In 2016 Eagle Insurance was sold to People’s United. This case arose as a result of the sale of People’s United to AssuredPartners in 2020.
A producer who sold his agency to a bank had concerns about the bank reselling its insurance agency assets and negotiated an escape clause in his employment agreement. The clause released him from any covenants not to compete if the bank’s insurance agency “ceased business operations.”
Several years later, when the bank sold its insurance subsidiary, the producer thought that his escape clause allowed him to compete, and he reestablished his agency and started obtaining broker of record letters from insureds. However, while the producer thought that the bank’s insurance agency subsidiary had sold its assets, the transaction involved a stock sale. As a result, a federal judge granted a temporary restraining order against the producer and his new agency conducting any business.
A successful agency sold to a bank’s insurance agency subsidiary
In April 2016, Michael Cox and his wife Kelly Cox (“the Coxes”) sold their successful insurance agency in Raynham, The Eagle Insurance Group, LLC (“Eagle Insurance”) to People’s United Insurance Agency, Inc. (“People’s Insurance”), a wholly-owned insurance agency subsidiary of People’s United Bank NA (“People’s Bank”) for a little over $2.4 million.
The sale agreement involved an asset purchase agreement for Eagle’s assets, goodwill and customer relationships, and insurance accounts.
The arrangement also stated that Mr. Cox would enter into an employment agreement with People’s Insurance with the title of Senior Vice President. This position would give him the responsibility to market to People’s Insurance’s in-service agency’s customers including those acquired from Eagle Insurance. Mr. Cox’s employment agreement provided for commission and incentive compensation with an annual guaranteed minimum of $275,000. According to People’s Insurance, between April 2016 and November 2, 2020, Mr. Cox’s commissions and incentive compensation totaled approximately $2.6 million.
Eagle Insurance sale agreement and employment agreement included covenants against competition
As part of the sale of Eagle, the Coxes agreed to restrictive covenants, including restrictions on competition in a large geographic radius centered around Raynham. The covenant prohibited solicitation of certain People’s Insurance policyholders, clients, and employees, and the unauthorized use or disclosure of People’s Insurance’s confidential information. The restrictions on competition and solicitation applied to Mrs. Cox for a period of five years from the date of the closing (i.e., until at least April of 2021); and to Mr. Cox for a period of five years following the termination of his employment with People’s Insurance.
Mr. Cox’s employment agreement’s ongoing business covenant
During negotiations to sell Eagle and accept employment with People’s Insurance, Mr. Cox had concerns about People’s Insurance parent company, People’s Bank. In particular, his primary concerns focused on the selling or ceasing to operate of its insurance business. In such a scenario, there was the possibility that some third-party would acquire the rights to the restrictive covenants in his employment agreement.
To avoid this potential issue, Mr. Cox included a provision in his employment agreement stating the following:
“[People’s Insurance] agrees that in the event of the bankruptcy, receivership or dissolution of the Agency or the cessation of business by [People’s Insurance], [Mr. Cox] will be released from the restrictions and covenants set forth in this [employment agreement].”
The term “cessation of business,” however, was not defined in the employment agreement.
People’s Bank sells its insurance agency business to a national broker for $120 million in cash
On September 22, 2020, People’s Bank announced that AssuredPartners, had agreed to buy People’s Insurance from People’s Bank for $120 million in cash. Based in Florida, AssuredPartners is a Florida based insurance agency which has expanded to 34 states and is now ranked as the 11th largest insurance broker in the United States.
This sale of People’s for $120 million equaled a multiple of 3.7 times People Insurance’s income for the twelve months preceding the agreement. While the sale was announced publicly, the announcement, however, did not specify the legal structure of the purchase and sale agreement.
Mr. Cox concludes People’s Insurance will cease business because of the sale
Following the announcement of the sale, Mr. Cox received communications from People’s Insurance, People’s Bank, and AssuredPartners informing him of the following:
(i) his position at People’s Insurance was being terminated; and
(ii) that all [People’s Insurance] staff that were invited to continue working after the sale closed would do so by joining AssuredPartners.
(iii) In a Q&A about the sale, the Section titled “Will People’s Insurance retain its brand,” answered “No, People’s Insurance will be fully integrated into AssuredPartners and conduct business as AssuredPartners Northeast.”
Mr. Cox also received other numerous internal communications from both People’s Insurance and AssuredPartners about the acquisition and the integration of People’s Insurance into AssuredPartners. Based upon his understanding of those subsequent communications, Mr. Cox took to mean that People’s Insurance had “ceased operations” such that he had no further non-competition obligations with the company if he chose not to accept employment with AssuredPartners.
Mr. Cox notifies People’s Insurance on the day of the sale his non-compete no longer applies
On November 2, 2020, People’s Insurance’s parent company, People’s Bank, closed the sale of People’s Insurance to a subsidiary of AssuredPartners, AssuredPartners Northeast, LLC.
On the same day, Mr. Cox, through counsel, notified People’s Bank that he was terminating his relationship forthwith with People’s Insurance based upon the terms of his employment agreement, which provided that his employment with People’s Insurance would terminate upon “the cessation of business by (People’s Insurance).”
Mr. Cox’s letter identified the transaction between People’s Insurance and the AssuredPartners as the “sale of its assets,” meaning that People’s Insurance had ceased operations and no longer was in business. Therefore, the letter stated that under the provisions of his employment agreement, he was “released from the restrictions and covenants set forth in Section 14 of the “employment Agreement.”
Assumption of Stock Versus Asset Transactions and Producer Rights
Mr. Cox’s assumptions about the sale of People’s Insurance involving an asset sale were reasonable under the circumstances. Almost all purchase and sale agreements for insurance agencies consist of asset purchases. The main reasons are that the purchasers do not assume any of the selling agency’s liabilities and can depreciate, for federal tax purposes, the acquired insurance accounts over a fifteen-year period.
Purchase agreements where the buyer acquires the stock of any agency are not common. In some cases, however, there are advantages for a stock transaction. Possible agency liabilities can be handled by insurance and warranties with hold-backs from the stock price for such contingencies.
The advantage of a stock sale is that an existing agency continues as either a subsidiary of the purchasing company or engages in a merger. In either case, the business continues with everything in place, existing employees, existing contract agreements, existing employment agreements, existing insurance, agency agreements, and carrier relationships.
Mr. Cox maintains his position after being advised that there was no asset sale
On November 3, 2020, counsel for People’s Insurance and AssuredPartners advised Mr. Cox that his obligations under the Eagle asset purchase agreement and his employment agreement had not been affected by the sale because, in fact, the sale had been a stock transfer and not a sale of assets.
This information from People’s Insurance’s counsel about the sale transaction did not change Mr. Cox’s opinion. He advised People’s Insurance that, in his opinion, People’s Insurance was not an ongoing business operation and that, therefore, he was released from his obligations under the asset purchase sale and his employment agreement.
On November 6, People’s Insurance sued Mr. Cox in federal court seeking a declaratory judgment on the question of whether the stock sale had canceled Mr. Cox’s obligations under his employment agreement and asset purchase agreement. People’s Insurance subsequently amended its suit, adding claims seeking money damages alleging:
- Breach of contract of the Eagle asset purchase agreement against the Coxes.
- Breach of the covenant of good faith and fair dealing against the Coxes.
- Mr. Cox’ alleged breach of his fiduciary duty and duty of loyalty under his employment agreement and position as a senior vice president of People’s Insurance; and,
- Three counts of tortious interference with contractual relationships against the Coxes and Encore.
The Coxes form a new agency and start soliciting People’s Insurance’s business
Notwithstanding the filing of the initial declaratory judgment action by People’s Insurance, Mr. Cox proceeded to form on November 16, 2020, the Encore Insurance Agency (“Encore”). Per the allegations of People’s Insurance, the Coxes planned to rebuild their “Book of Business” through Encore and then sell the revived agency.
On November 20, 2020, Encore became licensed as a producer by the Division of Insurance, according to People’s Insurance’s allegations, and proceeded to obtain agency appointments with various insurance carriers.
Soon after, People’s Insurance began to receive what it described as a “flood of broker record” notices from its insurance clients appointing Encore indicating that the Coxes had successfully solicited the insurance customers Mr. Cox serviced at People’s Insurance to move their business to their new agency, Encore.
People’s moves for a preliminary injunction based on the stock sale
On December 8, 2020, People’s Insurance responded by moving for a preliminary injunction in its federal court suit. Its main allegation was that Mr. Cox’s employment agreement’s restrictive covenants were still in full force and effect.
People’s Insurance presented to the judge hearing the evidence the facts that AssuredPartners purchased the stock of People’s Insurance from People’s Bank. Since the purchase, notwithstanding various changes to employee benefits and the use of the AssuredPartners’ trade names, People’s Insurance continued to operate as an ongoing business concern. The undisputed evidence, People’s Insurance claimed, was that since the stock sale:
- People’s Insurance continues to be listed as an active entity with the Secretary of State’s offices in both the Commonwealth of Massachusetts and Connecticut.
- Insurance policies are sold on behalf of People’s Insurance.
- People’s Insurance holds the appropriate licenses necessary to sell insurance.
- People’s Insurance is a party to contracts with insurance carriers necessary to sell insurance.
- People’s Insurance’s contractual rights and duties survived the sale and remained in People’s Insurance’s name.
- People’s Insurance’s employees are still paid by People’s Insurance, using an Employer Identification Number issued to People’s Insurance.
- People’s Insurance’s employees all have the same jobs, duties, and responsibilities that they had before the stock sale.
Federal court issues temporary restraining order pending a hearing on a preliminary injunction
On December 16, 2020, the federal judge hearing People Insurance’s request for a preliminary injunction found that:
(1) [People’s Insurance] is party to an April 6, 2016 Asset Purchase Agreement and Employment Agreement with Defendant Michael L. Cox, which, among other things, contain restrictive covenants prohibiting [Mr. Cox] from competing with [People’s Insurance] within 100 miles of Raynham, Massachusetts for a period of 5 years following the conclusion of his employment with [People’s Insurance].
(2) these restrictive covenants were executed in conjunction with the sale of Mr. Cox’s business to [People’s Insurance].
(3) these covenants are necessary to protect [People’s Insurance] legitimate business interests and are reasonable and enforceable; and
(4) Defendant Michael Cox has repudiated his obligations under these restrictive covenants for purposes of competing with [People’s Insurance], in violation of his covenants.
Based on these findings, the judge entered a temporary restraining order which barred the Coxes and Encore from:
- Soliciting, selling, or accepting business related to the sale of insurance policies or related insurance products or services of the kind that:
- [People’s Insurance] was selling or attempting to sell on behalf of [People’s Insurance] as of November 2, 2020.
- has sold on behalf of [People’s Insurance] at any time within the three years prior to November 2, 2020; or
- are otherwise being sold by [People’s Insurance] from [sic] (i) any existing customer of [People’s Insurance], which was being serviced by [Mr. Cox], or any other personnel of [People’s Insurance] under [Mr. Cox]’s direction or supervision, as of November 2, 2020.
- Owning, managing, operating, controlling, or being employed by, or otherwise having a financial interest or engaging in a sales capacity in, any company, venture, business, or other entity which operates as an independent or captive retail insurance agency business…within a one hundred (100) mile radius of Raynham, Massachusetts, including but not limited to Encore Insurance Group, LLC.
Hearing on preliminary injunction scheduled for January 5, 2021, continued to January 26.
Upon entering the temporary restraining, the judge ordered the Coxes and Encore to show cause within seven days why your injunction should not issue. On December 22, 2020, the day before the filing was due, People’s Insurance and the Coxes filed a joint motion to continue the preliminary injunction hearing from January 5, 2021, to January 26, 2021.
Under the joint motion, which the judge allowed, the hearing on the preliminary injunction was postponed until January 26, 2021, and the temporary restraining order was also extended until that date.
Agency Checklists will keep its readers posted
The likely reason for the agreed continuance of the temporary restraining order is the possibility of settlement discussions. If the temporary restraining order becomes a preliminary injunction, its orders will remain in force during the the litigation. As a practical matter, such an injunction would likely have a decisive effect on the case.
On the other hand, Mr. Cox’s employment agreement did have a provision for the possible repurchase of his accounts upon leaving. This option was not guaranteed but, if granted, would require his payment of the commissions earned on business renewed by him, including for the first anniversary 100 percent, the second anniversary 75 percent, and the third anniversary 50 percent.
Insurance Coverage Legal Expert/Co-Founder & Publisher of Agency Checklists
Over the course of my legal career, I have argued a number of cases in the Massachusetts Supreme Judicial Court as well as helped agents, insurance companies, and lawmakers alike with the complexities and idiosyncrasies of insurance law in the Commonwealth.
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