In Schwartz Levitsky Feldman LLP v. Werbin, 2015, an action was put forward by Schwartz Levitsky Feldman (SLF) claiming loss of profits due to the departure of Mr. Werbin. The firm contended that they purchased Werbin’s clients when they purchased his sole proprietorship. SLF contended that Werbin did not properly introduce his clients to SLF partners and, when Werbin departed SLF, his clients left with him as a result.
Although there were issues and ambiguity in the wording of the contract between SLF and Werbin, the Superior Court took exception to the profits calculation put forward by SLF’s accounting expert because there were several key issues that were not considered relating to the purchased clients that were lost.
Whether the loss of purchased clients is due to a product recall, contract dispute or business disruption, etc., the following factors must be considered when reviewing the loss of customers:
Nature of customers – Are they long term or short-term? Is there repeat business or is it one-time business? Are there contracts in place? In the Werbin case, there were clients that had been with Werbin for 40 years and had built a longterm relationship with him. Although he had introduced a number of these clients to SLF, the long-term relationship resulted in the clients leaving with Werbin.
Turnover – How many customers are retained year-over-year? What is the historical attrition rate? Are the customers happy with the service or product provided? In this case there were clients that were unhappy with SLF’s billing and service, which is the reason the clients left rather than as a result of Werbin’s departure.
Timing – When did the customer leave? Was it before the incident? In this matter there were clients that had left prior to Werbin’s departure from SLF; therefore, these customers did not leave as a result of Werbin’s departure.
Operations – Is the customer (that left) still in business? In the Werbin case, there were clients that had gone bankrupt or closed their business. Therefore, there was no loss of profit relating to these clients.
Industry – Are there economic factors that could affect the industry such as new laws, new competitors, better/faster products, downturn of economy, etc.?
It’s easy to point to an incident and assume it to be the reason a customer has left. However, one needs to understand the reason why the customer terminated the relationship and determine if it was as a direct result of the incident.
Published in November 2015 issue of Insurance People.