A recent court case, Thomson v. S.I.A. Insurance Brokerage Ltd., is a cautionary tale of well-intentioned succession planning gone wrong in a family-owned insurance brokerage.

If an adult child cannot or does not want to buy a parent out, ensuring that the firm’s buyer gives the child a job may not be the best succession plan. That’s what happened in this instance, and it resulted in costly and pointless litigation.

This July 2005 Ontario Court of Justice case arose out of a common insurance business
scenario. The father was getting out of the business. However, the court decision implies, the son did not have the financial means nor the desire to buy Dad out. Dad was left looking for a buyer and a way to take care of his offspring. He asked the purchaser of the firm to make a place for his son.

Unfortunately, the connection between the new owner and the son broke down. The son was fired, and he sued for wrongful dismissal. The firm counterclaimed for alleged losses based on the son taking brokerage clients with him to another firm. In the end, because of lack of evidence, both claims were denied.

“This is an example of what can go wrong,” says Lawrence Geller, president of L.I. Geller Insurance Agencies Ltd. , in Campbellville, Ont. “It’s tough to sell your book and say: ‘Now, pay my son to service it’.”

However, it is natural for a parent to want to keep the business in the family, says Jim Bullock, registrar of Toronto-based Peel Institute of Applied Finance. But, he adds, that may be easier said than done, especially if the parent is not on the verge of retiring.

Bullock suggests two options that could produce better results than the Thomson scenario. In the first, the parent encourages the child to start his or her own business.
Then, 10 years later, when the child’s business is thriving and the parent is approaching retirement, the parent can invite the child to bring his or her book into the parent’s firm.

Alternatively, the child is sent to work at a friend’s brokerage. Children will often have a better attitude toward a non-parental employer. “It makes for less tension around the dinner table,” Bullock says.

Either way, he says, when children come back to the family firm, they are better educated and more well-rounded: “They may know what they’re talking about when they disagree with you.”

Events leading up to the Thomson case date back to 1990, when Glenn Thomson joined his father’s firm as a salesman. He was paid a salary until the fall of 1997, when his father, Roy, changed Glenn’s compensation to commission-based payments on accounts Glenn had solicited himself.

Meanwhile, Richard Farmer joined the firm with the understanding that he would purchase half the business. Farmer’s discussions with Roy continued. Because Glenn had decided not to buy the business or a share of it, his father turned control of it over to Farmer. A formal sale agreement was signed in March 1998.

In the discussions leading up to the sale, Roy insisted Farmer offer a formal employment contract to his son. Roy approved a draft contract Farmer prepared but Glenn countered with an amended contract, which Farmer disliked.

Relations between Glenn and Farmer became increasingly tense until, in August 1998, Farmer terminated the younger Thomson. Glenn immediately found work with another brokerage and began moving clients to his new employer.

Glenn’s claim was mitigated by his ability to find a new job the day after his termination.
The court also reviewed several arguments put forward by Farmer that Thomson had been fired for “just cause.” The court found two arguments to be convincing: first, Thomson had, without authority, reassigned accounts formerly held by his father to himself; and, second, he sent a letter to a client stating he would not inform an insurer of a change in risk because it would result in higher premiums.

As a result of this behaviour, the court refused to analyse damages that may have resulted from wrongful dismissal. Thomson’s wrongful conduct, such as switching the accounts and taking some of them with him, Judge D.S. Ferguson says in his decision: “makes it impossible to calculate which of [Thomson’s] earnings were improper earnings. The unwarranted lack of evidence makes a reasonable calculation of loss impossible.”

@page_break@The court came up against the same obstacle when attempting to address the claims made by Farmer and S.I.A.

Bullock, who has been involved in several court cases involving the sale of insurance books, says the courts need solid evidence to weigh a claim. “Hot air doesn’t weigh much on the scales of justice,” he says. “My experience is that judges are sympathetic to people with a ‘triable issue.’ I don’t understand why this went to trial.”

Geller agrees: “A judge will have difficulty valuing the loss to a company if it has lousy records.” This is an example of how advisors and their businesses suffer when they don’t keep proper records, he adds. IE