For years, we’ve anticipated a significant turnover in agency ownership as Baby Boomers retire or transition to “second act” careers. Given the reassessment of priorities in the wake of the pandemic, it’s not surprising that this trend is gathering momentum. Some agency owners may choose to pass their business on to a chosen successor. Others may realize the value of their life’s work through a merger or acquisition. For many, however, their exit strategy will involve winding down their agency.
Walking away from a business is never easy, but facing unexpected compliance hurdles can make the process even more painful. To avoid that complication, be sure to address the following areas:
Affiliations and Appointments
Start by requesting Producer Database Reports from the National Insurance Producer Registry for the agency and any licensed individuals. The PDBs show not only license information but carrier appointments as well. (Be aware, however, that the report is a “snapshot.” The information quickly can become dated.)
It’s also important to tidy up agency affiliations. While either party can terminate an affiliation, it’s thoughtful to contact the agency in question and ask them to process the request. This allows the agency to ensure that it has another agent affiliated – especially for a Designated Responsible Licensed Producer (DRLP). You’ll also want to understand the process for terminating your agency’s affiliations if the agent’s license(s) will remain in effect. (If they surrender their license, any affiliations cancel automatically.)
Carriers will typically terminate an appointment if a licensee’s production falls below the threshold listed in the carrier contract/producer agreement. Still, it’s polite to let your carriers know that you plan to stop doing business with them. Review your contract to see if there are specific terms and conditions governing its termination and act accordingly.
When you surrender your licenses (more about that in a moment), notify the carrier. Then, they can submit an appointment termination to the appropriate state insurance departments. Again, don’t do this until you are no longer writing new business or servicing existing policies.
Once you no longer do business in a particular state, you can surrender your agency and individual licenses. Be sure you don’t need the license any longer before doing so. It’s a lot less costly to maintain your license and business registration in a state than to start all over from scratch if your needs change.
Many producers think it’s fine to simply let unneeded licenses lapse at the next renewal date. In fact, until a licensee cancels the license or it lapses due to failure to renew, any compliance obligations remain in force. For major lines of authority, these consist of little more than renewals and perhaps CE requirements for individuals’ resident licenses. With other license types, such as surplus lines, failing to stay compliant – even if the license is not “in use” – can result in significant fees and fines, even administrative actions. This is because several states require a licensee to make regular filings/reports until they surrender their license.
Be sure, also, to surrender any non-resident licenses before you request a cancellation of your resident license. While a lapsed resident license will eventually result in the termination of any non-resident licenses, it can often take time for state regulators to act. Better to keep everything tidy.
Foreign Corporation Registrations
While giving up licenses is an important part of winding down an agency, it’s not the only part. An agency that does business outside of its domicile state usually needs to register as a foreign corporation with that jurisdiction’s Secretary of State Office. Once all licenses for the state have been surrendered, it’s time to withdraw that registration. You may also see the phrase “voluntarily surrender of Certificate of Authority” used.
Unlike licenses, business registrations don’t “lapse.” The Certificate of Authority status may change to “inactive,” but the registration remains in effect — quietly racking up costly penalties for failure to submit annual reports or corporate tax filings/franchise taxes.
The COA status must be “in good standing” before the registration can be withdrawn. An agency with any other status must submit any past-due compliance filings and then request a reinstatement. Only then can the entity properly withdraw its registration. Some states also require withdrawing entities to obtain a Letter of Tax Clearance from their revenue department.
The time required for the state to approve the request to withdraw varies from a few weeks to more than a year. (This doesn’t include the time needed to review and approve any past due filings if the entity wasn’t in good standing.) Until regulators approve the withdrawal, continue to keep up with compliance requirements. If a business holds a Certificate of Authority for any portion of a filing period, an additional annual return and/or corporate tax filing may be required – even if it isn’t actively doing or soliciting business in the state.
All foreign registrations need to be withdrawn before the entity surrenders its COA in its domicile state. Otherwise, you may find your agency “stuck” in revoked status.
Once all foreign registrations are approved, the business can dissolve its registration in its domicile state. Note that if the agency’s resident license state is different from its domicile state, treat the registration there like any other foreign registration. Registrations in non-resident license states should be approved before initiating the withdrawal in the resident state, however.
Although the term is different — “withdrawal” for a non-domicile state and “dissolution” for the domicile — the process is fundamentally the same. Obtaining a tax clearance, if required, can be slightly more complicated since the entity likely filed the majority of its taxes here.
Why It’s Important
It may be tempting to say, I’m not going to be in the insurance business anymore. Why should I care if the regulators aren’t happy? Apart from (hopefully) a desire to do the right thing to protect the consumers who rely on our industry, there can be real-world consequences for insurance professionals as well.
First, if any licensed producer serves as an owner, partner, officer, director, member, or manager of an agency subject to an administrative or legal action, that sanction follows them for the remainder of their career. Second, a business owner who fails to meet their compliance obligations, particularly to the Secretary of State’s Office or Department of Revenue, may have difficulties establishing another business in the same jurisdiction in the future. That can be a real setback for a “second act” venture. Most of all, you’ve spent years building a solid reputation for yourself and your business. Why throw that away?