Client relationships are the most critical asset possessedby any insurance agency, and when an agency finds itself competingfor those relationships against its own former employee, relationscan become especially ugly. Ask a spurned employer about the impactof the loss of one of its top producers, and the conversation mightsound like a hard-luck love song full of loss, anger and regret.Given what's at stake, this is completely understandable—yet it ishighly preventable.

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The loss of key employees or independent producers, whetherthrough voluntary departure or termination, is a fact of life forall types of professional service firms. Insurance agencies andbrokerages have been turning to non-competition, non-disclosure andnon-solicitation agreements to help them protect their books ofbusiness and stanch the bleeding when a departure occurs.

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Brokerage and agency leaders have said holding onto theircritical client and employment relationships is the top issuekeeping them up at 4 a.m. This is in part because of uncertaintycreated by the inconsistent treatment of these contracts undervarious states' laws.

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Taking a proactive approach involves weaving carefully craftedlanguage into the employment agreement at the time of hiring,following a number of sensible best practices and understanding howa non-compete agreement may eventually play out in a court dispute.And for employers bringing in a new employee from a rival firm,understanding the non-competition parameters imposed by the newemployee's previous employer is critical to avoiding alawsuit.

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Get It in Writing

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A great deal of time and effort is required to build the trustand confidence that helps a client differentiate one agency orbrokerage from the rest—which makes it well worth taking steps toprevent those relationships from vanishing when a client's point ofcontact leaves. Without a written agreement signed by the employeethat safeguards the firm's accounts from poaching, it is difficultfor the agency to succeed in a legal action to prevent poaching orto recover losses when it occurs.

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Related: Read the articles by Mark E. Ruquet “U.S.District Court Tosses Aon's Restrictive Covenant Claims AgainstAlliant.”

While trade secrets enjoy legal protection even without aprivate contract, without an agreement, client relationships areopen season.

A proactive approach begins with implementing a policy thatrequires all employees, especially producers and others inclient-facing positions, to sign documentation outlining what theycannot do, and for how long they cannot do it if they decide toleave. The three types of agreements are non-competition,non-disclosure and non-solicitation agreements:

1. Non-compete agreements (NCAs), whenenforceable, afford the most comprehensive protection againstpost-employment competition. A broad NCA precludes an employee fromselling insurance in any capacity for X years following departure.Others may be more specific and preclude the sale of insurancewithin a certain geographic range, industry or other targeted nichefor the determined time. This depends upon the situation. Forexample, when an agency's range is national, a geographiclimitation may be moot. Typically, NCAs are drafted with a 2-yearlimit. A limit of 3 or more years will likely be found excessive bya court, and a shorter limit may invite disregard. When the NCAgrows out of the sale of an agency, however, a restriction of aslong as 5 years on competition by the seller is not uncommon. If anNCA is overly broad and doesn't include reasonable parameters,courts will be less inclined to enforce it. There must be areasonably equitable balance between the agency's legitimateinterest in protecting its business and the ex-employee's abilityto earn a living.
2. Non-disclosure agreements (NDAs) prohibit theemployee from disclosing or using the company's confidential orproprietary information. NDAs aren't necessarily what protect thecompany from theft of trade secrets (other areas of the law coverthat), but they do spotlight the fact that the employer is seriousabout protecting confidential information and provide anopportunity to clearly define what the employer considersconfidential or proprietary. This may include sensitivepricing information, renewal dates, client contacts, businessstrategies and customized client service processes. Because today'srogue employee can siphon a trove of information in just a fewkeystrokes, the most enlightened firms are deliberate aboutinformation security.
3. Non-solicitation agreements (NSAs) prohibitthe employee from soliciting clients of the agency for a limitedtime following their departure. NSAs may be broad to include anyclient the employee has serviced or prospected while at the firm,or they may be sharply focused on certain key clients that thecompany especially wishes to protect. They also may prohibit theemployee from working for a rival agency that is soliciting thoseclients, regardless of whether the former employee is involved inthe solicitation. A growing number of NSAs recognize the value ofretaining other key employees and producers—the loss of whom may beeven more devastating than the accounts they service—by prohibitinga departed employee from actively recruiting others to his or hernew shop.

Enforceability andLitigation

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No federal statutes govern the protection of the criticalrelationships that make or break an agency, similar to insuranceregulation, this legal framework varies by state, and some stateshave more highly developed case law than others. Before enteringinto any client-relationship-protecting agreement with a newemployee, understand the relevant limitations and opportunitiesthat may exist based on how courts have ruled regarding theenforceability of contracts or certain provisions.

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The variability of states' enforcement of post-employmentrestrictive covenants was recently on display in the widelypublicized litigation involving Aon Corp. and AlliantInsurance Services. That case began when several senioremployees of Aon Risk Solutions' construction services group,including its CEO, surprised Aon by resigning and joining upstartcompetitor Alliant in June 2011. The lawsuits that followedcentered around the enforceability of the restrictive covenantsthat Aon had in place with these former employees, whose employmentagreements prohibited competition for business serviced while atAon for a 2-year period, without geographic limits.

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According to published reports, Aon's construction servicesgroup lost 60 employees to Alliant, with more than 100 broker ofrecord letters transferring more than $20 million in revenue fromAon to Alliant. Clearly, the stakes couldn't have been much higherfor either company.

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Aon scored an impressive victory late last year when a trialcourt in New York City, applying Illinois law, found that Aon CSG'sformer CEO and others had violated their restrictive covenants whenthey left Aon for Alliant. The court ordered a wide-rangingpreliminary injunction upholding the restrictions in Aon'sfavor.

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Related: Read the article “Crump Reaches“Standstill Agreement” With Employee, R-T Specialty” by ChadHemenway.

However, in June, in a parallel case filed in California by three ofthe former Aon executives who had departed for Alliant, all of whomwere California residents, the court there found, “Under Californialaw, the interests of the employee in his own mobility andbetterment are deemed paramount to the competitive businessinterest of the employers.”

Having made the key determination that the law of Californiagoverned the dispute—and not that of Aon's home state Illinois—thecourt found Aon's restrictive covenants to be void andunenforceable, notwithstanding Aon's argument that the three hadacted with unclean hands by coordinating a mass exodus from Aon andwere using Aon's confidential information. These ex-employees ofAon were thus unencumbered by their NSAs. At press time, it remainsunclear as to the final outcome of this litigation.

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Poaching, it would appear, is a matter of perspective. The sameNSA that shackles an ex-employee from competing in New York orIllinois may pose no obstacle whatsoever to one's “mobility andbetterment” in California. Despite the fact that the agreements inplace between Aon and its former executives reportedly included achoice of law clause (Illinois), this multi-venue litigation hasproven to be inherently unpredictable to its core given theauthority of the courts to set aside a private agreement as towhich state's law governs. Seen in this light, carefulconsideration of a choice of law clause—whether to have one, and ifso, which state's law to stipulate—should be considered a bestpractice.

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The Aon case illustrates the complexity and uncertainty ofrestrictive covenant litigation. A typical first step toward legalredress is to seek a preliminary injunction against the formeremployee within days of the separation. But courts typically willnot grant such an injunction without a strong showing that theagency is likely to prevail on its claim. This requires a massive(read: expensive) effort to investigate the facts and to launch alegal offensive on extremely short notice. Withoutsmoking-gun-quality evidence of improper activity, the request willprobably fall flat, even if the restrictive covenant isacademically enforceable. And enforceability is hardly a given, asthe restrictive covenant must be found to be reasonable in purpose,in duration, and in geographic scope, and also must be supported byadequate consideration.

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More to the point, if a claim does succeed at the injunctionstage, the eventual cost of litigation in fees, lost time andstrained client relations may outweigh the positive impact of thevictory. Bear in mind that legal fees do not shift to the loser(unless the agreement provides for that), which means that even ifyou win, you lose in a protracted legal battle. For this reason,post-employment restrictive covenant cases often burn a short fusebefore detonating and releasing a new status quo—the product of apreliminary legal ruling followed by pragmatic (if acrimonious)negotiation.

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Most sources conceded that employee departures involvingcompetitive risk are best viewed through a transactional lens.There is a price to be paid for the freedom to compete, and thesooner the two sides come to see it that way and sit down to workit out, the better for the parties and their clients.

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Best Practices and OtherConsiderations

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Agencies too often refuse to accept the risk of losing a keyemployee (“Why would anyone want to leave here?”) or look at anyeventual departure with a sentimental, punitive mindset, especiallywhen strong egos are involved. But the best is to treat theemployment relationship like a transaction, where each partyclearly understands their expectations should the relationship endand takes appropriate precautions to avoid future disputes. Reviewall documents with legal counsel experienced in employmentagreements and ideally in the insurance industry—many agencies havelearned the hard way that litigated endings are rarely happyones.

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Be upfront, fair and reasonable. Ideally, NCAs, NDAs and NSAsshould be signed upon hire as a condition of employment. Sometimeslater developments necessitate signing new contracts, such as whena vulnerability is discovered or when one agency acquires another.In these cases, this should be handled as soon as possible, andthey should accompany some sort of promotion, raise or favorablechange. States vary on this issue, but the bottom line is an NCAcan't be sprung upon an employee in a punitive way. Dialogue isimportant; as with interpersonal relationships, getting everythingon the table right away is best.

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Related: Read the article “How Safe are Non-CompeteAgreements?” by Scott Robertson.

Accept that organic change is inevitable, even with topproducers. Gone are the days when an agent would remain a companyman or woman for an entire career. Many agencies develop specialpost-employment restrictions for their top producers, ones thatrecognize the individual's importance and attempt to reach a commonground where neither party can be seen as taking advantage over theother. One option is what some call a “fee to flee” agreement, inwhich the departing agent agrees that if certain accounts followhim or her out the door, the previous firm receives a certainpercentage of trailing commissions for the first year. Arrangementsshould not be so strict that they act as a turnoff for top talent.Such predetermined adjustments offer the highest predictabilitywhile incurring the least stress, potential for litigation andimpairment of good will.

Agencies and brokerages increasingly use independentcontractors, but the informal feel of that relationship should notdistract the agency from using proper agreements to clearly defineclients and information that are the agency's property.

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Data security is another critical issue that should be dealtwith up front. Today, it is far too easy for a departing employeeto sneak off with client contact information or policy renewalschedules. Employers should take reasonable steps through theiracceptable use or other information technology policies to legallydefine what is confidential—and to show that it strongly protectsthat information by limiting access.

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Finally, agencies hiring a lateral need to be just as consciousof the incoming employee's non-compete restrictions as the previousemployer. Determine whether a potential new hire is bound by anysuch agreements, and if so, review the agreements carefully withcounsel to determine what he or she will be able to do (or not do)for the next few years. Get it in writing that the agency does notallow a current employee to take actions that would violate anyexisting non-compete agreements.

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The challenge for agencies is to provide their agents with thetraining and business development resources to make them successfulcontributors without becoming an incubator for competitors. Don'twait until it's too late; being proactive and sensible about thepotential for any employee's departure goes a long way towardpreventing future disputes and unnecessary drama. Some ill feelingsmay still accompany a chance meeting on the street with a formeremployee or partner—but these feelings beat a court battle over keyclients and commissions.