RISKVUE ARCHIVE | FEATURE STORIES

How Can An Insurance Agency Protect Its Book Of Business Before An Employee Or Independent Producer Leaves?

By Steven R. Schoenfeld, Esq.

The Threat To An Insurance Agency’s Book Of Business

One of the greatest threats to an insurance agency occurs after an employee leaves the agency and solicits clients for his or her own business or a rival agency. An employee who quits is generally free to compete with his or her former employer. While such an employee may not take files, the company Rolodex, or anything tangible, he or she may use specific information about customers to solicit accounts. A former employee who has dealt with an agency’s important clients for many years is in an excellent position to target the most profitable accounts, to time solicitations so that they coincide with insurance policy renewals, and to tailor the solicitation to the needs of the particular customer. If there is no written agreement signed by the employee to safeguard the agency’s accounts, the agency may be left with either no legal remedy or protracted and costly litigation that may not prove successful. Even where such litigation is successful, damage in the form of strained client relations, and diminished customer goodwill may offset the victory. The legal position of the agency or brokerage is especially precarious in jurisdictions such as New York, where courts generally do not consider insurance customer lists to be confidential trade secrets.

When an employee quits and begins soliciting accounts, the agency often seeks immediate relief by filing an application for a preliminary injunction (a court order early in the proceedings) to stop the former employee (and even the new employer) from soliciting the agency’s accounts or using or disclosing confidential information concerning those accounts. The courts, however, generally are reluctant to grant such an injunction. It is crucial for the agency to convince a judge that the agency is likely to prevail on its claim; that the ex-employee acted improperly by, for example, using confidential proprietary information that should be protected by the court; that the agency will be irreparably harmed if the ex-employee’s conduct is not enjoined (i.e., money damages would not adequately compensate the agency for the resulting harm); and that the balance of equities justifies the relief sought. These often are difficult—although not insurmountable—hurdles, especially when the agency has not protected itself in advance with a written agreement that specifies the agency’s rights, protects its confidential information, and bars solicitation of its accounts. Because an ex-employee may be able to raise sufficient issues to avoid a preliminary injunction, insurance agencies may find that they cannot protect their accounts or that they are forced into protracted litigation.

Insurance Agencies Should Use Non-Compete Agreements To Protect Their Book Of Business Before An Employee Leaves

To the extent possible, insurance agencies should protect their books of business by ensuring that all employees, particularly those that have close contact with customers, sign a written contract that (1) prohibits the employee from using or disclosing confidential customer information, (2) restricts the employee from soliciting the agency’s accounts for his own benefit or the benefit of a competitor, and (3) secures the employee’s consent in advance to a preliminary injunction barring such conduct if the employee breaches the contract.

The precise terms of the agreement, often called a “non-compete agreement,” should be drafted with the aid of an attorney. The typical confidentiality provision will bar employees from using or disclosing confidential information relating to customer accounts, both during their employment and for a specified period after their employment ends. Such a provision should describe the nature of the protected confidential information and the reason the information needs to be protected. In the event of litigation, the employee’s agreement in advance that certain information is confidential will help the agency overcome a court’s presumption that such information is not confidential.

All non-compete agreements also should contain a provision prohibiting the ex-employee from competing with the former agency for an appropriate period of time (usually one to three years) and within an appropriate geographic area.¹ The non-compete provision also should prohibit the employee from soliciting the agency’s customer accounts, especially the accounts of customers with whom the employee dealt during his employment and the accounts of any potential customers that the employee courted for the agency while he was employed. Non-compete agreements are scrutinized closely by the courts and will not be held enforceable if they are overbroad. Any restrictions that could be interpreted to reduce or limit competition must be reasonable in scope and duration, not harmful to the general public, and reasonably tailored to protect the agency’s interest in its book of business and related confidential information without unduly burdening the employee. Non-compete agreements that unfairly restrict an individual insurance agent or broker from earning a living in his profession will not be enforced.²

Non-compete agreements also should outline the agency’s remedies upon a breach by an employee. The agreement should specifically provide that the employee consents to a preliminary injunction that immediately stops the employee from breaching the agreement (e.g.., that stops his solicitation of the agency’s accounts). Such contractual provisions are helpful in supporting applications for preliminary injunctions, although injunctive relief is ultimately granted at the discretion of the courts.

The Risks To A Rival Agency That Hires An Employee Who Is Bound By A Non-Compete Agreement With His Former Employer

A rival agency that hires an employee bound by a non-compete agreement may be drawn into litigation with the former employer. For example, the new employer could be sued for interfering with the non-compete agreement and could be subject to a court order prohibiting the employee from using or disclosing the former employer’s customer information or soliciting the former employer’s accounts. Thus, an agency hiring a new employee should determine whether the employee is bound by a non-compete agreement with the former employer and, if so, review the agreement with an attorney to determine its scope and enforceability, and make sure that the new employee abides by the agreement to the extent it may be enforceable. Litigation in these circumstances may be unavoidable, particularly if a substantial amount of business is at stake. A new employer should weigh with counsel the litigation and liability costs and risks in defending against a claim for interference with the non-compete agreement against the potential business benefits of hiring the new employee.

Independent Producers—A Different Ball Game

An insurance agency that loses an independent producer or broker, as opposed to an employee, faces a different obstacle. The customer accounts developed by an employee, and all confidential customer information used by that employee during the course of his duties, belong to his employer. But, increasingly, firms hire workers as independent contractors to avoid, for instance, providing benefits. Insurance agencies often have independent brokers working in their offices. Technically, these independent brokers are not employees. Under such informal arrangements, the agency and the broker may share space, expenses and commissions and, in doing so, it is not always clear whether the customer accounts and related information are owned by the agency or by the independent producer.³ If a court determines that the independent producer owns the book of business, then the independent producer may be able to prohibit the agency from soliciting or servicing his accounts after he leaves the agency’s offices. To avoid uncertainty and to minimize costs in the event of a dispute, the agency and the independent producer should negotiate and sign a written agreement that specifies their rights and obligations and that includes provisions concerning (1) the sharing of commissions and expenses, (2) the ownership of customer accounts, and (3) the parties’ rights with respect to the use and disclosure of confidential customer information and the solicitation of customer accounts, particularly after the parties’ arrangement ends.

Conclusion

The best time for an agency to protect its book of business is before an employee or independent producer leaves the agency’s office and a dispute ensues. This can be done by an agreement developed with the aid of an attorney that makes the ownership of accounts clear, prohibits the use or disclosure of confidential information, prohibits solicitation of customers, and helps the agency to secure a preliminary injunction to protect its rights. 

Notes
¹ Restrictions on geographic area are not typically an important factor for most agencies because their customer market is not typically confined by narrow geographic limitations. Geographic restrictions could be important to storefront agencies that depend on walk-in customers living nearby and that want to prevent an ex-employee from opening up a competing agency across the street.
² E.g., John Hancock Mutual Life Insurance Co. v. Austin, 916 F. Supp. 158 (S.D.N.Y. 1996) discusses these factors.
³ See, e.g., Matter of the Estate of Erastus Corning, 108 A.D.2d 96, 488 N.Y.S.2d 477 (3d Dept. 1985).

ABOUT THE AUTHORS

Steven R. Schoenfeld, Esq. (Sschoenfeld@torys.com) is a litigation partner in the New York office of Torys LLP, a U.S.-Canadian law firm that handles all aspects of business litigation. Denise V. Zamore, Esq. (Dzamore@torys.com) and Timothy S. Davis, Esq. (Tdavis@torys.com), who assisted with the preparation of this article, are litigation associates at Torys LLP.

riskVue | The webzine for risk management professionals
July 2002