Aguilar Law Offices

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January 1, 2009 - Aguilar Law Offices Newsletter

Seeking a New Market?

2008 was not the best year for the insurance industy in California.

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The current economic forecast will continue to put abnormal pressure on insurance companies’ earnings. Since investment income has long disappeared as a buffer to keeping rates low across the board, you can be certain that insurance companies will be reexamining their portfolios with a view to maximizing premium production. This will manifest itself by pressure on you to increase the volume of your production in view of the insurance companies’ anticipation that your production volume will outperform claims.

The marketplace has gotten tighter for everyone across the board and many, if not all of you, already know that the insurance companies’ problems will become your problems very soon. Cutting overhead will certainly streamline operations but will not necessarily increase your production. The dilemma which faces many of you is not isolated to the small producer. I don’t need to tell you that the larger your operation, the more that is expected of your company.

Some of you will remember the solution which served as a lifeline to many small producers 10 or so years ago. The cluster concept allowed the individual producer to retain its own identity and permitted the group production by the cluster to grow to the point where it would meet the insurance companies’ threshold production requirements. The concept would apply equally well to middle to large operations where volume is essential for survival. It is something to seriously consider in these harsh economic times.

The legal structure to create these clusters is not particularly difficult. One of the agents associations, many years ago provided guidelines and general advice on how to set up a cluster. I haven’t seen anything like that recently; however, if you get a copy of the old handout, be cautious and make certain that the legal formalities are followed.

The cluster concept applies to both the admitted and non-admitted marketplace. Although, different considerations regarding the structuring of the cluster come into play and you should consider carefully an exit strategy when the crisis has abated and you want to go your own way again.

Don’t forget to keep your books and records up to date. If you decide to adopt a cluster program, the status of your and your associates, corporate books and records must be absolutely pristine. Take the time to review the status of the corporate trust accounts and your ability to respond to a Department of Insurance audit. Steps of prevention now will save you thousands of dollars in legal fees later to preserve your license.

Imagine coming to work on a bright crisp sunny Monday morning to learn that your most trusted associate has decided to leave. Your associate will not tell you where he is going because of his new employers has requested privacy. Your years of investment in time and training, the bonuses, the trips, the authority, the trust and loyalty that you'd showered upon your associate were not enough. You give your trusted associate a great party, wish your loyal associate the best of fortune and start looking for another young associate to train.

You soon learn that your loyal and trusted employee has gone to work with your competition.

A few weeks later you start getting calls from some of your friends and clients and learn that your loyal trusted associate has started to solicit their business. At first you wish him well, knowing that without your closely guarded client policy bordereau and database, your former associate will achieve only limited success. A few more weeks go by and you discover that your loyal and trusted former associate is soliciting all of your clients. Since you allowed your trusted associate over the years to handle the accounts directly, your loyal trusted former associate has developed enough of a rapport with your clients and, armed with your company client bordereau, client database, and other trade secrets your loyal and trusted associate has started to convince them that you're going out of business and he is in a better position to take care of their future needs.

As a result of technology, months before he announced his leaving, your former loyal and trusted employee was able to copy all of your electronic files onto a flash memory card smaller than a cigarette lighter. There has been an increase in the ability of employees with access to company confidential data, trade secrets and other customer databases, to copy your trade secrets and go to work for your competition. Yes, there is the 1984 Uniform Trade Secrets Act (UTSA) which provides a legal remedy for the misappropriation of trade secrets for California employers.

I do not need to remind you how valuable your customer lists, contact persons, policy renewal dates, claims history, premium payments history are to your business nor the ability of a competitor with the same information to severely attack and damage your business. Yes, you can sue your former loyal and trusted employee and your competitor. After a long, expensive and protracted litigation you may recover some portion of your losses; however, during that time you will be struggling to rebuild your business and pay your attorneys in an effort to survive.

All this of course can be avoided by taking reasonable steps to protect your customer lists, customer databases, confidential data, customer premium and claims bordereau, and other trade secrets. If your employees are loyal and trustworthy they will understand the steps that you must take in order to protect the integrity of your trade secrets and the ability of your company to continue growing its business.

We strongly recommend that you contact your insurance lawyers and discuss what steps you need to take in order to protect your company. A cursory search of the internet will reflect an alarming trend of trade secret theft. Unchecked and unprepared, the theft of your trade secrets could ultimately destroy your company and give your competitors the ultimate advantage of your years of hard work and effort.

A reminder that the Insurance Commissioner continues to monitor the payment of brokerage fees. For you wholesalers, be alert to the activities of your retail brokers insofar as they relate to the charging and payment of brokerage fees.