The Illusion Of Service: How To Become A Customer Friendly Agency

I have just completed Expert Witness testimony in a trial of a specialty insurance agency vs. two former employees and a large firm accused of stealing a book of business when the large agency hired the former employee of the small agency. My role was to determine the damages and to expound on the industry’s common practices with respect to ownership of accounts.

Ownership of books of business is acknowledged to belong to the originating agency. Production of that business and servicing of the business is done by producers and other employees of the agency at the behest of the agency. Certain notable exceptions occur when the producer is a broker, not working for the agency. In that circumstance, the agency manages and services the business on behalf of the broker who “owns” the business. Other exceptions occur when an agency has a written agreement yielding some or all of the ownership of a specific book of business to the producer of that business. If the normal ownership of accounts were not accepted as that of the agency, itself, few insurance agencies would be able to perpetuate or sell themselves. Any employee could vie for any or all of the agencies’ accounts as a competitor after the sale or perpetuator assumed control of the business, rendering the agency valueless. The simple fact that insurance agencies are bought and sold at strong Fair Market Values indicate that the industry accepts the ownership of the book of business as the agency’s.

While the ownership of accounts is commonly accepted as owned by the agency employing the sales and service employees, the presence of an employment contract containing non-piracy and non-compete agreements substantiates that commonly accepted fact. Without such agreements, a doubt is raised as to the potential of producers or other employees becoming competitors for business about which they have intimate and confidential knowledge, whether through documentation or through their memories and familiarity with the accounts. The accounts may “belong” to the agency, but only the non-compete and non-piracy clauses in the contracts provide contractual acknowledgement of that fact by the employees’ themselves. For definition’s sake, a Non-Competition Clause applies to business produced by or serviced by the employee on behalf of the agency. A Non-Piracy Clause applies to all other agency business. In some cases these clauses are expanded to apply to business written by the agency within a year or two of the termination of the employee. This extension protects the agency from employees causing clients to leave while the employee is still with the agency to be regained by the employee when (s)he eventually leaves to become a competitor.


A large agency was trying to attract a specialty group of customers, many of who were insured through a small, specialty agency dedicated to that type of client. When the large agency found it impossible to move many of these prospects due to the excellent service and specialized attention provided by the specialty agency, they identified the staff who provided the service to the group of clients and enticed them to join the larger agency, with the additional incentive of compensation for any specialty clients that they would bring to the new agency.

The employees of the specialty agency had long-standing employment contracts that included non-compete (2 years) and non-piracy clauses. These clauses didn’t stop the employees from leaving – or even from joining a competing organization. They properly addressed the accounts on which the employees worked and all other accounts that were written by the specialty agency. The new agency immediately began taking clients from the specialty agency in defiance of the former employees’ contracts. An injunction was sought, granted (and immediately broken), and a lawsuit was brought. A wrongdoing was acknowledged by the court, and Agency Consulting Group, Inc. found the scope of damages as follows:

1. The first level of damages was the commission value of the lost clients for their remaining prospective lifetime at the specialty agency. We conducted Lifetime Studies of both the live and dead files to determine the average life of lost business vs. the average life of continuing accounts at the agency. We also determined the average number of policies of a) agency lost accounts, b) agency live accounts, and c) the accounts taken from the agency by the larger firm.

Interestingly, the policy per account study confirms those studies done within the industry over the years. Dead accounts had an average of 1.4 policies and those policies lived an average of 7.2 Years. Existing live accounts at the agency had an average of 2 policies and had lived an astonishing 13.7 years from initiation to date (considered their “half-life” for our study). The lost accounts, the most productive and profitable in the agency had an average of 2.8 policies each and had lived an average of 8.2 years before they were taken by the other agency.

Since the agencies on-going policies averaged 13.7 years and were going strong with 2 policies per account, we were justified assuming that the special accounts lost through theft, with an average of 2.8 policies per account, would have lived at least as long as the existing accounts (estimated at 27.4 years through the application of the half-life to present theory).

We calculated the value of each account from the time of the theft to its estimated 27.4-year life.

2. The second level of damages was the effect to the agency of contingency income lost because of the premium volume loss and the loss of a low loss ratio book of business that negatively affected the agency’s contingency income with a few major carriers. We were able to pro forma the loss ratios based on prior years performance and identified the value of the lost contingency income over the remaining lifetime period of the lost accounts.

3. The agency maintained excellent records of the referrals achieved from their existing accounts and did virtually no advertising for new business. As a specialty agency, it did not receive inquiries for business and only wrote business from those referrals, and because of the agency’s record keeping, we were able to determine the value of lost referrals as the result of the loss of the special accounts.

4. The final measure of damages was the loss to the asset value (the agency’s Fair Market Value) caused by the loss of this book of business.

As you can tell, the damages were far in excess of what the book of business would have been sold for because damages as the result of wrong-doing differ considerably from simple Fair Market Value. The specialty agency had no intention of selling this book of business. The owner is young and would have maintained and grown that business as had his father before him. Once wrongdoing was determined, our job was to determine the total past, current, and future economic loss resulting from the wrongful act (brought back to Present Value, of course).

As this example illustrates, the adoption of a proper contract with Non-Competition and Non-Piracy clauses is worth its weight in gold. It should discourage any temptation for wrongdoing. If the temptation is too great, the cost of the act will be high, but it all starts with an active and proper contract.