Ten Essential Contract Provisions for Service Provider Agreements

This is the first in a series of three blogs leading up to our Compliancedashboard® webinar on December 5^th, 2018: Contracts 101: Creating Simple, Compliant Service Provider Agreements. If you sponsor a welfare plan(s), and use a third party to provide some or all services with respect to that plan(s), then you likely have a contract in place with each provider. Now is a good time to brush up on your legal vocabulary and ensure your providers know their duties—and you do too (because, if you’re a plan sponsor, you have a fiduciary duty to hire and monitor each plan provider).

Common service provider agreements include those with: an insurance company; TPA; claims & billing administrator; COBRA partner; stop loss carrier; financial institutions (trusts and 401K accounts); and vendors who provide software services that handle Protected Health Information “PHI”.

This week’s blog is a bit longer read, but these are worth the time. Whether your existing agreements are up for negotiation or you’re on the threshold of signing a new one, consult your counsel and consider including these provisions in your agreements. *

1. Recitals & Definitions: Why are these provisions essential? Because a third party who reads well-drafted recitals better understands the contracting parties’ intent. Likewise, a separate definitions section (on the first page) will be easier to reference than searching for definitions within provisions.
2. Acknowledgement of Fiduciary Authority: Simply summarized: the ERISA plan sponsor represents and acknowledges they are the “named fiduciary” with respect to the plan; may act as a fiduciary; is not related to the service provider; and has the authority to enter into and sign the agreement.
3. Standard of Care Provisions: It’s essential that the plan sponsor acknowledge facts about the service provider as well as make certain representations about itself. Consult with an experienced ERISA attorney to learn more about the detailed language required for this provision.
4. Parties’ Acknowledgements & Representations: This provision should be clear, concise, and precisely state who is responsible for what based upon regulatory requirements and the parties’ agreement. Remember—don’t take the “boilerplate” contract language at face value—ensure balance between the parties. Negotiating this language is expected.
5. Scope of Services to be Provided: This is the “heart” of the matter, so to speak. This language describes who provides services to whom. Keep it simple yet thorough.  If you don’t understand the services to be provided, re-work the language until you do. Alternatively, if a service is NOT to be provided by a party, consider explicitly stating it to avoid operational blunders.
6. Compensation & Service Fees: Consider a separate compensation and service fee section that also explains the procedures underlying the payment and receipt of fees. Know, however, that under ERISA, any compensation paid by the plan to the provider must be “reasonable.”
7. Mutual Limitations on Liability & Indemnification: These provisions can get a bit…sticky…and require both knowledge of law and tact to negotiate. This language should also be balanced between the parties—some responsibilities cannot be contracted away (for instance, a plan cannot indemnify a service provider for fraud or willful misconduct)!
8. Arbitration Agreement Provisions: This is optional but may be essential depending on circumstances of the parties’ agreement. Arbitration clauses, if drafted well (clear, simple, and specific) have the potential to make disagreements less painful (and shorter lived) for both parties.
9. Termination Provisions: Just as it’s essential to draft recitals and outline services to be provided, it’s essential to specify both the procedures to be taken and duties of both parties if one party wants to terminate the agreement. Don’t forget to include language on how to transition services from one provider to another or what happens if the plan terminates.
10. Miscellaneous Provisions: Yes, it’s a catch-all—but an essential one. Choosing the structure of this section depends on the business arrangement.  Consider inclusion of the following:
    1. Notices & Disclosures—how parties are to provide notice and communicate.
    2. Assignability—can you transition this agreement? If so, how?
    3. Integration—make it clear whether this agreement is the entire agreement between the parties or not—an essential provision.
    4. Governing Law—which law governs if there is a suit? Don’t forget to ensure alignment with any arbitration provision language.
    5. Amendment Procedures—if you need (or want) to modify the contract, this language tells the parties how to go about it.
    6. Electronic Systems—we can’t escape our world today—most arrangements include some sort of data housing or transfer—so draft language to address our modern times: software usage, licensing, and procedures for file transmissions.

*This blog post is not intended to be an all-inclusive representation of necessary contract provisions nor constitute legal advice. Please consult your counsel regarding specific contract provisions for your service provider agreements.