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Equity Insurance Managers of Illinois, LLC v. McNichols

August 02, 2001


The opinion of the court was delivered by: Presiding Justice Hartman


Appeal from the Circuit Court of Cook County. Honorable Thomas Durkin, Judge Presiding

Plaintiff, Equity Insurance Managers of Illinois (Equity), obtained a $91,000 arbitration award against defendant, Mary Kay McNichols, following defendant's breach of an employment contract. The circuit court confirmed the award and defendant appeals, alleging (1) the court erred in not vacating the award because the employment contract violated public policy and (2) the amount of the award was miscalculated.

In March 1985, McNichols began her employment at Irland & Rogers, Inc. (Irland), an insurance wholesaler. In 1996, Charley Rogers, the president and principal shareholder of Irland, sold Irland's book of business and name to Equity. During the sale negotiations, Rogers requested that several Irland employees, including McNichols, be provided with employment contracts to protect their employment after the sale.

About December 10, 1996, James Skelton, Sr. (Skelton, Sr.), the managing director of Equity, presented McNichols with an employment contract. McNichols returned the employment contract to Skelton, Sr., unsigned, because she objected to a non-compete clause in the contract and the amount of salary. Shortly thereafter, a second employment contract was tendered. McNichols again refused to sign the contract because it still contained a non-compete clause. On December 30, 1996, Skelton, Sr. provided McNichols with a final draft of the contract. McNichols testified that Skelton, Sr. told her she needed to sign the contract in order to complete the sale the following day. McNichols reviewed the contract, identified a typographical error in the salary, and questioned a non-compete clause. Skelton, Sr. informed her the non-compete clause did not allow her to compete with Equity while employed by Equity.

The corrected contract included a salary of $68,500, a bonus based on 2% of Equity's profit, a clause stating McNichols agreed to remain an employee of Equity from January 1, 1997 through December 31, 1999, and a clause stating any dispute with respect to the construction or interpretation of the contract which could not be settled by the parties would be decided by a single arbitrator. Equity retained the right to terminate McNichols' employment "for cause." The contract did not include any language allowing McNichols to leave Equity before December 31, 1999. McNichols testified that during the final negotiations, she indicated to Skelton, Sr. that she understood she could leave for any reason or be fired for any reason and Skelton, Sr. responded, "that's right." Skelton, Sr. testified he did not recall responding to McNichols' comment during their discussion in light of the language of the contract. McNichols signed the contract on either December 30 or December 31, 1996. McNichols admits she read the contract but did not spend a great deal of time addressing it and did not consult an attorney because December is a very busy time of the year.

Following the acquisition, Equity began marketing itself both as an insurance wholesale broker and as a managing general agent. Skelton, Sr. and James Skelton, Jr. (Skelton, Jr.), the assistant managing director, did not have substantial wholesale broker or underwriting experience. McNichols spent a good deal of time providing training to both Skeltons. During the first year, Equity financed marketing efforts to increase business, but did not make a profit in 1997 due to ineffective marketing efforts and the accrual of extraordinary expenses including the installation of a new computer system and a copy machine.

McNichols became disenchanted with Equity for several reasons, including: the work day hours changed from 8:30 a.m. - 4:30 p.m. to 8:30 a.m. - 5:00 p.m.; she was required to attend a weekly morning meeting that necessitated leaving her home early in the morning; she took work home with her; she worked several Sundays; she endured a long commute from her home; she did not receive additional staff to assist her as promised; she believed Equity was illegally charging customers an assembly fee; she perceived individuals at Equity Kentucky, a major shareholder of Equity, as sexist; she could not communicate with Equity Kentucky employees directly; she believed she did not receive some of the perks enjoyed by the Skeltons, such as trips to conventions with spouses; and she believed Equity had financial problems.

In January 1998, William Yurek of AVRECO, Inc. (AVRECO), a direct competitor of Equity, contacted McNichols about possible employment with AVRECO. McNichols and Yurek met for lunch and discussed the possibility of her employment with AVRECO. A few days later, McNichols met with Yurek at AVRECO's offices, presented her salary requirements, toured the offices, and reviewed AVRECO's client list. Later that day, Yurek telephoned McNichols and offered her a position, including a salary of $85,000 per year, profit sharing, and additional vacation time and holidays.

The next morning, McNichols informed Skelton, Sr. about AVRECO's offer. McNichols was hurt that he did not make a counter offer or attempt to convince her to stay. McNichols continued working for Equity for two weeks, during which time she continued to perform her normal work, prepared her work for the transition to other employees at Equity, and cleaned out her office. On her last day, Skelton, Sr. asked McNichols to sign a termination agreement. McNichols refused, testifying she believed that the terms of the agreement differed from her understanding that she could leave Equity at any time and there would not be a non-compete clause. McNichols testified she resigned from Equity because "a better offer had come along, and it seemed *** ideal. I was overworked [and] considerably underpaid." She agreed she resigned for a better opportunity.

In May 1998, Equity hired David Russow at a salary of $55,000 per year with no benefits to replace McNichols. Russow had about 20 years of insurance experience, but limited underwriting and brokerage experience. Russow needed a substantial amount of time to understand Equity's business and meet its clients. He generated substantially less business than did McNichols. Equity's business declined and Skelton, Sr., Skelton, Jr., and another Equity employee spent about 10% of their time attempting to renew business previously serviced by McNichols.

In May 1998, Equity initiated arbitration proceedings against McNichols, alleging she breached her employment contract by leaving before December 31, 1999, and breached the non-compete clause. An arbitrator heard extensive testimony concerning Equity's claims and, in December 1998, found McNichols did not breach the non-compete clause of the contract because the clause was only in effect while she was employed by Equity; but did breach the contract by "accepting a better opportunity with AVRECO" before the contract's expiration; and found no record evidence of intolerable working conditions that would rise to the level of a constructive discharge. The arbitrator assessed Equity's damages at $91,000 based on the cost of replacing McNichols, foreseeable consequential damages, and Equity's duty to mitigate damages. The arbitrator found that Equity saved approximately $17,000 in salary payments because McNichols was not replaced for three months and approximately $29,000 in salary and benefits from the date Russow was hired because of the difference in McNichols' and Russow's salary, for a total savings of $46,000 in personnel costs. The arbitrator offset the amount saved by $28,000 to account for the 10% of time the Skeltons and another employee had to spend administering and reviewing McNichols' accounts, assuming the disruption was over by the end of 1998. Therefore, Equity saved approximately $18,000 in personnel costs through December 31, 1999.

The arbitrator also found that a loss in new business and renewal commissions was foreseeable based on both parties testifying that personal relationships are very important in the wholesale broker business. The arbitrator found McNichols' stream of new and renewal business commissions could be projected with a reasonable degree of certainty based upon her prior production. Based on McNichols' past production, the arbitrator determined she would have generated approximately $150,000 in commissions for the remainder of 1998 and $170,000 in 1999. The arbitrator then adjusted the amounts because of Equity's duty to find a suitable replacement for McNichols and to otherwise exercise reasonable diligence to minimize its losses. Based on the testimony and exhibits, the arbitrator found Equity's actual loss of commission in 1998 was $75,000 (50% of McNichols' calculated commissions) and $34,000 for 1999 (20% of McNichols' calculated commissions), for a total of $109,000. Subtracting the $18,000 saved in personnel costs, the arbitrator awarded Equity $91,000 plus costs.

In February 1999, Equity moved to confirm the arbitrator's award. The next day, McNichols filed a petition to vacate the award and a multi-count complaint at law against Equity. The circuit court consolidated the two actions. In April 1999, the court granted Equity's petition to confirm the award, denied McNichols' petition to modify or vacate the award, and transferred her complaint to the Law Division. In May 1999, McNichols unsuccessfully moved for ...

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