By: AgencyEquity.com
Non-compete and non-disclosure agreements are routinely used in insurance agencies to protect them against a producer jumping to a competitor or starting their own agency and taking their business with them. Still, sometimes a producer will look for a workaround, and that can lead to the type of litigation a New Hampshire agency faced.
The agencies involved were highly specialized. Their focus was on:
- Prize indemnity insurance, which covers an organization should it promise a prize if an uncertain event occurs, such as a specific team winning the Super Bowl
- Contractual bonus insurance, which covers sports teams if they are obligated to pay a player a bonus if the player meets a specific goal such as being chosen for the All-Star team
- Over-redemption insurance, which covers the risk that more customers than expected will take advantage of a coupon or discount offer
An individual began his career with one of the agencies as an intern and, over the next 24 years, worked his way up to senior vice-president. During his first nine years, he gradually took on responsibilities for generating business and keeping clients happy. Since the policies the agency sold by their nature insured against short-term exposures (such as a single football season,) the agency depended on repeat business.
Over the years, the producer developed strong relationships with his clients, giving him “intimate knowledge of certain repeat promotions.” By the time he was promoted to senior vice-president, he was overseeing a division of the company, handling more and larger accounts, and had underwriting authority.
Four years into his tenure, he signed non-compete and non-disclosure agreements with the agency. The contract gave the agency the right to seek a court injunction if it ever determined that he had violated either agreement. Five years later, after the agency was purchased, he signed a second agreement with the new owners affirming that he was still bound by the previous agreements.
Fifteen years later, he jumped ship and went to work for another agency. This agency created an entirely new division to sell the same products he had sold previously. During the discussion process, he pitched his potential move as a book of business purchase for the agency. He estimated the book at between “$3-$5 million in gross premiums.” His former employer later said in court that this would amount to half the agency’s business.
Within a few weeks of his joining the agency, the new division was announced in a press release and he was contacting some of his old clients. The court record showed some evidence that he used confidential information. Four and a half months after he left, his former agency sued him and his new agency. Almost 11 months after he left, they sued for an injunction to stop him from soliciting their clients and disclosing information.
The court found that the agreements were valid, enforceable and were being violated. It granted the injunction with regard to the disclosure of client confidential information to the new agency but declined to grant it with regard to non-compete violations, citing how long the first agency waited to request the injunction. Courts grant injunctions when the complaining party is likely to suffer irreparable harm otherwise; the judge doubted this was the case when the agency waited almost a year to take action. Nevertheless, the judge found that the first agency’s lawsuit was likely to succeed.
It is hard to know what the hiring agency and the producer thought would happen when they attempted to take $5 million in business from the first agency. Any agency faced with losing that much business over an alleged breach of contract would likely sue, just as this one did. Agencies use these agreements to protect themselves; it should have come as no surprise when the producer’s former agency did just that.
