Accounts ‘not’ for sale: Defining account ownership

The value of most businesses is predicated upon that business’ ability to “control” its clients and accounts. For insurance agencies, the business’ value assumes that the agency “owns” the accounts.

The definition of who “owns” the accounts is a very flexible one. In one sense, no one can “own” a client. Clients are free to do business with whomever they choose.

Account “ownership” then becomes an understanding between the employees and the agency itself. State law and judicial precedent, however, temper any understanding — or misunderstanding between employees and the agency.

For many years, agencies operated under the assumption that the accounts belonged to the agency. Sales people and other staff had no control. Since all parties operated under this assumption, things ran smoothly. Most people stayed at their jobs for their whole career, so no “issues” would occur, anyway.

Over the years, business became more competitive. Retention of the accounts was becoming more and more contingent upon the strength of the relationship a sales person had with the clients. Employees at the same time began to flex their muscles and looked for better opportunities outside their current place of employment.

The new business climate created new “issues.” Clients would follow a sales person from one agency to another. Agencies responded by requiring producers to sign contracts, which included non-compete clauses. As the question of account “ownership” became more common, state laws, business codes and court rulings on the matter also multiplied.

Contracts in place for producers, others
It is highly recommended that agencies have contracts with all producers. Not only for the issue of account ownership, but for describing compensation and other terms as well. It is also recommended that the contract clearly state that the agency owns the accounts — unless both parties agree that the producer owns them instead. Specifically stating the ownership of the accounts will clear one hurdle if the contract needs to be enforced.

It is also recommended that the contract include terms for the producer to buy the accounts at a fair price. Producers typically have strong relationships with their accounts. So, when a producer leaves an agency, there is a strong likelihood that their accounts will go as well, either with the producer or to another agency. Rather then fighting this likelihood, it makes sense to plan for it instead.

A producer that leaves and wants to take his book of business will surely consider paying a fair price for the book of business rather than getting into a lawsuit. The agency he is are going to would also be well advised to pay for the book rather than take it.

The downside of contracts can be the cost in time and money in enforcing them. It is a sad but all too common fact that even if the contract is well written and the agency has met all the terms, it can often still be a crapshoot if the dispute ends up in court. A decision needs to be made early on as to how much time and money should be spent enforcing a contract. Oak & Associates has been involved with a few cases where the cost of litigation well exceeded the actual value of the book of business.

The upside of contracts is that most people will more or less abide by them. The fact that the terms are spelled out will alleviate most disputes. If the producer is given a fair opportunity to buy the book of business, most will do so without a fight.

Protecting trade secrets
Along with producers, the rest of the staff should also sign a document regarding non-piracy and trade secrets. This can either be part of a contract or part of the employee handbook that they sign every year.

Another concern is when staff jumps ship with a producer. Service staff can also have very strong relationships with clients and may let the new employer know who these clients are that they handled. Without a signed agreement, staff may not feel they are violating anything when opening up the door for them. A non-piracy and trade secrets agreement will bind them as well and make it that much more difficult for the leaving parties to be successful taking accounts.

The other issue on account ownership involves the agency’s association with wholesalers, managing general agencies and insurance companies. This rarely comes up but can be a huge surprise when it does. Make sure that all contracts are carefully read and understood. Contracts with wholesalers should include a clause on account ownership. Avoid any “Right of First Refusal” with any contract. Otherwise, when an agent sells his agency, he will need to go to the carrier to ask permission.

Summary
Ownership of the accounts in an agency should not be left to chance.

It’s wise to make sure that agreements are in place and the proper wording is used to describe who “owns” the accounts.

Bill Schoeffler and Catherine Oak are partners at Oak & Associates. The firm specializes in financial and management consulting for independent insurance agents and brokers. They can be reached at (707) 935-6565, by e-mail at bill@oakandassociates.com, or visit www.oakandassociates.com