In the more than 2 years since I began to write articles for American Agent & Broker, I have covered a wide range of subjects significant to the successful operation of a professional insurance agency. All of these articles have dealt with the external relationship between the agency and its clients and the insurers that the agency has agreed to represent. Have you spent as much time planning your internal relationships as you have with your external dealings? My definition of internal interactions is how you deal as an agency principal with producers and other key employees of the agency. I am talking about failing to procure the proper protection for the agency's major assets: customers and trade secrets.
The good old days
In the olden days, agencies hiring producers—especially inexperienced producers—was an uncomplicated process. The standard method of providing guidance to the new producer was to provide a telephone book and suggest they start calling prospects. These days, it is far too expensive and too difficult to get new producers off the ground without providing substantial support. One of the most common methods of supporting producers is to give them access to agency clients they can cross-sell or upsell.
Let's fast forward several years. Your new producer is now a veteran and a big asset to your agency team. Not only does the producer's success enhance your reputation as a recruiter, but the realization that you now have a star on your hands means you need to do something about recognizing your current business relationship with the producer. It is apparent that the original producer agreement signed when our superstar producer was new is not relevant in today's terms.
You could conclude that what's needed is a non-solicitation agreement, a non-compete agreement or a combination of both. You go online and find a template for an agreement that seems to clearly specify what would happen in the event of a termination of the producer by the agency or by the voluntary separation of the producer from the agency. You and your star producer sign the new agreement.
As time goes on, business is booming, the agency is growing and all seems well—until one day when the producer tells you that he's leaving to start his own organization.
After recovering from the shock and the intense feeling of disloyalty on the part of the producer, you point out that the signed agreements preclude him from soliciting any of your existing or prospective customers or using any trade secrets that are the property of the agency.
Do you know the difference between a non-solicitation agreement and a non-compete agreement, or the exact definition of a trade secret? I have been involved with restrictive agreements throughout my career—as a principal of a regional general insurance agency, as an educator and as a consulting witness. I have personal involvement with more than a dozen different restrictive agreements, but the issue still confuses me.
I am not an attorney and nothing in this article is intended to provide a legal opinion or legal advice. I interpret the distinction between a non-solicitation agreement and a non-compete agreement a matter of geography. Under a non-solicitation agreement, the main thrust is to prevent the producer from soliciting agency accounts after leaving your agency. The non-compete includes the additional factor of geographical limits. Simply stated, this means the departing producer cannot solicit existing accounts or agency prospects, reveal agency secrets or compete with his former agency in a particular area. In all cases, the agreement must be reasonable and cannot preclude the producer from earning a living.
Sounds simple, right? Why not go online, get a template of an agreement and spare the cost of an attorney? But what do you do if you have a multi-state operation with resident employees in other states than your home office? How about the fact that some solicitation agreements are not enforceable in certain states but non-compete agreements are enforceable? Alternatively, some states make it difficult or impossible to enforce non-compete agreements. Let me assure you that this is not a good place to save money on legal fees.
Being reasonable is not enough
The closest I can come to a national standard is as follows: "An employer may impose on an employee the obligation not to compete in the same business for a reasonable period of time. The restriction must be necessary and if the time and territory restraints are reasonable, a court (depending on the state) will enforce it." Unfortunately, being reasonable is not enough. Some states do not permit restrictive employee agreements of any kind, some states make a distinction between non-compete and non-solicitation agreements, and even the definition of a trade secret varies from state to state. Some states come down in the middle of interpreting these restrictive agreements.
For example, Colorado presumptively views restrictive agreements as not enforceable. However, just like insurance policies, there are exclusions and exceptions. The Colorado statute provides "non-competition and non-solicitation covenants are presumptively void in Colorado." Seems obvious, except these presumptively void agreements can be held valid if they meet one of four criteria:
- The covenant is made in connection with the sale of the business
- The contract protects trade secrets
- The contract recovers employees training or education costs
- The contract is for executive and management personnel and employees who constitute professional staff to executive and management personnel.
Related: Read Mintzer's article "Train novice agents, producers".
Broken promises
Every insurance agency pro has heard the familiar answer to why a producer looks for a new relationship: "I was promised a partnership and it never happened." Whether or not any particular producer was ever promised "a piece of the action" is open to question. What is not open to question is the fact that the agency needs to protect its valuable agency assets: its clients and its trade secrets. Consulting an attorney is almost mandatory to ensure that your agency-producer agreement is clear as to its exact terms and conditions and that it conforms in all respects to the laws in your particular state or states. This same concept applies to any of your valued employees who regularly interface with agency clients or have access to agency trade secrets.
Every insurance agency's main task is to manage risk for others. After a lifetime of building an agency, why endanger the most valuable agency assets by having unenforceable or ambiguous agency producer or key employee agreements? I cannot imagine a bigger issue, error or omission than failing to do everything possible to protect agency assets.
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