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The PIPELINE

A national monthly newsletter for agency principals dedicated to agency management topic

GEOGRAPHIC NON-COMPETE AGREEMENTS

For many years, agency owners have used Non-Compete Agreements as a method of assuring that the employees and producers within the agency acknowledge that the clients are owned by the agency. Using this agreement forces the producers and employees who solicit, write and service the clients in the agency’s name to acknowledge that the customer is a part of the agency’s book, and not personally owned in part or in whole by the employee.

Both today and in the days of the “Wild West”, when a cowboy located cattle on the range of his employer, he “rounded them up” and corralled them with and for the rancher who paid his wages. Those cowboys who couldn’t effectively round up cattle the way his position was expected to accomplish were dismissed in favor of those who worked hard and effectively to gather the herd. There was never any question regarding the ownership of the cattle that the cowboys rounded up while being paid to do so by the ranchers. The rancher was the employer, the cowboy was the employee, and the job for which he got paid was to effectively round up as many cattle as the other “successful” wranglers did. And, by the way, any babies born to cattle in the herd also belonged to the rancher, whether or not the cowboy aided in the foaling.

There was a name for hired hands who left and took cattle with them – cattle thieves – and they were generally hanged when found. Quick justice resulted in only the desperate, the very stupid and those who thought they were smarter than everyone else still trying to steal cattle. Were that the case today, there would be many fewer court cases involving the topic of this article.

What’s the difference between the Cattle Ranching motif and the Insurance Agency of today?

They paid people to find and round up cattle. We pay people to find and “round up” clients.

Their cowboys were also responsible for making sure the cattle didn’t stray from the herd during cattle drives and repositioning the herd. Our “cowboys” are responsible for maintaining the relationships we have with our clients.

Any cowboy could leave a ranch and the rancher had the right to terminate his employment, whether long term full time or hired for one season or one drive. They could go to work anywhere else. But they would still be hanged if they stole any of the prior employer’s cattle. And, similar justice would indicate that any producer (employee or 1099) could leave the agency and continue to earn a living “wrangling” customers for another agency. But they shouldn’t be permitted to steal the clients for whom they were paid to solicit, sell and/or service for the agency the producer left – even if they became friendly with the client while servicing him for his previous employer.

There are two main differences between the Ranches of the West and Insurance Agencies of today.

1. We pay our producers to find prospects, whether or not they are already insured with someone else, and convince them to move to our agency. Cowboys were “discouraged” from stealing other ranches’ cattle, even if it was for the good of their employer.

2. Our clients can leave our agency if displeased with our service. Once their cattle were branded to the ranch, if they left for “greener pastures” all other ranchers maintained the code of return to their owning ranch.

Of course, we are not equating insurance clients with cattle. The clients have free will while cattle are a possession and commodity. Our argument is not with the classification of the variable product of the business in question; it is in the status of the employee or hired hand of the business.

Whether a formal non-compete agreement exists or not, the example, above should illustrate why the clients and active prospects for which an agency pays its producers and other employees to solicit, write, and service should be considered “owned” by the agency.

The advents of Non-Compete Agreements were meant to cement an already existing principle. It shouldn’t and doesn’t mean that employees who were paid to produce, service or administer clients on behalf of one agency have free rein to leave and solicit clients without restriction. They were paid to cement relationships between clients and the agency. When courts began disregarding the concepts illustrated in the ranch example, above and permitted someone paid to build relationships for one agency to break them and try to move the clients to another, the need for more distinct non-competition wording became necessary. However, most current non-compete agreements actually went too far in restricting the activities of the producers and should be revised to “lighten” the terminology and, thereby, making the Agreement more reasonable and binding.

A Non-Compete Agreement that contains geographic wording is like a rancher telling a cowboy that if he can’t work for the rancher, he also must move to another geographic area to ply his trade. Geographic wording prohibits a departed employee from performing his trade in a geographic area defined by distance or geographic markers. That is unreasonable and courts around the country have indicated such. The courts generally say that a business cannot stop a worker from plying his trade where he lives and works. Unfortunately, the courts may not just eliminate the geographic part of a non-compete clause. They might negate the entire Agreement.

Rather than a geographic term, your Non-Compete Agreement should prohibit a producer or employee from influencing your clients and active prospects, the ones contacted by the former employee within a year prior to departure while being paid by your agency, to move to another agency, whether or not the former employee is an employee, a producer, or an owner of that agency.

The key to a logical non-compete agreement is NOT the prohibition of a client to move to another agency. The key is that your former employee has information that was gathered while he or she was working for your agency or information in your files of system that was not readily available publicly. While the clients are free to leave your agency if they wish, your former employee is NOT FREE TO INFLUENCE THEM TO LEAVE NOR TO ACCEPT THEM AS A CLIENT WHILE WORKING AS, FOR OR AT ANOTHER AGENCY OR INSURANCE ENTITY if the non-compete agreement is properly executed.

Consult your attorney with this article in hand. Since the change suggested actually “softens” the Agreement, removing the larger, geographic restriction and replacing it with restrictions applying only to your existing clients and active prospects, additional “consideration” such as paying the employee for a change in his contract is not required in most jurisdictions. Consider a minor change in your contracts to keep you from spending many thousands of dollars in legal and other professional expenses should former associates try to “thin your herd”.

We can help you motivate, manage, compensate and select producers in your agency. We are expert witnesses for agencies throughout the U.S. on all topics regarding insurance agency operations, personnel and disputes. We have wording that can be used by your attorney for non-competition and non-piracy agreements and we share them freely with our clients. Call Agency Consulting Group, Inc. at (800)779-2430.