As the world of broking gets ever more cut throat, employers will stop at nothing to stop former staffers walking out the door with company secrets. An Insurance Times investigation has uncovered the widespread use of private detectives, and legal fees spiralling into tens of millions. Danny Walkinshaw reports
You’ve just started a new job. At five o’clock every morning, as you begin your long commute, you notice a familiar figure loitering outside your house. The figure follows you, day after day. Soon, you’ve had enough. “Why are you following me?” you demand to know.
The answer? He’s a private detective hired by your former employer to discover if you are passing company secrets on to your new firm. If you are, and you signed a contract promising not to do so, you could end up in court.
And while this may seem an extreme example, it actually happened to an employee of Broker Network. Chief executive Grant Ellis says: “I rang the previous employer and said if you want to know where he is, I will send you his diary.” Ellis believes such dirty tricks are now common in the cut-throat world of broking.
Every week, headlines scream of court cases between brokers and their former employees, who stand accused of poaching business for their new firms. Just this week, the UK’s two biggest brokers, Willis and Marsh, reached an out-of-court settlement over poaching claims.
An Insurance Times investigation has discovered that the use of private detectives costing upwards of £1,000 per day is rife in such cases and that even more threatening tactics are now being whispered about. The cost is escalating, with one legal expert suggesting the industry is spending a cool £10m a year on legal fees alone. Has the industry succumbed to an expensive fit of paranoia, and how far would your boss go to stop you walking out the door with sensitive information?
Restrictive covenants, which limit a former employee’s business activities for a stated time after his departure, have been written into broker contracts for years, but their presence has expanded recently thanks to the fierce competition in the broking sector.
One expert in employment law said that a number of firms are currently toughening up the phrasing of restrictive covenants to ensure they are watertight. “There is a growing trend for insurance companies to seek advice on the ability to seek covenants and to make a statement to the individual that action will be taken if they breach their covenants,” says Chris Syder, head of employment at law firm Davies Arnold Cooper.
Following a flush of high profile cases, brokers and lawyers are realising that the courts are willing to uphold covenants. In the past, judges were more lenient and often it was harder for a firm to tackle a breach.
Bob Parkins, managing director of the Purple Partnership, remembers when covenants were not worth the paper they were written on. “The law would not stop someone earning a living,” he says. “If someone left and they were approached by clients it would not stand up in a court of law.”
Until now. As consolidation increases and brokers pay high prices to make acquisitions, the stakes are higher than ever. If one broker buys another, only to have the staff leave and take the clients with them, they end up with nothing but a hefty bill. Parkins points to consolidator extraordinaire Towergate as a key instigator in the perception of restrictive covenants. “Towergate has changed everything. It has bought so many brokers and has changed the face of restrictive covenants,” he says.
Towergate chairman Peter Cullum fought tooth and nail for a number of months after accusing Bob Beckett and 15 former Towergate employees of breaching restrictive covenants and poaching clients from the broker, after Beckett quit Country Mutual Insurance Brokers following its acquisition by Towergate. ‘
‘ When the case was eventually settled, the legal costs were estimated at £1m. After the case, Cullum said: “We pay top dollar for businesses we acquire, so we do not expect vendors to look to reclaim the business they have sold. This would be like buying a house then finding the previous owners trying to move back in.”
Cullum has now entered a high court battle with Chaucer Insurance and 10 former employees – the first time an insurer has been accused of poaching in such a high profile case.
So what goes on before the case lands in court? Gathering evidence that the covenant is actually being broken is the first step. Enter the private detective.
Keith Stowell, senior investigation consultant at BTG Intelligence, said the insurance sector is one of a number of financial institutions that commonly uses private investigators. At least two are commonly used, each costing up to £1,000 per day.
Stowell was recently called in when a broker acquired a smaller firm. “The broker suspected that the boss of the business it had just bought was not doing his job properly and wanted to know whether he was just sitting back and being lazy, or selling his business elsewhere,” he says.
“He was working from home in a remote part of the UK and we were asked to have a look at what he was up to.”
It is common for suspicious minds to start working as soon as a broker hands in his notice. Stories of staff preparing to start a new business or sending confidential details to their personal emails on company time while they work out their notice are all too common.
One lawyer says: “I have had entrapment cases before where employers have hired private investigators to follow their staff while they are still working for them, and when they have joined a new firm. I’ve also seen telephone tapping, data mining of computers and even seizure orders issued from the court to search homes. Some employers will use almost any device.”
It is not just your old employer which will be thinking about restrictive covenants. When taking on new staff, some firms will stop at nothing to ensure they sign up to restrictive covenants. The lawyer claimed to have even come across blackmail tactics by employers desperate to make new staffers sign up.
Less drastically, firms frequently offer sweeteners and incentives to get new staff to sign. Broker Network’s Ellis says: “When you buy a business the first thing you look at is the contract of employment that is in place and any restraint clauses.
“With any acquisition you have to make sure contracts are tight and they tie the people in and give incentives to stay. We do that like most acquirers do. We have a 12-month restraint clause in our contracts.”
Steve Burrows, chief executive of the Cobra Network, adds: “When we make an acquisition we put them on a Cobra contract which has a restrictive covenant built in it. If they don’t sign it we wonder why.”
So what compels employers to watch over their employees and former employees so fiercely?
Stories of staff taking their business with them are commonplace. One market source told of how brokers that move to new companies would ask the person sitting next to them to ring his old clients, and drop into the conversation that he had joined that company. Another recalled a broker who had moved between companies in a town putting an advert in the local paper to that effect, in the hope their clients would follow.
“Restrictive covenants are key and the enforcement of them is paramount when you consider the multiples being paid for brokerages and the financial effects of losing cases and teams,” says Stuart Randall, director of Brokerbility.
As such, employers will pay a high price to protect their business. Davis Arnold Cooper’s Syder said businesses are prepared to go on an all-out offensive if they know they have a case, and the larger brokers can often use their financial strength in their favour.
“It is a well known litigation fact that a particularly well-funded employer may take the view that if an individual had left to start-up his own broker firm and he knows that the covenants are likely to be held up in court the cost would be so huge that it could actually prevent him from trading,” he said.
He added that High Court proceedings are expensive, and brokers spend a significant amount on legal fees. “It’s a huge amount of money,” he says.
Despite the stresses and costs involved, the legal battles show no sign of abating. “Restrictive covenants cases are currently occurring on a one a week basis, maybe even a bit more than that,” says David Coupe, a partner at Clyde & Co International law firm.
“People are willing to take the risks,” agrees Cobra’s Steve Burrows. “Most brokers know if they are worth their weight, they will go to court.”
Something to bear in mind next time you see a shadowy figure hanging around outside your house. IT
What’s in a covenant?
Restrictive covenants must be carefully drafted to ensure that employers have reasonable protection in all circumstances.
The standard covenant will usually place restrictions on an employee for 12 months. They are only enforceable if they are no wider than is necessary to protect the ex-employerâ€™s legitimate business interests. Restrictive covenants that are aimed simply at restricting competition will be struck down as an unreasonable restraint of trade.
Insurance companies generally refer to four areas in their covenants. These include preventing an employee from:
Competing with the employer within a defined area â€“ either geographic or in reference to the employerâ€™s markets
Contracting with the employerâ€™s
suppliers and customers
Poaching the employerâ€™s suppliers or customers
Poaching other members of the employerâ€™s staff.