Owning an insurance agency does not equate to “owning” the customers it serves. If the agents (or producers) who have the relationships with those customers leave, and those agents do not have an effective non-piracy agreement with the agency, the business will be at risk. Owning an insurance agency without each producer and CSR being subject to a non-piracy agreement is akin to renting a business rather than owning it.
One of the first due diligence items a potential buyer of an insurance agency will want to review is the non-piracy agreements put in place by the agency. Failure to have those agreements can immediately put a transaction at risk or place the agency in a position where it is scrambling to convince the proposed buyer that the business is secure.
Building an insurance agency is about building a solid book of business. The value of the agency depends not only on the size of the book of business, but on its stability as well. The best time to think about protecting the agency’s most valuable asset is when a new producer is hired. It makes better business sense to negotiate sensible non-piracy arrangements at the front end of a relationship, and in most instances the law requires that the agreement be signed at the beginning of the relationship. It is far more difficult to impose protective measures once a producer has decided to leave the agency.
A non-piracy agreement is a limited form of non-competition agreement. A typical non-competition agreement prevents an employee from competing in the same business in a specific geographical area for a limited period of time after the employee’s employment is terminated. However, an insurance agency is generally not concerned about keeping its former producers from selling insurance altogether. Instead, it simply wants to keep a former producer from taking the customers of the agency when the producer moves to a new job. In the case of an agency and its producers, non-piracy agreements are preferred to a non-competition agreement. They are less onerous to employees and are usually viewed more favorably by courts than traditional non-competition agreements.