Why Employment Agreements are Critical for Customer-Facing Employees and for Producers

• By: Al Diamond
• September 28, 2026

“Trust but verify,” a Russian proverb, was a favorite of both Ronald Reagan and Vladimir Lenin (we can’t think of two more different people). The proverb suggests that verification of intentions (in writing) supports the just and common agreement between people. 

If you don’t have any safeguards against the loss of your employees (production or service) and if they leave and take some or all of your agency’s clients as their own after you sell the agency (as if you owned it all and were qualified to sell that asset), how much is the agency really worth?  

Of course, all agency owners claim ownership of the agency’s clients. If you don’t, what assets do you have to sell or perpetuate? 

And, YES, every client has the right to be insured wherever they choose – as long as they qualify to be insured by that person or entity. However, not all customers are qualified to be insured by every coverage provider. Some companies can only insure members of a group (credit union, federal workers, armed service members, business types, etc.).  

More importantly, some agents are prohibited or restricted from being insured by a specific entity because of contractual conditions (like restrictive covenants against taking clients). And many agencies have employment agreements that spell out the ownership of the clients and include covenants restricting former employees from unfair competition for agency clients under certain reasonable circumstances. 

If there are no restrictions on departed employees of an agency and the agency only has a value relative to its future earnings, what stops any employee from leaving the agency and taking confidential information generated while that person was employed, thereby eroding the agency’s revenue (and profit) and lowering its value to its current owner or to any future owner? 

If all agency staff stay with an agency transitioning to new ownership, there is no effect on the agency’s value potential (unless the new owner either improves or degrades the value of the business through operational changes). But what really happens if your producers or service team members leave and solicit the agency’s clients and take some or all the clients with them, because they have relationships and access to information learned while they were employed by the agency?  

Employee Flight and the Erosion of Agency Value 

This loss of value can happen quickly and seriously harm a buyer who agrees to pay the seller based on projected future profitability from past performance. If clients leave to follow producers or service members, the buyer may have paid profits and earnings the agency will no longer generate. 

The security of the value of an agency comes in part from the use of employment agreements that spell out the jointly accepted conditions of employment, a part of which is the employee’s acceptance (at hire) that the customer belongs to the agency. These agreements often include non-solicitation and non-acceptance covenants that explain what a former employee may not do after leaving the agency. 

Primarily, the former employee is not permitted to take confidential information about the client (or move or take any existing agency clients or policies) or convert the agency’s clients until the agency has (a specific) time to replace that employee with someone who will have time to re-establish and manage the relationship between the agency and its clients. The covenants cannot be excessively restrictive (i.e., courts frown upon stopping someone from pursuing the career for which they are trained in an area in which they reside). The employee has already signed an agreement that accepts the ownership of the accounts as belonging to the agency. This covenant provides protection to the agency’s continued relationship with its client base for as long as reasonably needed to maintain the customer/agency relationships.  

What Should Be Restricted? 

The former employee should not be permitted to solicit, market, sell, service, or refer agency clients (insured in the current year or in the past twelve months). More importantly, the former employee should not be permitted to provide insurance advice, to insure, to refer to a company or agency with whom the employee has any relationship, or “accept” any client of the former employee for a period of time (two-to-three years is typical but more specific time elements depend on the type of client and coverage being provided).  

This gives the agency more than one policy period to replace the relationship the insured built with the former employee. Once several policy terms have passed, the confidential information (for which the former employee has been compensated by the former employer) has grown stale and the “playing field” evens out.  

At that point, the former employee is free to compete on equal terms with the former employer agency. 

What Plays Out in Court? 

When cases come to court or to mediation regarding the alleged theft of accounts, a mediator, judge, or jury looks for reasonable safeguards for both parties against unfair trade practices and unfair competition. Any judicial decision made by an individual or a jury must be considered a “crapshoot.” A “roll of the dice” in the form of the opinion of one person could decide the financial future of your business. But the “reasonability factor” appears to be the key to a successful outcome. 

As an expert witness, I have been involved in a number of court cases in which the written agreements were key elements of justice when a “falling out” occurs in insurance agencies. The simpler and straight-forward the definition of the intention of the parties, the more likely there would be no dispute in the future. 

The obtuse nature of the agreement (or the absence of an agreement) was an open invitation for difference of opinions in either the short term or long term. These disagreements are never easily resolved and are always expensive in money and emotional stress for all parties involved. Why? 

When Things Don’t Go as Expected 

When someone comes to work for you, it is like a hopeful breath of fresh air. The individual may be seen as the hoped-for salvation of issues within the business that have been troublesome. You expect and project that a new producer will grow the agency and be compensated fairly for the efforts. 

If things don’t work out in the short term, the agency or the individual may decide that their expectations are not met, they will leave in the short term. However, many employees hover on the brink of either success or failure and find themselves working for years before they either gain a comfort level or find greener pastures elsewhere. Worse yet are the employees, producers, or service team members whose situations mature differently than those of the agency or owners and find themselves in a terminal situation after many years with the agency.  

If the situation is terminal, the parties may find that their definitions of their agreement differ sufficiently, that either the individual or the business is hurt when the final actions take place resulting in a termination event. 

The right thing to do (which we rarely see happening) is a mediation event conducted by an independent mediator, which results in a decision accepted by both parties. Otherwise, a lawsuit arises with each party claiming their interpretation is correct, and both willing to fall on their swords to make their points. The only winners in these matters are the attorneys. 

The worst-case scenario occurs when each party continues to take action that the other party finds offensive until the inevitable clash occurs in court, usually with a decision that neither party finds fair nor equitable. 

The Solution 

Write It Down, in a way that both parties agree that the words on paper define the agreement of both parties that would be fair and equitable. Trust but verify! 

No, there is no “standard” employment agreement. It depends on what the agency and the employee have agreed when the agreement is executed. But the more detailed and straight forward the Agreement, the more likely it will never have to be exercised. 

Service Employees’ Agreements 

The agency’s greatest fear is that the service employees who form relationships with the agency’s clients leave and entice the agency’s clients to follow them to a new agency. The solution? If a service employee (customer facing) leaves, they should not be allowed to service the prior employer’s customers for a period of no less than two years (long enough to allow the agency to replace the employee and re-form a relationship between the agency and the clients (over at least one renewal period). If, after that time, the former employer has not re-assigned the client to a different service representative, the playing field is even, and the former employee may re-connect with their serviced clients for solicitation of the account to move.  

Some agencies try to enforce a non-compete or non-solicitation clause on the entire agency’s book of business, but most courts have not found it reasonable if the service representative is not trying to re-assume the service role with their former client. 

What do the courts find “reasonable”? A two- to three-year period (two renewals) during which the former employee may not accept a former client who had a service level relationship with the former employee until the employer can re-establish a relationship through another employee. 

What do the courts find “unreasonable”? An inordinately long non-acceptance period. The courts understand that the former employee may have a friendship or even a business relationship with clients that cannot reasonably be required to be frozen in time. People will continue to encounter each other, especially in a specific target market or in a small town or rural area where contact is reasonable. It is sufficient to forbid “acceptance” of a client for a reasonable period during which the former employer can re-establish at least a business relationship with a replacement service representative. 

Producer Agreements 

Non-compete agreements tend to be weak if they are time driven (prohibiting a producer to sell insurance for a period of time) or geographic in nature (prohibiting a producer to sell insurance within a specific distance or border from his former employer’s location) Courts find it objectionable to stop someone from earning a living doing what they are trained to do or forbidding producers to solicit clients who have not been active clients of the former employer for a long period of time or who NEVER were customers of the former client.  

However, acknowledging that the producer earned their living from the former employer by gathering confidential data on active agency clients, courts have found it reasonable to allow the prohibition of solicitation or acceptance of a former employer’s clients for a period of time sufficient to make the data in the agency’s file (or system) about the client stale and no longer preferential.  

At that point (usually two to three years) the “playing field” is considered even, and the former employee may, again, solicit those accounts. The time granted is sufficient for the former employer to replace the producer with another relationship manager and rebuild that relationship to retain the business. 

Summary 

1. Execute an employment agreement with every new client-facing employee, whether service or sales. 

2. Review that agreement and have both employee and employer sign off on it every few years. This reinforces the covenants 

3. If you do not already have such an agreement, you will need to compensate any employee for whom you expect to execute an Agreement because it restricts their rights. Every agency is different, but your goal is to keep surprises from happening when your physical condition, age, or desire to perpetuate the agency faces a roadblock from employees whose actions might negatively affect the value of your business. Better to know this before an event than at the time of an ownership transfer. Compensation discussion in this agreement for existing employees can be combined with raises or bonuses. You’ll receive less resistance than the agreement in isolation.  

Remember, the agreement codifies what your assumptions have been. Hopefully, the employees understand and agree that the clients of the company that hold the carrier contracts and support the cost of service, sales and administration of the sale belong to the agency for renewals and continued service. 

Copyright © 2026, Big “I” Virtual University. All rights reserved. No part of this material may be used or reproduced in any manner without the prior written permission from Big “I” Virtual University. For further information, contact nancy.germond@iiaba.net.