA at the Secretary of State’s Office before another business can use it. Be aware that once the prior holder releases the name, it’s up for grabs. Be prepared to act promptly to secure the desired name(s).
Again, you cannot change the name of another registered entity or file a withdrawal request in a non-domicile state or a dissolution request in its domicile state. Attempting to do so can not only get you in trouble with regulators; it can also open you up to lawsuits.
Having been through more than one acquisition myself, I know how stressful and time-consuming the due diligence process can be—not to mention the negotiations over the terms of the sale. Don’t overlook compliance, though! Securing agency licenses, registering a business with the Secretary of State, and all the related compliance tasks take time.
Plan ahead so that all necessary licenses and certificates of authority are in force when you close the M&A deal—or at least very shortly afterwards. Only then can you begin soliciting and transacting insurance business without risking censure by state authorities.
From insurance licensing, corporate compliance, and surplus lines tax filings to business process management, operations optimization, and more, ReSource Pro helps insurance businesses meet their regulatory obligations and achieve their strategic growth goals. Visit our Compliance page to learn more.