Restrictive Covenant Ruling

In one of the first appellate court cases to deal with Georgia’s new restrictive covenant law, the U.S. Eleventh Circuit Court of Appeals (whose jurisdiction includes Georgia) has held that law did not take effect until May 11, 2011.  As you may remember, that law was originally intended to take effect the day after the constitutional amendment allowing for its enactment was approved by Georgia voters in November 2010.  The Georgia legislature had originally enacted the law in 2009, but delayed its effective date until the day after the constitutional amendment was approved by the voters.  However, due to an oversight by the drafters of the legislation for the constitutional amendment, there was no effective date specified in the legislation for it, which meant that the amendment did not become effective until January 1, 2011.

Realizing their mistake, the Georgia legislature passed an almost identical statute in its 2011 session, which statute became effective on the date it was signed by the governor, which was May 11, 2011.  This left open the question of whether restrictive covenant agreements that were executed between January 1 and May 10, 2011 were to be governed by the new law or the previously existing law.

The Eleventh Circuit Court of Appeals has now answered that question and held that the previously existing law would apply to such agreements.  However, the opinion was unpublished, so it does not have any binding effect on the U.S. District Courts in Georgia and even if it had been published, the state courts of Georgia would not be bound by it.  Even so, any agency owners who had their employees sign new restrictive covenant agreements between January 1 and May 10, 2011 thinking they would be governed by the new law should give serious consideration to having new agreements signed, as you probably don’t want your agreement to be the test case for the Georgia Supreme Court on this issue.

New Benefit for IIAG Members

Coming soon will be a Frequently Asked Questions booklet that provides answers to those questions most often asked by insurance agency owners and agents.  Created by the author of this blog after consultation with many members of the IIAG’s Board of Directors and other veteran industry participants, the booklet will provide a resource for agency owners and agents, alike, to use in answering those questions that most often occur in the creation and operation of an insurance agency and in the performance of the duties of an insurance agent.  A formal announcement of this new member benefit will be made in the near future and the booklet will be available for distribution to the members shortly afterwards.

Stay tuned for further announcements about the status of this new member benefit.

Protecting Personal Information

A recent article by the Executive Director of ACT, Jeff Yates, addressed the need for agencies to consider how to better protect the non-public personal information they obtain about their customers during the course of providing services to them.  In the article, Mr. Yates discusses the use of encryption technology for e-mail correspondence, policies and procedures that should be followed by agencies to minimize the possiblity that such information will be improperly disclosed, and the use of secure connections for any personal information that customers may be asked to provide on an agency’s website.  This aritcle, along with many other articles of interest to agency owners looking for the best ways to protect the security of their agency’s confidential information, can be found on the Security and Privacy page of the ACT website.   Click here for access to that web page.

The importance of protecting the non-public personal information that agencies obtain about their customers from not only inappropriate disclosure to the public, but inappropriate use by its employees, was underscored by a recent decision of the Georgia Court of Appeals.  In that decision, the court held that a person had a cause of action against a bank under the Gramm-Leach-Bliley Act for the inappropriate use of a customer’s personal information by an employee of the bank.  Even though that Act did not explicitly give a person the right to bring a private action for a violation of its provisions, the Court of Appeals held that  Georgia law permits any person to bring a cause of action based on the violation of a statutory duty that results in injury to such person.  As I am sure, all insurance agents who have been in the business since the late 1990’s are aware, the Gramm-Leach-Bliley Act applies to insurance agencies, as well as banks and other businesses.  There is also HIPPA for personal health information and a myriad of state laws that provide protection against the improper disclosure of various types of personal information that can provide the basis for lawsuits against agencies that do not follow their requirements.  In assessing the need to comply with state laws, please keep in mind that it is the law of the state in which the customer is located that governs the use of personal information about such customer, not the state in which the agency is located.

Claim limitations for Multi-line Policies

The Georgia Supreme Court recently held that multi-line policies could specify different time periods within which claims can be made under them.  In doing so, the Court limited the application of the Insurance Commissioner’s regulation requiring all property and casualty insurance policies to contain limitations on the filing of a lawsuit that are at least as favorable as those found in the “Standard Fire Policy” promulgated by the Commissioner to only claims of the type found in that policy.  Thus, claims for theft or other losses that are not referred to in that policy can have claim limitations that are less than the 2 year limitation found in that policy.

To avoid potential E&O claims, all agents should start advising their customers of the fact that there can be different time limitations for the bringing of claims under their multi-line policies and encouraging those customers to read their policies carefully to determine what those limitations are.  Please note that if the agent assumes the duty of advising their customers what those limitations they, he or she can potentially be held liable for any incorrect information provided.

Georgia’s Texting Ban

Having just returned from my summer vacation, I noticed that many drivers were using their mobile phones and some even appeared to be reading or writing text messages while driving.  For adult drivers in Georgia, since 2010, it is has been illegal to “operate a motor vehicle on any public road or highway of this state while using a wireless telecommunications device to write, send, or read any text based communication, including but not limited to a text message, instant message, e-mail, or Internet data.”  This ban on the use of mobile phones or any other electronic device for text based communication while driving is important for those employers whose employees are expected to remain in communication with the office while out of the office.

In order to avoid being held liable for an accident in which their employee was involved and was using their mobile phone at the time of the accident, an employer must have a clearly communicated and consistently enforced policy governing the use of mobile phones by their employees for business purposes.  At a minimum, such a policy should prohibit all text based communication while driving, as it is clear that such conduct if engaged in by an employee who is involved in an accident will result in the employer being held liable for any injury or damage caused by its employee and potentially for punitive damages due to such conduct being illegal.  For reasons that are explained in more detail here, employers should also consider prohibiting all use of mobile phones for business purposes while driving.


Subchapter S compensation – trap for the unwary

As we hit the half way mark for 2012, many insurance agents are probably trying to determine what the rest of the year will bring in terms of compensation and how to minimize the taxes paid on that compensation.  For those who are owners of Subchapter S corporations, there is one relatively easy way to reduce the amount of taxes paid on a portion of their compensation.  While FICA (social security and medicare) taxes are owed on all salary paid to such an owner, no such taxes are paid on distributions of profit taken by the owner. 

Thus, an owner of a Subchapter S corporation can save the 15.3% FICA tax on each dollar that he or she takes as a distribution of profit.  That is a significant savings, which has lead some Subchapter S owners to pay themselves a very modest salary and take most of their compensation as profit distributions.  Unfortunately, such owners have ended up in trouble with the IRS, because the law requires them to pay themselves “reasonable compensation” in the form of salary.  What is “reasonable compensation” will depend on what other persons in the local area performing services similar to those performed by the owner are being paid.  

In one recent example, an accountant paid himself $24,000 in salary and over $200,000 in profit distribution in one year.  Such a large disparity is a red flag for the IRS and the accountant ended up owing a significant amount of back taxes, plus penalties and interest, to the IRS.  So those of you who are owners of a Subchapter S corporation need to be wary about the amount of profit distributions that you pay yourselves throughout the year, or you may experience an unwelcome visit from the IRS.