Strategic Resources for Your Insurance Agency

Will A Court Invalidate Your Non-Compete Agreement?

SHARE

 

Insurance is a relationship business. Clients do business with people they've grown to know and like. A strong client relationship gives an agency a significant advantage when it comes to retaining business. However, it can be a two-edged sword, especially when the person who built the relationship leaves the agency.

To protect themselves against the day when a producer leaves, agency owners often require producers to sign non-compete or non-solicitation agreements. These contracts prohibit the producer from soliciting the agency's clients for stated periods of time after the producer leaves. The idea appears sound, but it does not always work out in practice.

An Illinois agency had a new producer sign a contract in which he promised not to solicit agency clients for two years after the contract's end. A few months later, he signed an employee confidentiality agreement. This agreement reduced the period during which he could not solicit agency clients to 12 months.

The producer's tenure with the agency lasted just over eight months. He left the agency for a larger brokerage. Almost exactly 11 months later, the agency received notice from a longstanding client that it was moving its medical malpractice insurance business to the other brokerage. The agency's former employee had persuaded the client to make the change.

The agency principals did not take this development well. Less than a month later, they filed suit against their former employee. They sought damages for breaching the non-solicitation agreement and to recover commissions they had advanced to him. They argued that the two-year non-compete agreement was enforceable and that it provided sufficient consideration (compensation) to the producer - namely, his job.

They also pointed to the confidentiality agreement that reduced the non-compete period. This, they claimed, benefited the producer and eliminated the need for any additional consideration. They further argued that his continued employment for three months after he signed the confidentiality agreement was enough consideration.

The producer argued that the non-solicitation agreement merely modified the previous contract and was unenforceable without additional consideration paid to him.

The trial court dismissed the case, ruling that the consideration the agency had given him in exchange for signing the agreement was not sufficient. In response, the agency voluntarily dropped the claim for recovery of the commissions, but it appealed on its breach of contract action.

The appeals court also sided with the producer. Before determining whether the non-compete agreement was reasonable, the court said, it had to first decide whether the agreement was subordinate to the main contract. It also had to determine whether there was adequate consideration to support the agreement. In this case, the court agreed with the lower court that the consideration given was not sufficient.

The reduction in the non-solicitation period to 12 months did not amount to additional consideration, the court said. "(W)here a party does what it is already legally obligated to do, there is no consideration as there is no detriment...If defendant was already obligated not to compete against plaintiff, we fail to see how his promise not to compete for 12 months could be new, valid consideration."

The judges rejected the argument that the producer's continued employment was valid consideration. "When a defendant is an employee at will, such as he was in the instant case, his continued employment is an illusory benefit because the minute after he signed the non-solicitation agreement, plaintiff could have fired him and then he would have received nothing in exchange for his fresh promise represented by the signing of the second agreement ..."

They also held that three months' employment was too short a time to constitute sufficient consideration, saying that two years was the minimum period necessary. 

Agency principals have a valid interest in protecting their books of business. However, if they are going to ask producers to restrict their ability to make a living, they must offer appropriate compensation. In this court's opinion, simply giving a producer a job is not enough. Agency principals should craft narrow non-compete agreements with some kind of additional compensation for the producer. A too-broad agreement is the same as no agreement at all.

 

Explore Agency Equity

Subscribe

Stay up to date with AgencyEquity

absolute absolute.gif absolute
absolute
absolute>
absolute
absolute