Indemnity calculations: the value of new customers and increased business with existing customers

November 12, 2012

Some agency agreements provide for a terminated agent to be entitled to an indemnity in place of compensation following termination of the agency agreement. 

The amount of the indemnity cannot exceed a figure equivalent to an indemnity for one year calculated from the agent’s average annual commission over the 5 years preceding termination (or a shorter period if the agency has lasted for less than 5 years).  

However, the above maximum has to be compared with a formula which considers (amongst other things) whether the agent has introduced new customers or significantly increased the volume of business with existing customers.  The absence of either or both will impact adversely on the amount of the indemnity.  

As such, principals whose agency agreements provide for an indemnity should keep good records of:

  • which customers were passed to the agent at the start of the agency;
  • what business was being done with each such customer at that time; and 
  • any new customers passed to the agent during the duration of the agency agreement.

Such records are likely to reduce the amount payable by way of indemnity to a terminated agent.

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Emma Roake
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