Who Owns The Accounts

For 200 years the generally accepted rule is that the agent (or agency) who creates a program and sells or generates account “owns” those accounts. “Ownership” in this definition does not forbid other agents from soliciting those accounts. It does prohibit the agency’s employees (and former employees) from soliciting the business that was generated under the sponsorship of the originating agency. This prohibition is assumed since the agency paid the employees who sold and/or serviced the accounts on its behalf. The prohibition is further solidified by Employment Agreements including Non-Competition and Non-Piracy clauses. The Non-Competition Clause addresses accounts produced by the former employee while in the employ of the agency. The Non-Piracy clause addresses all other accounts written by the agency during the employees employment. The reason these clauses are important is because of the unfair competition created by former employees who learn and have information about an agency’s accounts while employed and being paid by the agency. This information is confidential and should not be used against the agency who paid the employee while that information was gathered. This applies to company records, client information, prospect information and carrier information. Exceptions to the ownership of accounts by the agency for whom they are written are explicit agreements that are non-standard in nature, permitting some ownership of accounts to producers who have sold those accounts. Many court cases have arisen from the “theft” of accounts by former employees. As long as the agency has a written Employment Agreement including the two clauses mentioned above and as long as either employment is dependent upon the employee signing the Agreement and/or consideration is provided as a part of the Agreement in sponsorship of the ownership of the business by the agency, the courts have agreed to the rights of the agencies.

One area rarely challenged has been the ownership of accounts between agencies, wholesalers and carriers. It has been common business practice that wholesalers handling the accounts of retail agencies do not compete directly on those accounts, even if the wholesaler is related to a retail agency. Similarly, insurance companies have never expressed an ownership interests in the accounts brought to them by their agents (unless the agent works as an employee of the carrier). Independent agents have always had “ownership” of their accounts without worries about competition by their own carriers. They had the ability to re-market and replace accounts when it was in the best interest of the customers.

This year we have encountered three situations that deserve your attention. One involves an agency and a wholesaler. One involves a broker and a wholesaler. One involves an agent and a carrier.

1. An agent evolved a long-term program in a specialty line of business. He designed the necessary policies and achieved sponsorship of some major organizations. Because the agent had no specialized carrier relationship the program was placed with a carrier through a wholesaler. The program developed excellent experience, matured and stabilized. When the agent wanted to activate and grow the program, neither the wholesaler nor the carrier would support his efforts tangibly. As a result, the agent marketed the program directly to other carriers to achieve his results.

A carrier was identified who would meet every need of the agent to grow his program. The original carrier and wholesaler were notified that they program was being moved and that the agent would guarantee an orderly transition to avoid any complications to the carrier or to the wholesaler.

While the carrier remained mute, the wholesaler advised the agent that they (the wholesaler) would like to give the clients the opportunity to stay with the pre-existing program under the wholesaler’s management.

The agency has achieved a very strong restraining order on the wholesaler with the court strongly agreeing to the principle of ownership by the retail agency. While this case is not yet complete (so can not be cited), it is evidence that the mixing of wholesale and retail operations can become dangerous to the agencies using the wholesale facility. While most wholesalers very strongly represent their non-competition with their retail agents, a written representation would be a more definite assurance.

We recommend that you request a section in any agreement with a wholesaler specifying the ownership of accounts.

2. A specialty agency brokered business through a wholesaler for their specialty line. A brokerage agreement existed. The brokerage agreement included a Right of First Refusal on the part of the wholesaler on any bona-fide offer that the agency might get on their business (not just the business placed with that wholesaler).

The agent was ready to retire and contacted a similar, specialty agent to whom he desired to sell the business. In order to complete the sale, the seller found himself at the wholesaler’s doorstep “asking their permission” for the sale.

The wholesaler had no intention of buying the business. They used this “Right of First Refusal” to assure that the specialty agency did not move into the hands of a buyer with whom they wouldn’t want to do business. Of course, this rationale was non-sense because the wholesaler could always terminate or non-renew the policies and would certainly NOT accept business from an entity of which it did not approve. However, they used the “Right of First Refusal” rationale to potentially permit them to buy (and eventually resell) the book of business to a favored agent.

Be careful of the contracts that you sign with wholesalers and with carriers. Examine them for these types of clauses and refuse the clauses to avoid harrying experiences if and when you ever desire to sell or merge.

3. A subsidiary of a major insurance company inserted a “Right of First Refusal” clause in their contracts. Presumably, this protects them against doing business with agents that they wouldn’t appoint in states that make it very difficult to terminate books of business (even though agency appointments in changes of ownership are never guaranteed). An agency wishing to sell is afraid that any buyers who bid on their agency can have the carrier “end-run” the buyer by exercising their “Right of First Refusal”.

A greater worry by the rest of the industry is the ability through contract terms for companies to purchase independent agencies’ books of business and create their own captive agency network. That “Right of First Refusal” should not be permitted for an entire agency since the carrier should only be permitted to protect its own interests (the book of business placed with the carrier). Leveraging that “Right” to the entire agency represents a restraint of the agent’s ability to transact his own business and, in final analysis, makes the agency much less salable.

Review your company contracts. Identify and ask about any clauses involving a “Right of First Refusal”. Ask the company if they have ever exercised that right and why. Ask the company what you should do if more than one carrier in your agency maintained the same “Right of First Refusal” in their contracts. Who gets the “First, First Right”??

The bottom line is that an agency that gives up its right to transact and to perpetuate itself constricts its future course. Those agents who have no problem giving those rights to the carriers or wholesalers should understand that a “Right” of this type demands a premium price since the contract restricts the ability of the agency to determine their own course of action. If you feel you wish to or feel forced to accept this type of contract term, insist on “consideration” ($$) or a premium (i.e. change the term to the company’s Right of First Refusal at 10% premium over the accepted bona-fide offer). Without the elimination of this clause or consideration for its inclusion, buyers will be reluctant to give you a serious offer in fear of the company stepping in and taking the transaction from them and the carriers and intermediaries (wholesalers) that are used to place the business from competing unfairly on business generated under the sponsorship of the originating agency.