Minding Your Business: Preparing for the Loss of a Producer

Recently, a client of ours had two producers leave to start their own agency. The impact on the agency was significant. These two producers generated about half the agency commissions. The owner was scrambling to adjust to the change.

Producers come and producers go. That is the nature of the insurance industry. There are a variety of reasons why producers change agencies. The most common reasons include seeking higher compensation or benefits, but it could include getting better support or finding a friendlier working environment.

As soon as the first producer is hired, the agency owner needs to have an idea in the back of his or her mind about what to do if that producer were to leave. This contingency plan obviously changes as the producer becomes more ingrained and integral in the agency. So what are some of the basic ideas that an agency owner needs to consider regarding a producer’s departure?

The first thing to consider is does the agency have a contract with the producer? We highly recommend that all producers have contracts. A well-written contract will define the essential terms of the arrangement between the producer and the agency. It allows for a performance benchmark on both sides and will help resolve (or squelch) many common disputes. The contract should spell out any requirements or expectations, if the producer were to leave or be terminated.

For example, the producer might not be entitled to any deferred compensation if they were employed for less than three years. Some producer contracts require the producer to pay back to the agency any draw on commission they were paid, if they quit within a certain timeframe or during their training.

Account Ownership

Another common issue when producers leave an agency is related to account ownership. Regardless of whether there is a written contract or not, some producers can have some ownership in the accounts in their book of business. Problems arise when there are different understandings of what the account ownership arrangement is between the agency and the producer.

It is always best to periodically review the account ownership situation with the producers, such as at review time.

Just because a producer has ownership in the accounts does not mean that they should take the accounts when they leave. Some CSRs might have a better relationship with the accounts than the producers.

It might make better sense if the agency were to buy the accounts back from the producer; otherwise, the client might find a totally new agency to handle their business. In some cases the producer might be going to an agency that does not have the markets to handle some of their accounts. It’s a wise thing for the agency and the producer to sit down and review who should keep which accounts.

On the other side of the coin, if the agency owns the accounts but the producer is really tied to the accounts, it might make sense for the agency to sell those accounts to the producer.

This way at least the agency is getting paid for an account that will most likely eventually migrate to the departing producer.

Non-Piracy, Non-Solicitation and Non-Compete Agreements

The rules on upholding non-piracy, non-solicitation and non-compete agreements will vary based on the state and what’s written in the contract. If there is no written contract it’s very difficult to enforce any of this. In general, an agency can block a producer from taking client lists (non-piracy) and directly contacting (non-solicitation) from those lists. The courts usually uphold this arrangement for a period of two to three years. However, the client is free to do business with whomever they choose. So if a client contacts the producer at the new agency, there is typically nothing the agency is legally allowed to do. Each state is different so an owner should contact a local attorney to find out what is enforceable in their particular state.

Transferring Accounts

What’s the best way to transfer the accounts from the old agency to the producer’s new agency? If the book of business is large enough and concentrated in one or two markets, the insurance companies will often allow a block transfer of the Broker of Record (BOR). For a small number of accounts or those that go through the wholesale/E&S marketplace, individual BORs must be issued. It is common industry practice for the new agency to be responsible for servicing the accounts while the original agency still gets paid on any commission from those accounts until the policy renews. However, there is a trend with some companies to not allow BORs until the renewal date. Cooperation between the producer and the agency is required for a successful and smooth transfer of the accounts. Animosity and ill-will could mean a loss of business for everyone.

Service Staff

A producer that takes a large enough book of business will also impact the service staff. It is not unusual for producers who leave with a large book of business to also include their CSR in their plans. It can be considered the piracy of employees. However, if cooler heads prevail it might actually make sense. After the producer leaves the agency an employee may not have accounts to service. Cooperation and negotiations between the producer and the agency can avert expensive litigation.

Accounts That Stay

Often producers do not own their accounts or take a book of business with them when they leave. This provides the agency a good opportunity to go through the book of business and reassign the accounts. We recommend that a CSR or account manager handle all personal lines accounts and small commercial accounts rather than a producer. The medium or large commercial accounts that are assigned to a new producer should be done so at a lower commission rate than if they produce the accounts themselves, often at a 20 to 25 percent rate.

Bottom Line

Producers will leave. The question is whether it’s on the producer’s terms or the agency’s terms. A well-written producer contract and some contingency planning will allow for the orderly transition of a producer from one agency to another, as well as maximizing the protection of the agency’s assets.