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Federal court rules brokerage firm breached 1994 contract

By: Laura Brown//November 28, 2023//

Two businessmen shaking hands

Federal court rules brokerage firm breached 1994 contract

By: Laura Brown//November 28, 2023//

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Two insurance brokerage firms entered a business arrangement where they would split revenue generated when they solicited and serviced business clients together. Although one of the firms decided it longer wanted to be a part of the deal, the U.S. District Court recently found that it breached the contract.

Norrick Inc. and Hays Companies Inc. (HCI) are insurance brokerage firms that would occasionally work together to get new business and would then divide the revenue. The brokerage owners all signed a document — referred to as the “1994 Memorandum” — that delineated the business arrangement between the two companies. Part of the memorandum specified that the businesses would share revenue on “NEW BUSINESS WRITTEN.” If one company sold a shared account and the other marketed the account, the former would get 60% of the revenue and the latter 40%.

The relationship went on for nearly three decades. In all, there were over 100 shared clients between the companies. Then, in 2003, a Norrick employee solicited business from a company called Summit. After getting the Summit account, HCI handled the marketing and serviced the account. HCI shared the Summit revenue with Norrick, following a 60-40 split. Then, about seven years into having the Summit account, the parties agreed to a 50-50 split to account for increased costs HCI was incurring.

Norrick received 50% of the revenue from 2010 until HCI stopped sending Norrick its expected share of the revenue in September 2021. A few years prior, Summit was acquired by a private equity firm. Still, HCI was retained for its insurance and surety program. The following year, HCI was bought by a diversified insurance agency. Still, payments to Norrick continued for about three more years. Then, Summit was sold to yet another private equity firm, and this coincided with when the revenue-sharing payments stopped.

Norrick filed a lawsuit in June 2022, claiming breach of contract and promissory estoppel. The court found that a reasonable juror could only determine that there was a contract formed in 1994. Despite HCI’s argument that it was not required to pay anything to Norrick under the agreement, internal communications — which expressed frustration at paying 50% on something that Norrick acquired nearly two decades ago and did not actively work on — suggested that they understood HCI was bound by the agreement.

The court presented HCI with an alternative to terminating the contract: cut off Summit. “HCI retains the discretion to cease making 50% payments to Norrick per the parties’ agreement because it can choose to stop performing work for Summit,” the court reasoned. “However, having agreed to share revenues on a shared account with the account’s seller, HCI cannot unilaterally decide that it should now receive all the benefits of the relationship with Summit without having to fulfill its obligations to share revenues with Norrick.”

The court ordered summary judgment to Norrick on its breach-of-contract and declaratory-judgment claims. However, the court declined to order specific performance of the 1994 memorandum. It found that Norrick was entitled to backward-looking damages if defendant continued to earn revenues from when it stopped paying Norrick commissions. Nevertheless, it proposed that the parties discuss their own proposals to resolve the remedies without need for more court intervention.

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