What Agencies Should Do When Key Employees Leave

Protecting Trade Secrets, Confidential Agency Information Critical, Attorney Hirshfeld Says

The insurance industry is a highly competitive market, even when it comes to its work force. There’s a shortage of highly qualified employees at all levels of the industry. Agency owners may experience the loss of a key employee, or the loss of 100-plus employees to a competitor in one day, as was the case with CRC Insurance, one of the nation’s largest wholesale brokers, recently.

When employees, especially those privy to confidential information, do leave an agency, there are steps the owner should take to protect the agency.

The first thing an agency owner should do is investigate what might have been taken by the exiting employee, says Stephen Hirshfeld, a founding partner of the law firm Curiale, Hirschfeld, Kraemer in San Francisco.

“The best way to do that is to do an exit interview with all the people that are leaving, individually one-on-one, and make it clear what they should take and what they’re not allowed to take,” Hirshfeld said.

Agency owners should tally what physical property might belong to the agency, such as cell phones, PDA devices, laptops, and other devices, when employees resign. Then, they should investigate what types of information might reside on those devices.

“What’s been downloaded on there? What kind of files, if any, do they have? Do they have customer lists? Any contracts with them? What kind of materials are at their home? Do they have a home office? And what I’d want to do is be absolutely crystal clear with each of these individuals what they can take and what they can’t,” Hirshfeld said.

The second thing agency owners should do is to let the employee know what’s expected going forward. Hirshfeld says that agencies should have in place a document that outlines what’s expected during employment and after employment ends. Employees should sign this when they are hired, he said. “Ideally if they have that, you’re going to review that with them before they leave.”

Hirshfeld also advises agencies to conduct some due diligence once an employee resigns. “I’m going to probably have an IT person take a look at their e-mails, their web access, see what, if anything, they’ve done, any documents they’ve downloaded and haven’t disclosed. So if you think of it as interpretation and determination, is this something we need to legitimately be worried about?”

If anything worrisome arises, Hirshfeld advises agency owners to then contact the new employer to inquire about concerns such as possible trade secrets and propriety information the employee may have taken with them. “Any information that is confidential that your competitors don’t know about, that took you time, effort and money to develop,” he said.

In the insurance industry, Hirshfeld says trade secrets include contracts between customers, clients and the agency. Also, how much an agency charges for various services, information on any special needs of clients, or special pricing or products all can be trade secrets.

Expiration dates are also extremely important to protect because if a competitor knows about those dates they might aggressively go after that business, he added.

Non-Compete Agreements

Non-competition agreements signed by most producers are generally enforceable in most states, according to Hirshfeld. California is one exception.

“As a general rule outside of California, non-competes are enforceable so long as they’re reasonable,” he said. “They’re reasonable in the amount of time involved and the scope. For example, and every situation is going to be different, but as a general rule you can stop somebody from competing with you with certain customers or certain product lines or certain regions in the country. It could restrict them for a reasonable period of time, which normally for most employees it’s going to be a year or two.”

Hirshfeld cautions agencies outside California that if the non-compete agreement is too restrictive a court might say the owner “overreached” and not enforce it.

“Some courts will engage in what’s called blue penciling, where they say, ‘You said it was five years, we’ll give you two,’ but you take a risk by doing it for five years because you might find a judge that says, ‘It’s all or nothing.'”

In California, the general rule is that non-competes are unenforceable, he added. “The one exception is what involves the purchase or sale of a company or a business or your ownership interest in it. For example, if I, as a brokerage agency, were to purchase your company, bring you in to work for me, part of it is you sign an employment agreement and non-compete that says for a period of time after you leave you won’t compete with me. That’s enforceable because it’s in conjunction with my buying out your business,” he said.

Despite tough competition for quality employees in the insurance industry, Hirshfeld believes most employees are honest and will try to do the right thing.

“It doesn’t mean, by the way, that I might not look for greener pastures somewhere, and that’s OK,” Hirshfeld said. “I don’t think it’s a violation of duty and loyalty to go out and interview for another job, or to think about starting up a competing business. But what I’m not going to do is do it in ways that are directly harmful to my employer.”

Topics California Agencies Market