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The PIPELINE

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THEFT OF ACCOUNTS What to Do When A Producer Departs - With Your Accounts

A wise person once said that the real crises in life are not those about which we worry, the real crises tend to arise out of the blue on a Tuesday afternoon when you are generally feeling pretty good about life. That is when the call came in from the agency – referred by his association.

“Mr. Diamond, we have just lost our key producer and do not know what to do!”

My first question in this case was exactly the same as it has been in the last 20 such calls.

“Did you have an employment contract?”

When an employment contract has not been executed with valid non-competition clauses, I tend to get a sinking feeling. Perhaps we can still work with the client to save his business. After all, the producer sold the business as an employee of the agency and the agency has serviced, marketed and administered the account, not the producer; but we have lost the contractual “high ground” that makes retention or pursuit of damages much easier.

Understand here that all non-competes must be “reasonable” in all respects in order to be enforceable. They are to be no longer, broader or tighter than minimally necessary to protect the value of the agency.

In this case, the agency had executed an employment agreement with the producer when he was first hired over ten years ago. That led to the important second question, “Was the Non-Compete and/or Non-Piracy Clause territorial, or pertaining to a stated book of business?”

So many agencies still have contracts that are territorial as well as time sensitive. They state that an employee cannot compete within a specified area (25 miles, a city, county or stated territory). Unfortunately, the courts have generally not agreed to the validity of territorial non-compete clauses. The general principal accepted by the courts is that you cannot totally prevent a person from continuing his career in his chosen field (his “trade skills”) in the area in which he resides or with which he is familiar – unless you pay them a lot of money for it, such as to the seller of an agency. The best non-compete terms involve a prohibition from “directly or indirectly soliciting, accepting, servicing or otherwise diverting” those active accounts that the producer produced during his employment at the agency. Furthermore, that type of “non-piracy” clause prohibits the producer from soliciting any other policies or clients that are active in the agency, were active in the last year, or were solicited in documentable fashion by him or anyone else in the agency during the last year. Of course, the clause extends to any type of involvement or association by him with an agency soliciting these accounts and puts a reasonable time element on those restrictive covenants. Most states will accept 2 or perhaps 3 years for a producer; perhaps 1 or 2 years for a CSR who is licensed. This permits the producer to continue his career (selling insurance), but not to his former employer’s clients and prospects.

Happily, our new client had such a contract with account-sensitive, not territorial-sensitive, non-piracy clauses. The third question is just as important to the validity of the contract as the first two: Was signing the contract a condition of employment – or – was there “timely and legally sufficient” consideration given for signing the contract if the employee was already employed by the agency? By the way, their customary Christmas bonus cannot suffice; it must be new and “fresh” consideration and ordinarily a minimum of several thousand dollars depending on the anticipated danger of that particular producer to the agency following their departure; perhaps much, much more or a new Lexus would suffice if he has a substantial book.

If the contract was signed as a condition of initial employment, you are safe. If you had employees sign a contract after they were employed (or revised the contract to take any benefit away or reduce its liberalism), the only way to assure validity is by rendering consideration (usually money, but perhaps a non-cut employment provision for a couple years or some such) and having the employee sign the contract (or revisions thereof) with a specific notation therein that such consideration was expressly given and accepted by the employee in exchange for the non-piracy. By the way, that consideration should not be nominal. $100 to have a producer sign a non-compete and non-piracy for the first time may not be considered valid by a court, especially if there are remedies spelled out in the contract, because it constricts his rights without reasonable consideration or remuneration. It appears (whether right or wrong) that the producer would have jeopardized his job if he did not sign away his competition rights. It’s also advisable to keep a time line and give them at least a week minimum to review and contract and have it gone over by their own attorney if they wish; you do not want to be accused of coercing them into signing without the benefit of counsel.

The producer in this case signed the contract as a condition of employment, so we were safe so far. “What’s the problem?” I asked. It seems that the employee joined another local agency and suddenly our client was facing a flood of BOR (Broker of Record) letters, surprise non-renewals and clients who would no longer return our agent’s phone calls. Obviously, the producer was soliciting. The agent could prove this because some of his clients who were also his friends tipped him off to their solicitation by the producer with exceptional knowledge of their accounts. Obviously, the producer had stolen agency confidential information to prepare him for the theft of agency clients.

The agent said he did not want to make a big deal of the solicitation, if we could only make him stop! He would even SELL the producer some accounts that he seemingly controlled. I told the agent that if that was the attitude that he wanted to take, I would give him my advice FREE, but would not represent him. This surprised the agency and he asked my why I would take that position in such a clear-cut situation.

If an agency has valid contracts with non-competition and/or non-piracy clauses and does not enforce them one time, it likely invalidates the restrictive covenants of his other producers in the future since a court or arbitrator may determine that the supposedly protected information is now of public knowledge, and therefore no longer protectable. After all, how does he pursue the next departure when the second lost producer simply states in court that since the agency did not pursue the first lost producer, he felt that pursuing those clauses in this case is discriminatory (and it is) and an unknown amount of otherwise confidential agency information appears to be public knowledge? We always seek what is RIGHT and pursue it with dogged determination until the situation is resolved. Luckily, RIGHT has prevailed in most instances.

In this scenario we advised the agent to take the following steps:

1. Write a personal letter to all of the clients generated or serviced by the producer advising them of his departure and that the agent (or a representative) will visit them soon to assure continuity of coverage and service. Note that persistency with a carrier will assure the best treatment on renewal or in the event of a loss.

2. Send a Newsletter or Bulletin to all other clients with a few articles of general interest and a notice that the producer has left, wishing him well, and naming the successor producer and/or servicers that are available to meet any insurance needs.

3. Working with his attorney, get temporary injunctions against both the producer and the agency specifying the offenses that have been committed, and offering to avoid further legal action if they a) return the accounts that have been lost, and b) avoid any further solicitation of any accounts covered by the contract.

4. If you had our recommended expanded restrictive covenants in there, you’ve also provide that cannot even “accept” a protected client – and just because the state insurance code says the client can take his business to anyone she chooses, that has no effect on your contract that says the producer is prohibited from accepting such business even if the client searches him out totally on her own volition.

5. If the solicitation continues, SUE THE BASTARDS! In the old West, when someone took your cattle, you first asked for them back (in case the herds just got mixed up). If they proved their criminal intent by denying or continuing the wrongdoing, they were prosecuted and hung!

Note that the agency can also invoke the Uniform Trade Secrets Act, which precludes the theft of trade secrets such as a customer list and/or expiration dates or contact points, etc., regardless of whether or not there is a contract between the agency and the producer. Such a list is called a protect “compilation”, since it is a unique list valuable only to an insurance agent; it is compiled in a special way for a special target group, and we not be valuable to say a plumber – but is extremely valuable intellectual to any insurance agency. By the way, it’s useful to restrict the theft of both “confidential information” and “trade secrets” – the former being defined under case law (common law) decided in your state, and the latter being a creature of statute defined by the legislature; so by specifying both, you’ve much more effectively covered all the ground you wish to protect. One can also throw in the federal Uniform Trade Secrets Act; which then forces the producer to defend himself in both state court and federal court at the same time in the event there is a substantial amount of money at stake and you can persuade a federal prosecutor to go after him criminally for theft of such trade secrets. NOTE: Do not threaten the producer with being prosecuted for a crime; just go to the prosecutor first, and they’ll let the producer know they are being investigated for theft – otherwise, you can be convicted of extortion yourself.

WHAT ARE THE DAMAGES?

Too many contracts do not specify the damages done or the values of those damages. Those contracts that do specify the levels of damages are rarely broken. There are various types of damages, including amongst others:

Level One Damages – The revenue value of the lost accounts. The lost accounts will accumulate lost commissions for every year they would have stayed in the agency. Each agency has two types of business; that of average duration, and that of extended life. If you randomly sample your dead files you will identify the average life of accounts that have died (initial inception date to termination date) and, with enough in the sample, could determine the average life of accounts by type. Measure the life to termination of the accounts lost to the departed producer to determine if they fall into the average category and calculate the remaining revenue value to each policy/account. If an account has been with the agency more than double the average life, it is an extended life account and should be valued as if its life to the point of theft was its “half-life”.

Level Two Damages – Asset value decline to the agency. If your agency is worth $X intact including the book of business and growth generated from that book in the future, how much less is it worth without that book of business? Agency Consulting Group, Inc. or other agency valuors can determine the value of your agency with and without the stolen business to add that measure of damages.

Level Three Damages – If a stolen book of business has proven to be a generator of referrals, the value of the expected referral accounts over their lifetime is another measure of damages.

You can make a business decision as to whether to provide that the substantially prevailing party shall be entitled to collect their attorney’s fees from the other side. If that’s not in there, the agency may gain some advantage by the mere threat of out-spending the renegade producer and causing no end of time spent answering interrogatories and sitting through depositions and the like with no chance of him collecting his [substantial] attorney’s fees from you even if he should win. On the other hand, the threat of having to reimburse you for your attorney fees could double his risk of losing, and scare him into honoring his non-piracy just on that basis alone. Make no mistake; these actions can be extremely expensive on both sides. The producer could be forced to spend more than $10,000 defending himself in a couple of weeks just for openers if the agency pursues an immediate temporary restraining order and escalates things from there rapidly.

The best contracts will spell out the damage calculations (often referred to as “liquidated damages”) in the event of a theft of accounts. Once this form of contract is accepted and signed, there is little chance of a producer breaking the non-compete or non-piracy clauses upon his termination.

By the way, another major avenue of attack here is to go after the departed producer’s new agency for “tortious interference” with business contracts in the event the successor agency is aware of the non-piracy and proactively encourages or assists the producer in the piracy of accounts. In most states that can result in multiple damages plus attorney fees against the successor agency; potentially a great deal of money. Often a carefully worded threat letter from your attorney to that agency can in and of itself stop the piracy in its tracks when the other agency owner figures out how much its actions could cost him – he’s the deep pockets.

Please make no bones about it. The primary value of an insurance agency is in its book of business. The greater the retention and growth of the accounts, the more the agency is worth. The solicitation of an agency’s accounts represents THEFT, pure and simple. This theft is worse than the burglary of jewelry from your home. In the case of jewelry, you have lost the value of the pieces once (and any emotional attachment you may have had to them). In the theft of accounts, you lose the revenue value of the accounts EVERY YEAR. Offering to “sell” the stolen accounts to the thief makes as much sense as telling the burglar that you’ll forget about the theft if he will compensate you for the lost jewelry.