A tool to protect your agency's
assets and increase your agency's value
By Anita Larson
Editor's note:
The following article presents suggestions concerning non-solicitation, disclosure and confidentiality agreements between insurance agencies and their employees. The author also has posted at the Brooke Corp. Web site (www.brookecorp.com) a sample agreement. We present the article in order to provide discussion points concerning such agreements. We recognize that individual agencies must necessarily address these and other employment practices matters in ways that are consistent with their own business plans and individual legal advice.
Brooke Corporation is an agency franchise company engaged in agency acquisitions and financing in 16 states. (See article in October 2002 Rough Notes, page 188.) In 2002, Brooke had annual revenue of approximately $40 million, most of which was derived from commissions on the sale of property/casualty insurance policies distributed by franchise agents.
Your most valuable agency assets are intangible. They are fragile, like fine crystal. When you ship or store valuable crystal you take steps to protect it. I would guess that your agency assets are far more valuable than any crystal you own, but have you taken steps to protect them? Employee non-solicitation, non-disclosure and confidentiality agreements can protect your assets and can help increase your agency's value when it's time to sell. Your agency will be worth more to a prospective buyer if the buyer is confident that employees can't steal the accounts he or she intends to purchase. Even if you do not intend to "cash in your chips" any time soon, you should give serious thought to having your employees sign agreements to protect your agency.
When you think about employment agreements, you may think of "non-compete agreements." There is some confusion about non-compete agreements. This isn't surprising because the term is used as a sweeping description of a variety of restrictive covenants, such as restrictions on soliciting customers and using trade secrets even though these restrictions may not necessarily restrict competition. A traditional non-compete agreement may not offer the best protection for your agency. Given the circumstances, other restrictions or limitations may be more effective and enforceable. Several protections are available to agencies, including the following:
Non-compete agreements. A traditional non-compete agreement restricts a person from competing by starting his own agency or working for a competitor. An employee would breach a traditional non-compete agreement just by holding a job with a competitor, even if he or he doesn't take a single customer.
Non-solicitation agreements. Unlike non-compete agreements, non-solicitation agreements don't restrict a former employee from working for a competitor. A person bound by such an agreement can sell insurance for herself or for one of your competitors as long as she doesn't sell insurance to your customers. Non-solicitation agreements can also be drafted to keep former employees from inducing other employees to leave and work for a competitor.
Non-disclosure and confidentiality agreements. Non-disclosure and confidentiality agreements are frequently used in conjunction with non-compete and non-solicit agreements. They protect your agency from a current or former employee disclosing your expiration list or client information and from using agency information in a harmful manner.
Anita Larson is general counsel of Brooke Corporation.
Agency owners often wonder which employees should be asked to sign agreements. Generally non-solicit, non-disclosure and confidentiality agreements are more critical if the employee is licensed, services a large base of customers, has the opportunity for significant customer contact, and/or has a strong ability to influence or control customers. Although unlicensed employees may not pose as much risk, they generally have some access to customer files and other proprietary information. Therefore, non-solicit, non-disclosure and confidentiality agreements are frequently appropriate for all agency personnel.
It's preferable to have employees sign agreements when they are hired. However, if you failed to have them do so at the point of hire, you aren't necessarily out of luck. If you want to ask an existing employee to sign an agreement, you have to consider whether the added protection is worth the chance of offending or demoralizing a loyal and dedicated employee. How you present the idea may make a difference. If you are asking all employees to sign agreements, it is less personal and less likely to offend a particular employee. If you believe that it will offend employees or affect their morale, explain that you don't distrust them but that there are other compelling reasons the agreements are important. With recently enacted privacy requirements, it makes sense to have employees sign confidentiality agreements. If you get an agency loan, the lender will be more comfortable lending money if the agency's assets (i.e., the lender's collateral) are protected by these agreements. If you are updating office procedures, it makes sense to implement a policy requiring agreements.
If you decide that the added protections are worth getting, you should consider whether an agreement made by an employee after hire is enforceable. The answer depends on the laws of your state and if the employee has been given adequate consideration to sign. Most states recognize the right to continue employment as adequate consideration. If your state doesn't recognize continued employment as adequate consideration, you may want to give the employee additional consideration such as a bonus in exchange for signing the agreement.
You have probably heard that "non-compete" agreements in the employment setting are not enforceable. This is not necessarily true. Courts disfavor restraints on trade, and non-solicit and non-compete agreements restrict trade to some degree. Generally courts will not enforce restraints on trade if they are ambiguous or unreasonable. A few states take the position that post termination non-compete agreements (as opposed to non-solicitation agreements) are unenforceable or illegal in the employee setting. However, in many states, if a non-compete agreement is reasonable in the activities it restricts, its geographic scope and duration, and does not unnecessarily or unreasonably restrict a person's ability to earn a living, it will generally be enforced.
What is deemed "reasonable" varies by state. In Louisiana a non-compete agreement can apply only to an employee who is going into business for herself. Or if the employee is not self employed but is working for a competitor, a non-compete agreement can be enforced if the former employee is soliciting the agency's clients. In either case, however, in Louisiana a non-compete or non-solicitation restriction can last no longer than two years. Any duration longer than two years will void the restriction. Furthermore, the geographic area must be stated in terms of parishes. This means that, in Louisiana, a geographic area of "a five mile radius from the agency's office" will not be enforceable.
Even if an agreement is enforceable under state law, you may still face other practical obstacles. The cost of enforcement should be considered. Litigation is not cheap. If a former employee breaches his or her agreement, you must weigh the cost of litigation against the damage the employee is capable of causing. Proving that the former employee is violating an agreement is not always easy. Sometimes the evidence is circumstantial. Perhaps you have received a number of "agent of record" letters which suggest that the former employee is writing your customer accounts, or maybe an agency customer tells you that the former employee contacted her. Whatever the case may be, gather all the written evidence you can and document any anecdotal information provided to you to support your position. Finally, it may be difficult to prove damages. Sometimes damages can be established by simply showing loss of commission revenue. However, the former employee may contend that commissions are down because you aren't doing a good job running your business or that the person you hired to replace the employee is not effective.
How do you draft agreements to protect your agency? Here are ten tips to consider.
Ten tips
1. Don't ask employees to sign post-termination "non-compete agreements." Instead, ask them to sign non-solicitation, non-disclosure and confidentiality agreements because they are typically easier to enforce. Such agreements will restrict former employees from pirating your customers and using or disclosing the agency's confidential information. The restrictions should apply for only a reasonable period of time. Generally, the agreement should not only prohibit a former employee from "soliciting" your customers, but also should prohibit the employee from "writing" policies for them. The agreement should prohibit such actions from being conducted "directly or indirectly" so if the employee goes to another agency and the employee's new agency suddenly starts writing your business, you can use this provision. The employee should be limited from using or divulging the agency's confidential information and should be required to turn over all agency information he or she has.
2. State the consideration given to the employee in exchange for signing the agreement. For example, state that the agreement is signed in exchange for the opportunity to work for your agency or continued employment with your agency. Also, have the employee acknowledge that the consideration given is adequate and sufficient. Generally, a former employee will contend that the consideration given in exchange for the employee's promises was inadequate. If the employee acknowledges that the consideration is adequate, it makes it harder for the employee to assert this defense.
3. State the importance of the protective covenants to the agency. This helps set the stage to convince a jury that the protective covenants are absolutely necessary to protect the business. This may also help establish damages in the event you have to sue.
4. Have the employee acknowledge that the agreement isn't unreasonably restrictive and doesn't preclude the individual from earning a living. Another frequent defense raised by former employees in lawsuits to enforce non-solicitation agreements is that such agreements are overly broad and restrict the individual's ability to earn a living. If the former employee has acknowledged that the restrictions are not overly broad and do not keep her from earning a living, it may be more difficult for the employee to win using this defense or may even deter the employee from raising it.
5. Make the agreement assignable and state that successors and assigns can enforce it. This way, if you sell your agency assets, your successor is in a better position to enforce the protections. The agreement should state that its terms survive termination of the employment relationship whether the relationship is terminated with or without cause.
6. Include a "blue pencil" clause. Often contracts will state that if a provision is found to be unenforceable, it is struck from the contract and the rest of the contract is enforced as if the provision were not included. Generally, this isn't what you want if a restrictive covenant is found to be unenforceable. For example, if a court decides that a three-year non-solicitation agreement is too long, you don't want the provision struck completely but instead want it limited to a length of time that the court deems reasonable, perhaps two years.
7. Have employees acknowledge that monetary damages in the event of breach may not be adequate. The employee should expressly agree that injunctive relief (e.g., a cease and desist order) may be sought. This way, you can go to court to prohibit the employee from continuing to solicit your customers and use your agency's proprietary information in addition to seeking monetary damages. You may also want to have the employee acknowledge that damages may be difficult to determine and, therefore, you are entitled to damages of a stated amount if the employee breaches the agreement.
8. State that your agency owns all customer accounts, expiration lists and files and that such items are trade secrets. Along with this, it is helpful if the employee states that he or she has no vested interest in customer accounts or commissions. An employee may feel that the customers she brought to the agency are hers. Although the employee has been instrumental in developing the business, it should be made abundantly clear that the customer accounts and the book of business belong to the agency.
9. Limit the employee's right to engage in competitive employment during the time he or she works for you. Non-compete restrictions during the term of employment are not as disfavored and strictly construed as post-termination non-compete restrictions. You are giving the employee the ability to earn a living and the opportunity to work. You should have the right to expect the employee to be loyal.
10. State that the agreement can't be construed to grant employment for any particular period or length of time and that employment is "at will." Some states' laws indicate that written agreements with employees change the "at will" status of employment, making it so the employer cannot terminate the employee without just cause. A statement that signing the agreement does not change the "at will" nature of employment may help if you want to terminate an employee without cause. Note that a few states don't recognize "at will" employment.
An example of a simple non-solicitation, non-disclosure and confidentiality agreement is posted at Brooke Corporation's Web site: www.brookecorp.com. Keep in mind that the laws of each state are different and that your particular facts may be unique. Therefore, you should consult an attorney to discuss your specific facts and the laws of your state and to review any agreement you want to use. Given the value of your agency and the protections that a well-drafted agreement can provide, it will be well worth the time and money. *