Producer agreements: What works and what doesn't

Insurance producer agreements are important to your livelihood for both legal and business reasons. From the agency's perspective, a well-crafted producer agreement defines the legal and economic relationships between the parties and clarifies rights to key business assets, such as expirations and

Get it in writing. Producer/agency relationships are becoming more complex, so it's increasingly important not to rely entirely on oral promises. Both sides benefit when the relationship is clearly defined in writing, reducing the potential for disputes later. At a minimum, the agreement should specify the duties of the producer and the agency, compensation splits for new business and renewals, expense allowances, ownership of accounts, protection of confidential information, and employee versus independent contractor status.

Some non-compete and non-solicitation provisions are enforceable. While the general rule under California Business & Professions Code section 16600 et seq. is that contracts restraining a person from engaging in a lawful profession are void, there are several important exceptions. For example, a person who sells a business can agree not to conduct a similar business within the same territory, thereby protecting the goodwill of the business being sold. Another exception allows restrictions on competition by departing professional partners in a limited geographic area, particularly where the departing partner agrees to compensate his former partners for the business that he or she expects to take. Courts have upheld covenants not to compete and non-solicitation provisions where an employer has strong proprietary interests in protecting its confidential information and trade secrets. "Raiding" of producer talent and other acts of unfair competition will not be protected by courts under the statute. Accordingly, broad language restricting a producer's ability to earn a living will not work, but more narrowly-tailored clauses designed to protect the agency's valuable intangible assets may be enforceable.

Producer agreements increase agency value. Producer agreements offer intrinsic value to agency owners, despite occasional enforceability issues regarding specific clauses. Adherence to sound business ethics, deterrence of bad actors, and the value to an agency buyer or investor of having producer agreements in place can have very positive benefits. Producer agreements are key when valuing an agency or gathering data for a merger or acquisition, and agencies that maintain quality producer agreements generate significantly higher appraised values.

Professional business ethics matter. Successful insurance producers and agencies strive to uphold high standards of professional business ethics. Many producers and agencies will honor a producer agreement because their ethics and morals guide them to stand by their written promises. Integrity and honesty are key attributes of desirable producers, and producers who demonstrate these traits are likely to apply them to their relationship with the agency as well as their clients. Ethical producers and agencies are not afraid to enter into fair and appropriate written producer agreements (if they won't, why not?). The fact is that many producers will honor non-solicitation or non-compete clauses simply because they have given their written word, they expect others to rely on it, and it is "the right thing to do." Moreover, ethical agencies will avoid imposing overreaching restraints on their producers' ability to earn a living; otherwise, they will have difficulty attracting high-quality talent.

If ethics won't work, then in terrorem might. An agency may have to resort to deterring producers who waver in their commitment to honor their producer agreement. Under these circumstances, agency owners should clearly communicate their intent and ability to enforce the agreement, including a warning that the agency will undertake whatever legal action is necessary to protect its interests and valuable proprietary assets. If producers know that the agency will aggressively enforce its rights under the producer agreement, they are less likely to disregard it.

Conclusion: fair producer agreements benefit both sides. Like any successful negotiation, the goal of a producer agreement must be a "winwin" proposition. With that objective, an overreaching (and probably unenforceable) non-compete provision serves no purpose, other than making it even more difficult to recruit top talent. On the other hand, quality producers should not be afraid to sign a fair producer agreement that protects both the producer and the agency's core assets. Therefore, we believe strongly that the benefits to both the producer and the agency far outweigh the challenges of getting the language right.