Contracts between insurance carriers and their captive agents typically include provisions that restrain the agent from targeting the carrier’s customers after the contract is terminated. But what about when the customers target the former agent? Can the agent sell insurance to these customers? That was the dispute brought before the South Dakota Supreme Court.
The producer had been a captive agent for a regional carrier for four years when he decided to go to work for another carrier. Within three months, he sold insurance to some of his customers from his former carrier. The carrier quickly filed suit, asking the court to award them damages and to prohibit the producer from further contact with his former customers. They also asked the court for a temporary restraining order and preliminary injunction against him. The court granted the temporary restraining order and conducted a hearing on the question of the preliminary injunction.
The contract between the carrier and the agent prohibited him from selling or soliciting, directly or indirectly, any of the carrier’s policyholders in any of the counties where he had sold or serviced insurance. The prohibition applied for 18 months following termination of the contract. It also enjoined him from using the carrier’s confidential information after termination. The carrier argued that he had violated both of these provisions.
During the evidentiary hearing on the preliminary injunction, the producer admitted to selling to some of his former customers since leaving the company. However, he testified that he had not “reached out to any Farm Bureau customer and sought to persuade them to leave Farm Bureau.” Rather, he testified, it was the customers who initiated the contact with him.
The court gave the carrier a partial preliminary injunction. The producer was forbidden to solicit his former customers, but he was not prohibited from selling to them. The court held that prohibiting him from selling to customers who initiated contact would be a restraint of trade impermissible under state law. The carrier appealed to the state supreme court, arguing that the lower court misapplied the law.
South Dakota state law generally prohibits agreements that restrain the practice of a lawful trade or business, with a few stated exceptions. One of those exceptions permits a contract between an insurance carrier and a captive agent to prohibit the agent from engaging in the same business as the carrier and from soliciting the carrier’s customers in specific geographic areas for up to two years after termination. The carrier argued that, in the context of the law, “soliciting” meant “soliciting and selling.”
However, the Supreme Court ruled that the lower court’s interpretation of the law was the only reasonable one. They noted that, while the law in question did not define the word “solicit,” the state’s insurance producer licensing law did. That definition is the same as in most other states: “attempting to sell insurance or asking or urging a person to apply for a particular kind of insurance from a particular company[.]” A different definition could be substituted only where a contrary intention plainly appears in a law, and the court did not find one in the non-solicitation law. That statute, they wrote, “contains no provision for permitting an agent who continues to sell insurance to agree not to sell policies to existing customers who — unsolicited — request such policies.”
Non-compete and non-solicitation agreements are standard in agency-carrier contracts and those between an independent agency and its producers. This case illustrates the potential limitations on them. State laws vary, and it’s possible that the carrier’s lawsuit might have been successful in a state that expressly permitted a prohibition on selling to former customers. In general, however, courts will allow carriers and agencies to enforce these agreements only in narrow circumstances and for relatively short periods of time.
Producers who leave captive agency companies or independent agencies should still be aware of the limits imposed on them by their contracts. The agent won this case, but only after lengthy and expensive litigation. That is an experience no insurance agent wants to have.