Are you a gambler?
Are you willing to walk into a casino and lay down a bet of $25,000 on the Pass Line and let someone else roll the dice to determine if you win or lose? If you think that you’re not a gambler but have producers working for you without a contract, you’re sadly mistaken.
Every time you hire a (or promote someone to) Producer for your agency without a contract in place BEFORE (s)he begins that role, you have offered the gambling gods a bet of from $10,000 to $50,000 that you and that producer will see ‘eye-to-eye’ on his future for the rest of his career.
In our role as Expert Witness, in cases involving departed producers in litigation with their former employer, the price tag of that litigation is often between $10,000 and $50,000 and could reach even deeper into your pocket – all for the want of a clear contract, agreed to by both parties before the hire.
How much will it cost to create a contract? It could cost several hundred dollars and often costs less. It must be created by a qualified attorney, knowledgeable in contract terms. Either you or an advisor must guide the attorney in specific issues particular to insurance agencies that lie outside the normal contract terms of other industries. This document will provide you some guidance regarding non-standard issues needed in a producer contract in an insurance agency.
Most sections of a producer contract will be similar to other salesperson contracts. Sections like Responsibilities of the Producer, Responsibilities of the Employer, Exclusive Nature of Employment, Termination Standards, Benefits and Expenses, and Non-Disclosure of Company Information are relatively standard and cross industry lines. You must specify any special responsibilities within these sections. I direct you to GUIDE TO PRODUCER CONTRACTS, a part of the Best Practices Program of the IIABA for examples.
Several sections of the Producer Contract are unique and must be carefully communicated to both the producer and to the attorney developing the contract to be certain that it defines what you and the producer have agreed are the terms of employment and that those terms are defensible in case of litigation. Notice that I discuss these contract terms as communications between agency and producer. A contract must be mutually agreed upon in order to be valid and equitable. I always suggest that, during the hiring process, the agent write down what’s being offered with producer sign-off on each important section. This lends further credibility to contracts that simply formalize what the agent and producer have already agreed upon.
1. Compensation – We’ve worked with a thousand agencies have seen hundreds of different forms of compensation – all variations of a) salary, b) draw, c) straight commission, d) incentives and combinations of these compensation methods. The compensation section of the contract (often an addendum that can be changed) must be tailored to the specific situation.
2. Non-Compete Agreements – This is the core of many contracts because the agency wishes to protect itself from theft of accounts by departed employees. They are also the most problematic section of a contract because courts look for any tinge of inequity that may prohibit a former employee from earning a living. When found, they will invalidate the section (or the entire contract), so you must be sure that it protects the agency, but does not hamper the employee from continuing to earn a living in his chosen field of endeavor.
Define the Non-Compete as a prohibition of a departed employee from taking accounts for which he was paid to produce and/or service from the employer for a period of time reasonable for i) the employer to replace the former employee with someone who can maintain the relationship between the client and the agency, and ii) for the information known by the former employee about the client to have staled sufficiently to put the former employee and the employer on an “even playing field” with respect to competing for the account.
In other words, sufficient time must pass before a former employee can solicit an account for the account to form a relationship with another agency employee servicing the account and sufficient time must pass for the former employee NOT to have any advantage over the employer (or any other competitor) with respect to knowing confidential information about the client not available to him in the public domain. We have found that two years (or two renewal cycles) is sufficient time after which the former employee is at no particular advantage soliciting the former employer’s client (if the employer has done a good job cementing relationships in the interim). We have seen the courts accept three year non-competes, but rarely more.
3. Non-Piracy Agreement – While a Non-Compete Agreement protects the agency from the theft of accounts for which the producer was paid to sell or service while employed with the agency, a Non-Piracy Agreement protects the agency from the theft of all other accounts in the agency while the producer was employed. The difference is that the producer had some control over Non-Compete clients but had access to confidential information on all other agency clients that may give him an unfair advantage if used to solicit those clients from the agency after his departure.
Non-Piracy Agreements can also include accounts lost to the agency shortly before the producer’s departure (normally not more than one year prior to departure) and accounts actively prospected during that same period (one year prior to departure) for which the producer was paid while having access to detailed information about prospects to which he would otherwise not have be privy.
4. Geographic Limitations – Many producer contracts have included geographic limitations in the Non-Compete Agreements that prohibit the producer from soliciting within the defined marketing area of the agency. These geographic limitations have been struck down consistently because courts wish to protect the ability of insurance producers to earn a living in the geographic area in which they live or are familiar. This protection always seems to supercede the protection of the agency’s marketing area. We strongly urge you to limit your Non-Compete and Non-Piracy Agreements to specific accounts for which violation would show an unfair advantage being taken by the former employee due to the knowledge accrued about those accounts while being paid by the former employer.
5. Vesting and Cross-Purchase Options – Many agents choose to vest a producer in some form of financial interest in his book of business or in the agency based on a combination of longevity and successful growth of book of business. This vesting is meant to sponsor retirement benefits if the producer stays with the agency long enough. But it can also act to add to the agency’s protection through a Cross-Purchase Agreement that forces the producer to accept payment for his vesting to further sponsor his Non-Compete Agreement if he leaves the agency prior to retirement. In a Cross-Purchase Option, the agency or the producer may (or are required to) purchase the vested interest (or the non-vested portion of a book of business) over a period of time as a further guarantee of the validity of the Non-Compete Agreement.
6. Ownership of accounts – One very important section in the contract must address the ownership of accounts, expiration lists, renewals, etc. We recommend that the contract be clear that the agency and the producer agree that all accounts are owned by the agency. Exceptions may include accounts brought to the agency by producers who “own” their own books of business and would not want the agency to automatically assume ownership of their accounts upon employment. The contract SHOULD address eventual compensation (or stock ownership rights) granted to the producer in return for agency ownership of those accounts once the producer has been with the agency for a sufficient period of time to justify permanence to the arrangement. No agency should have producers in place for five, ten or more years who still own their own original books of business for fear that they will handle those with a greater priority than they manage the agency’s book of business. We have even seen arrangements in which the agency purchases the producer’s book of business under an agreement that the producer can re-purchase those books of business should they ever leave the agency.
Other provisions normal to producer contracts include (but are not limited to) disposition of attorneys fees, severability of sections, binding effect of the contract, governing laws and provisions for amendments.
Do NOT take a sample or other agency’s contract and adopt it without full analysis of how their sections are treated in your agency. This predilection among agencies (to use guides and other contracts as their own) seem innocuous until a problem arises that leads to litigation. Then, when asked what a provision means or was meant to accomplish the agent adopting a foreign contract instead of designing his own is at a loss. Using a guide (like IIABA’s Guide to Producer Contracts) is fine as a template but not as a rote form. Consider each section separately and how it applies in your agency and with your specific producer’s agreement with your agency. Adapt the contract (using a qualified attorney) to match what you and the producer have acknowledged is your agreement. If you need assistance designing Producer Contracts call us at 1-800-779-2430. We will visit you and design the contract specifically for your agency and/or for your producers.