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Planning your succession? What do your producer contracts look like?

Succession Planning Conference panelists discuss strengths and weaknesses of contract language

As speakers at the 5th annual Succession Planning Conference, hosted by Canadian Insurance Top Broker, Allyson Fischer and Stephen Gleave, partners at Hicks Morley, will discuss different ways owners can protect their business when a producer leaves the brokerage. The Conference takes place October 11 at the Royal York Hotel in Toronto. As a sneak preview, we asked Fischer and Gleave about new developments in case law around restrictive covenants.

What are some of the major concerns brokerage owners have when it comes to producers leaving their firm?

Stephen: The number one concern of brokerage owners is producers taking the relationships they have with clients. They’ll take the business of the clients away from the brokerage to the new brokerage and they’ll lose their gross commissions earned from those clients.

Brokerage owners fear then that every other producer that’s there thinks its open season to leave and take their clients too and that therefore their businesses will die on the vine.

Read: Coverage of the 2011 Succession Planning conference

Have there been any recent significant developments in case law around producer contracts?

Allyson: There are really two forms of protection: The restrictive covenants that you can have producers sign at the time of hire. Generally, there would be no solicit provisions, that if they leave they can’t solicit for a period of time.

Stephen: And a separate provision that they can’t service any of the clients.

That comes from the Staebler Court of Appeal case, confirming that you must separate a no-solicit provision from a no-servicing provision, otherwise the restrictive covenant will be non-enforceable.

The second really important decision is Gentech at the Court of Appeal, which says that if a producer takes a book co-owned with the broker, the producer must pay the broker for the fair-market value of that book.

The other side said that the obligation to buy the book was nothing more than an option and they could ignore the option and take the client without paying for it. The court said, “No, no, no. You have an option, but your option is leave the book or pay for it.”

That’s what’s going to catch a lot of brokers’ attention because it is a different way of protecting your business from a restrictive covenant.

Broker owners can get added protection for their business by saying to a producer, “If you leave with your clients, you will pay me fair market value for those clients’ business, whatever the valuation is.”

See: Gallery from last year’s Succession Planning Conference

What are the biggest mistakes broker owners usually make when crafting producer contracts?

Stephen: The biggest problem is being too broad and too aggressive. If you ask for too much in your restrictive covenants or your contracts, the courts won’t enforce it and you’ll have nothing. So less is more.

Allyson: If you’re asking for a three-year restrictive covenant, or you’re asking for something really broad from a geographic perspective then courts are going to be less inclined to enforce it. They’re going to say it’s unreasonable.

They look at it from two perspectives. They first look to see if the contract is reasonable, in terms of time, line of business, etc. And then if it is too broad and unreasonable then they’re not going to enforce it so it doesn’t matter what that producer did when they left.

Stephen: In the Staebler case, the court struck down the covenant and in the absence of the covenant the producers were free and took, I think, millions of dollars worth of business.

See the full agenda and register today for the 5th annual Succession Planning Conference.