Big insurance companies spend millions on advertising to convince people they provide a better product than their competitors. But the typical home and auto policies consumers buy are written on standard industry-wide forms, so the coverage options are not that different. The same is true for the CGL (Commercial General Liability) policy, the typical liability insurance businesses buy.
There are, of course, differences between insurance companies in financial strength, claims handling, and price. But the coverage they provide is fairly standardized. So it is only a slight exaggeration to say that insurance agents, especially independent agents, are selling an essentially fungible commodity.
So how do insurance agents differentiate themselves? It comes down to two things: personal relationships and customer service. If you can get insurance anywhere, you’re going to prefer an agent you know personally, and you’re going to stick with an agent who provides good customer service.
This creates a legal problem for insurance agencies that want to protect their assets. The law protects an insurance agency’s information in several ways: trade secrets law, enforcement of confidentiality agreements, the “Fiduciary Duty Lite” owed by an employee.
But the most valuable assets insurance agencies “own” are the personal relationships with customers. Accountants call this goodwill. It is literally the “good will” that a customer has towards a business.
People in the insurance industry call this a “book of business,” as if the book can simply be moved from one agency’s shelf to another’s. But the problem for insurance agencies is that the goodwill is usually directed at an individual not at an agency. This means that most of the value in an insurance agency is found in the personal relationships of the individual agents.
The agency must not allow the agents to discover this fundamental truth. If the agents ever found out the agency owner is making profits off their relationships, surely the agents would take to the streets and throw off the yoke of oppression. Insurance agents of the world unite, you have nothing to lose but your chains!
There must be a way for insurance agencies to prevent this and save capitalism as we know it. That’s where non-competes come in.
Enforceability of insurance agency non-competes
The more interchangeable the product, the more important it is to maintain goodwill with your customers. But goodwill is a relationship, not information. And there is really only one legal device to prevent employees from taking goodwill: a non-compete. Naturally, insurance agencies, like many other businesses, will often require their insurance agents to sign non-competes.
The legal problem is that a non-compete is a restraint of trade, and restraints of trade are generally illegal. I say “generally” because most states recognize an exception for non-competes. These states only differ on the size and contours of the exception.
If we had to sum up the Law of Non-Competes in the states that allow them, we could say this: there must be consideration for a non-compete, and the non-compete must be reasonably limited to the purpose of protecting the company’s goodwill with its existing customers.
Just about every state that allows non-competes follows some variation on this theme. When courts find that non-competes are unreasonable, it is usually because they are too broad in time period, geographic area, or the scope of activity they prohibit.
Case study in insurance agency non-competes: Allstate v. Rote
Let’s use an example to illustrate how these typical requirements for non-competes can apply to an insurance agency.
In Allstate v. Rote, the agent signed an Exclusive Agency Agreement that contained a one-year non-compete. For one year following her termination, the agent could not solicit any person in competition with Allstate:
(1) who bought insurance from the agency and was an Allstate customer at the time of termination;
(2) who was an Allstate customer at the time of termination and who the agent discovered as a result of her employment with the agency and access to Allstate confidential information; or
(3) from within a one-mile radius of the agency office.
In short, the Allstate non-compete barred the insurance agent from soliciting any insurance customers from within a one-mile radius, or soliciting the agency’s customers anywhere.
The court considered whether this non-compete was enforceable under Oregon law. Like Texas and many other states, Oregon requires that a non-compete be supported by consideration, limited in time and geographic area, and reasonably limited to protecting the company’s interests.
The judge found that the Allstate non-compete met these requirements: the appointment as exclusive agent was sufficient consideration, the non-compete protected Allstate’s legitimate interests in its customer relationships and confidential information, and the one-year time period and one-mile radius were reasonable.
But the judge denied Allstate the injunction it wanted. While the judge granted an injunction to protect Allstate’s confidential information, he declined to enjoin the agent from competing.
Why? Well, as with any injunction, to get an injunction to enforce a non-compete against an insurance agent, it’s not enough for the company to prove the non-compete is enforceable. The company also has to prove that an injunction would be fair.
Different jurisdictions formulate injunction requirements differently, but in essence it comes down to three words: imminent, irreparable, and equitable. First, there must be an “imminent” threat of harm to the plaintiff, meaning the harm is about to happen. Second, the threatened injury must be “irreparable,” meaning money damages are inadequate to compensate the plaintiff. Third, the injunction must be “equitable” and serve the public interest.
“Equitable” is just a fancy legal word for “fair,” so let’s say the third requirement is that the injunction must be fair to the defendant and to the public.
As a litigator who reads a lot of injunction cases (you can read about some non-compete injunction cases here), I should warn you to take these theoretical requirements with a large grain of salt. For example, courts often water down the “irreparable injury” requirement so much that it becomes almost meaningless. For example, in the Rote case, the judge had to follow Ninth Circuit law, which apparently says that a breach of a non-compete causes irreparable harm “[b]ecause the harm is intangible and difficult to quantify.”
Time out for a quick rant. It always bugs me when courts say this kind of thing. It is just wrong to suggest that the harm resulting from breach of a non-compete is always “intangible” and “difficult to quantify.” In many cases, the harm will be quite tangible and relatively easy to quantify: the amount of profits the company lost as a result of its customers buying a product from the former employee rather than the company.
Now back to the requirements for injunctions. Judges also vary widely in how much weight they give the third factor: equity and the public interest. Courts often brush aside these considerations with a rote statement to the effect of “enforcing reasonable non-competes is in the public interest, therefore an injunction here will not disserve the public interest.”
But some judges, like the one in Allstate v. Rote, take this requirement more seriously. As to Allstate’s demand that Rote cease operating out of her former agency location, Judge Hernandez said “[t]he controlling consideration is the harm that Allstate would suffer from the erroneous denial of a preliminary injunction compared to the harm Rote would suffer from the erroneous grant of such relief.” Considering the fact that Rote had signed a five-year lease at her office location, the judge found that granting the injunction would cause Rote “severe financial loss and ability to sustain her profession.” This tipped the “balance of equities” in Rote’s favor.
So, Allstate v. Rote shows us that even when an insurance agency non-compete is reasonably limited, the judge may decline to enjoin an agent from competing, especially where an injunction would cause the agent significant financial hardship.
Fact issues in insurance agent non-compete cases
Lawyers who enforce non-competes can sympathize with Allstate’s counsel. They are all too familiar with the employee’s lament of “judge, how can I possibly make a living and put food on my family’s table if you enforce this non-compete?” It’s an occupational hazard. But that’s not the only problem for an insurance company, or any company, that tries to enforce a non-compete.
There is also the “fact issue” problem. Insurance company non-competes tend to be especially susceptible to this. Often the insurance company will do what Allstate did and limit the non-compete to “solicitation” of customers. This makes it more likely the non-compete will be found reasonable and, therefore, enforceable.
The problem is that whether the insurance agent “solicited” the agency’s customers is often a fact in dispute.
Let me put it in terms lawyers will understand. Let’s say you’re a litigator who has seven active litigation matters. You leave your law firm to go to another firm. You call each of your seven active clients say, “I just wanted to let you know I’ve joined the firm of Burr & Hamilton; you are free to decide whether to stay with my old firm or not.” Has the lawyer just “solicited” the clients?
Different people will interpret “solicit” differently, plus there may be a dispute about exactly what was said on each phone call.
This was the issue in Allstate v. Sidakis. In that case, Allstate claimed that the defendants solicited Allstate customers in violation of a non-compete. Allstate even produced signed statements from customers claiming they were solicited. But the defendants denied this, and the court found that the conflicting testimony presented a fact issue for trial.
This problem is compounded by the fact that customers, who don’t want to be treated like property and told where they can and can’t buy insurance, are usually not inclined to testify in support of the insurance company.
Put all this together and you get fact issues. That means the judge cannot grant summary judgment, and the case has to go to trial. And a trial means more time and money. A lot of money (I explain how much in this video).
Good for lawyers. Not necessarily good for insurance companies, agencies, and agents. They’re already spending a lot of money on all those commercials.
*Update: Also check out the interesting opinion in Gallagher Benefit Services, Inc. v. Richardson, No. 6:19-cv-00427, 2020 WL 1435111, at *6-7 (E.D. Tex. March 24, 2020), where the court granted a preliminary injunction as to insurance agency clients who had not left, but denied an injunction as to clients who had already followed the employee to a competitor. The court reasoned that the agency did not prove its “ability and realistic prospects of regaining any of the clients” that had already left. This is a common issue in insurance non-compete cases.
Zach Wolfe (firstname.lastname@example.org) is a Texas trial lawyer who handles non-compete and trade secret litigation at his firm Fleckman & McGlynn, PLLC. Thomson Reuters named him a 2020 Texas “Super Lawyer”® for Business Litigation.
These are his opinions, not the opinions of his firm or clients, so don’t cite part of this post against him in an actual case. Every case is different, so don’t rely on this post as legal advice for your case.
 Please don’t take this generalization as legal advice for your situation; consult with a lawyer about the law in your state.
 Allstate Ins. Co. v. Rote, No. 3:16-cv-01432-HZ, 2016 WL 4191015, at *1-2 (D. Or. Aug. 7, 2016) (unpublished).
 Id. at *4 (citing Nike, Inc. v. McCarthy, 379 F.3d 576, 584-85 (9th Cir. 2004)).
 Id. at *7.
 In Texas, there is conflicting case law on whether the traditional common law requirements for an injunction apply to an injunction to enforce a non-compete, which is governed by statute.
 The judge also cited the important factor that there was no evidence that Rote had taken any business from Allstate by operating from her former agency location. Id. at *6. Perhaps the equities would have tipped back towards Allstate if Rote had been actively poaching Allstate customers.
 Allstate Ins. Co. v. Sidakis, No. 13-CV-7211, 2016 WL 556869, at *5, 8 (E.D.N.Y. Feb. 10, 2016) (unpublished).