Musical chairs: brokers and insurers must fight to retain their clients when key employees leave.

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* The News: High-profile employee defections have sparked a wave of lawsuits among rival brokers and insurers.

* The Background: The lawsuits raise questions about a possible talent shortage in the industry.

* The Payoff: Companies have many legal tools, including non-compete agreements and trade-secret laws, to protect their businesses.

Insurance is a relationship business, industry insiders like to say. Often, it's a relationship that companies are willing to go to court to protect.

A dramatic example is what happened to reinsurance broker Benfield. After about 20 employees, along with the leader of its 100-member facultative reinsurance team, were lured away by rival Aon Re Global in October 2006, Benfield estimated its earnings would drop by $18.6 million. Benfield didn't take the loss sitting down; it filed a lawsuit against Aon, and won an $18.4 million settlement in 2007.

It's a scenario that's becoming more and more common in the insurance industry: A key person leaves to go to a rival company, entices others to follow, and they attempt to take business with them. Meanwhile, the original company retaliates by taking its rival to court.

The risk of losing key personnel is so great that both of the two largest insurance brokers, Marsh & McLennan Cos. and Aon Group, mention it in their 10-K annual reports on file with the U.S. Securities and Exchange Commission.

"The loss of key professionals could hurt our ability to retain existing client revenues and generate revenues from new business," Marsh wrote. Aon said, "Our success depends, in part, on our ability to attract and retain experienced and qualified personnel."

Marsh and Aon are ranked as the first- and second-largest global insurance brokers according to Best's Review's 2007 ranking.

With so much at stake, companies attempt to retain their business by having employees sign restrictive covenants, such as non-compete agreements. In recent years, firms often have gone to court to enforce those agreements, creating a web of legal action that has touched many major industry players.

"In this industry, you have the phenomenon of having strong personal relationships that develop between some employees of the company and the client of the company," said Christopher Stief, managing partner of the Employee Defection and Trade Secrets Practice Group at the law firm Fisher & Phillips. "Clients are going to feel affinity with the person who is the voice and face of the company. This makes it tempting for a competitor to offer nice terms for them to go over, and take a book of business with them."

While some will point to this rash of poaching as a sign of a serious talent shortage, especially in highly specialized areas such as facultative reinsurance, others say it's more a sign of difficult economic times. Experts said there are ways to try to protect a business by having employees sign restrictive covenants--although there's no guarantee how the contracts will hold up in court.

Circling the Wagons

Companies have a variety of ways to protect themselves when employees leave and try taking business with them, said Steven A. Goldfarb, a partner with the Cleveland-based law firm of Hahn Loeser & Parks.

These legal tactics include pursuing violations of common law, fiduciary duty or the Uniform Trade Secrets Act against the defector and rival company. One common tactic is pursuing violations of restrictive covenants, which are contracts that limit what employees can do after they leave a company.

Such documents can include geographical covenants, which restrict an employee from working for a competitor within a certain area for a certain length of time. Another is the non-solicitation covenant, which restricts an employee from soliciting the company's clients or employees for a certain period of time.

In the United Kingdom, employers use what's often termed a "garden leave" clause. Employees who have given notice are required to spend a set period of time at their homes, or "in the garden," rather than in the workplace. They continue to receive their salary and benefits, but no longer can access confidential information at their original company and can't work yet at the new company. The garden-leave concept has begun to be used in the United States as well.

There's also protection under the Uniform Trade Secrets Act. Some version of the act has been enacted in 45 states, including California, Pennsylvania, Florida, Georgia, Illinois, Ohio and Michigan. Notable states that have not enacted UTSA include Texas, North Carolina, New Jersey and New York.

Former employees don't necessarily need to steal hard files to take business with them when they leave. A recent Ohio Supreme Court ruling found that memorized client lists qualify as trade secrets under UTSA.

Stief said he personally sees more cases involving life insurance agents than property/casualty agents, but noted "many companies don't bother to litigate over a single agent."

A good way to limit the impact of an employee's leaving is to have a team of people serving clients, he said. "That way, if one person leaves, or two or three, you still have some people left who had a relationship with the client. That's more of a fair fight. If you only have one person who knows the client and they leave, you are at a severe disadvantage."

Stief also said, "It's much more dramatic if you have a whole department or whole regional office defect. That often happens when a senior manager was recruited first. And if that happens, it almost guarantees litigation."

Worth the Fight

Often, companies expect to get sued when they recruit an entire team, Stief said.

"If it's a large enough group, then the revenues are big enough to be worth fighting the legal battle," he said. "You have to make a business decision. That's the first discussion we have with clients--is it worth the fight?--although certain companies feel like they have to take a stand, even on a micro level, just to make a point."

The company that has lost the employees needs some time to recover, Stief said, and can pursue a temporary court injunction against the rival.

For instance, General Reinsurance sought and won an injunction in 2007 to stop Arch Worldwide Reinsurance Group from divulging or using any confidential or proprietary materials with respect to Gen Re's trade secrets. That was after 30 members of Gen Re's facultative reinsurance staff joined Arch.

Restrictive covenants aren't always enforceable, and companies still have to prove they have legitimate business to be protected by such an order, Stief said.

"If you are faced with the loss of someone who's been the face and the voice of the company, you need time to get someone in their place," Stief said. "Maybe it was the company and products they liked, not the person, but you need a reasonable time to create a relationship before head-to-head competition starts."

In some states, judges are allowed to amend restrictive covenants if they feel the agreements are too harsh. For instance, a judge might say that restricting competition in a 250-mile radius for 18 months is too restrictive, and might opt to cut it back to a 100-mile radius for six months.

In other states, judges are only allowed two options: Enforce the covenant as is, or throw it out altogether. "So if it's an inch overbroad, you have nothing. It creates an incentive for employers not to overreach," Stief said.

In California, non-competes are not enforceable as a matter of law, Hahn Loeser & Parks' Goldfarb said. But it's hard to predict how the cases might come out.

"You'll often see cases going both ways, even on what looks like similar contracts and people," Stief said. "You have differences in state law, which matters a lot, and there are individual facts that matter behind the law. Judges will look at why the employee left. Were they being mistreated? Was the boss sexually harassing them? They'll weigh the equity in the situation. It can be hard to predict."

Looking for Talent

Both Goldfarb and Stief said employee poaching lawsuits tend to follow the economic cycle.

"I see it more in an up market than a down market in the real estate business, but it comes in cycles like everything else," Goldfarb said.

Stief said such lawsuits are fairly common, but tend to increase during turbulent economic times.

"Sometimes it's a shortage of talent, but sometimes it's changes in the economy," Stief said.

"Our practice is busiest when the economy is on its way up and on its way down," he said. "Plateaus at the top and bottom are slower. When the economy is on its way up, companies need more help. When it's on its way down, people get nervous that they can't match their past productivity, and start to jump ship. They start looking for different opportunities because where they are doesn't seem as good as it once was."

Etti Baranoff, associate professor of insurance and finance at Virginia Commonwealth University, said the number of such lawsuits signals a shortage of talented people in the industry.

"There is talk about a shortage of talent," Baranoff said. "It's more and more a shortage in terms of the very highly technical, very talented people in complex fields, such as actuaries and underwriters in the more esoteric fields, not the vanilla lines."

Goldfarb disagreed.

"It's not a shortage of talent. But the most talented people, the most valuable people, are always in demand," Goldfarb said, "and it always raises the question of 'whose customer is it?'"

Legally speaking, the customer belongs to the company, not the employee, Goldfarb said.

"The company is paying the person to have that relationship. They are paying all of the business expenses, and are paying for that person to do a job for the company. But the reality is those sorts of relationships become very personal, and there's a gray area where employees start to view themselves as bigger than the company that hired them," Goldfarb said.

In one of the largest jury awards for this type of case, Chicago Title was awarded a $43.2 million verdict, including $32.4 million in punitive damages, against rival First American Title Insurance Co. in 2005. First American had hired a Chicago Title executive who then allegedly breached his non-compete agreement by aggressively recruiting several other Chicago Title staffers.

An appellate court has since upheld the liability determinations of the trial court, but reversed the punitive damage award and remanded the case for a retrial on compensatory damages.

In a similar case, Security Title, a subsidiary of Chicago Title, won a $41.5 million award, including $35 million in punitive damages, in June 2006 after Security Title lost 40 employees in its largest Arizona office to First American Title. The jury found that First American brought about the mass recruitment by knowingly assisting the branch manager in breaching her fiduciary duties to Security Title. The case is under appeal.

Goldfarb, who represented Security Title and Chicago Title in both cases, couldn't speak directly on them, but said in general, "this is a problem common to many businesses. I get involved on both sides of the issue, trying to enforce protective covenants or trying to protect companies hiring people."

He then said, "The more competitive the world becomes, the more you see people willing to take risks and the less you see people thinking that contractual agreements or loyalty or duty to employer means anything.

"I think loyalty is gone, but there is still the law."

Key Poaching Lawsuits

Whether seeking restitution or temporary restraining orders, lawsuits brought by insurance companies and brokers against rivals for allegedly poaching employees are plentiful:

* General Reinsurance won an injunction against Arch Worldwide Reinsurance Group after 30 members of Gen Re's facultative reinsurance staff joined Arch. The former Gen Re execs who left included Steven Franklin, Jennifer Apgar, Philip Augur and Kenneth Vivian. The injunction prohibited Arch from divulging or disclosing any confidential or proprietary information concerning Gen Re that the executives may have brought with them to Arch.

* Guy Carpenter & Co., a subsidiary of Marsh & McLennan Cos., reached an undisclosed civil settlement in 2007 against three former facultative reinsurance business employees who had left to work at rival broker Integro Ltd. The lawsuit named former Guy Carpenter employees Julian Samengo-Turner, Ron Whyte and Marcus Hopkins for allegedly violating terms of the company's incentive plan. Carpenter sought repayment of about $370,000 in vested awards. It also charged the three men with aiding Integro in soliciting at least eight other Carpenter employees to join Integro.

* In January, a federal judge in California denied Arthur J. Gallagher & Co.'s request for a temporary restraining order against Edgewood Partners Insurance Center, a California brokerage formed by former Gallagher employees John G. Hahn, Dan R. Francis and 20 others. EPIC was launched in July 2007.

* In February, the London Times reported Marsh paid a "substantial sum" to settle a bitter legal battle with rival Willis, which was based on allegations that some senior executives at Marsh's London aviation division were plotting to poach staff and business from Willis. Willis alleged that Michael Moran, a former Willis aviation head, tried to recruit staff for Marsh while employed by Willis. The case also alleged that Moran, who quit Willis at the start of 2007, passed thousands of confidential files to two Marsh executives, Nicholas Vine and Mark Church, both managing directors at Marsh's aerospace division. Marsh later withdrew its job offer to Moran. Willis confirmed the case had been settled, but it refused to comment on financial details.

* Marsh is also facing a lawsuit in London filed by rival United Insurance Brokers over allegations it poached staff and was given confidential business information. UIB is suing for 2.5 million [pounds sterling] (about $5 million) covering allegations of damages, loss of business and legal costs. UIB alleges that Nicholas Vine, the head of UIB's aviation division until October 2004, breached his contract by attempting to broker "some form of team move" from UIB to Marsh, the London Times reported. UIB also alleges that confidential information about its airline insurance broking business was passed to Marsh by Vine--thought to include bid details for a contract with Pakistan International Airlines, which helped Marsh to lodge an identical bid for the PIA business. As a result, the suit implies, the two companies were appointed joint brokers for the PIA business. The dispute began after UIB chief executive Bassem Kabban wrote to then-Marsh UK chief executive Bruce Carnegie-Brown, complaining that Vine was trying to recruit UIB staff to join him in defecting to Marsh. Days later, UIB sacked Vine for moss misconduct: he joined Marsh the following month.

* American International Group's A.I. Risk Specialists Insurance Inc., a managing general underwriter for AIG's Lexington Insurance Co., filed a lawsuit in 2007 in U.S. District Court in Cleveland against Catlin Inc. for allegedly poaching seven staffers.

* In February 2006, Aon Corp. filed a lawsuit in Atlanta against Integro and two former Aon executives. The suit accuses Integro of engaging in a campaign to "pirate" employees.