Duties and Liabilities of Insurance Brokers
Insurance Brokers are Different than Insurance Agents
Duties and Liabilities of Insurance Brokers
Cases in which insurance brokers’ liability is in question depend in part on whether brokers are seen to be serving a fiduciary role or simply acting as a conduit between the insured and the insurer.
A person or an entity is a fiduciary with respect to a plan to the extent:
he exercises any discretionary authority or discretionary control respecting management of such plan or
exercises any authority or control respecting management or disposition of its assets, or
he has any discretionary authority or discretionary responsibility in the administration of such plan.[1]
Since 2004, two California appellate courts have taken the still-developing position on the law regarding insurance broker liability in different directions. In Hydro-Mill Company Inc. v. Hayward, Tilton and Rolapp Insurance Associates Inc.,[2] the court reduced insurance brokers’ exposure to their clients whereas Century Surety Co. v. Crosby Insurance Inc.,[3] increased insurance brokers’ duties to the insurers with whom they do business on behalf of their clients.
In California an independent insurance broker is not an agent of the insurer, but rather of the insured.[4] In Hydro-Mill, the California Second District Court of Appeal cast doubt on whether an insurance broker serves in a fiduciary capacity.
By so doing it limited the ability of an aggrieved client to obtain punitive damages as a result of the broker’s error. In reaching its conclusion the court noted that:
A fiduciary relationship has been defined as ‘any relation existing between parties to a transaction wherein one of the parties is . . . duty bound to act with the utmost good faith for the benefit of the other party.’
Such a relation ordinarily arises where a confidence is reposed by one person in the integrity of another, and in such a relation the party in whom the confidence is reposed, if he voluntarily accepts or assumes to accept the confidence, can take no advantage from his acts relating to the interest of the other party without the latter’s knowledge or consent.” (In re Marriage of Varner (1997) 55 Cal. App.4th 128, 141.)
FIDUCIARY DUTIES
Despite the seeming trend of cases in California to analogize the insurer — insured relationship to a fiduciary relationship, the cases which have directly addressed this point have held that this relationship does not produce a fiduciary duty. [Hassard, Bonnington, Roger & Huber v. Home Ins., 740 F. Supp. 789 (S.D. Cal. 1990)]
In Henry v. Associated Indemnity, 217 Cal.App.3d 1405, 266 Cal. Rptr. 578 (1990), the court held that there was no fiduciary duty between an insurer and an insured. The plaintiffs urge that Henry should not be controlling because it ignored apposite California Supreme Court authority. This is not the case. The Henry court stated "We ... find no support in case law, other than dicta in a few Supreme Court cases, which would support such a theory as to the insurers."
In Colorado, the relationship between an insurer and an insured is initially and fundamentally based on the insurance contract. [Allstate v. Starke, 797 P.2d 14 (Colo.1990)]
DUTY OF GOOD FAITH
Because the insurer/insured relationship is contractually based, both parties have a duty to protect their own interests, although each party also owes the other a duty of good faith and fair dealing. Neither, however, owes the other a fiduciary duty. [Bailey v. Allstate Ins. Co., 844 P.2d 1336 (Colo. App. 1992)]
An insurer's duty to act in good faith describes something less than a fiduciary duty by stating that the insurer must give at least equal consideration to the interests of the insured. In a fiduciary relationship, the fiduciary has a duty to act primarily for the benefit of the other; the fiduciary may not give “equal consideration” to its interests and the interests of those to whom a fiduciary duty is owed. Thus, an insurer/insured relationship is not a fiduciary relationship. [Cent. Flying Serv., Inc. v. StarNet Ins. Co., 150 F.Supp.3d 1038 (E.D. Ark. 2015)]
The Supreme Court of California has held that an insurer is not a fiduciary, stating: “The insurer-insured relationship . . . is not a true ‘fiduciary relationship’ in the same sense as the relationship between trustee and beneficiary, or attorney and client.” Although the law recognizes a special relationship between insured and insurer, and imposes duties akin to those owed by fiduciaries, the fiduciary-like duties arise because of the unique nature of the insurance contract, not because the insurer is a fiduciary.[5] If an insurer is not a fiduciary, a reasonable argument can be made that neither a broker nor an insurance agent is not a fiduciary.
Before Hydro-Mill it had been assumed that an insurance broker’s relationship with his or her client was fiduciary in nature. This was because, if nothing else, a broker serves as the client’s agent, and under the normal law of agency, an agent owes principal fiduciary duties.
Even if an insurance broker has certain fiduciary like duties, it cannot be sued for breach of fiduciary duty in a manner that conflicts with existing insurance law. [Workmen's Auto Ins. Co. v. Guy Carpenter & Co., 194 Cal. App. 4th 1468, 125 Cal.Rptr.3d 279, 11 Cal. Daily Op. Serv. 5303 (Cal. App. 2011)]
NEED FOR A SPECIAL RELATIONSHIP
New York appellate courts are noted for the brevity of their opinions and this case is a prime example. In Moutafis Motors, Ltd. v. MRW Group, Inc., 144 AD3d 1000, 2016 N.Y. Slip Op. 07935, 2016 WL 6885718, Supreme Court of the State of New York, Appellate Division: Second Judicial Department (11/23/16) was asked to reverse a trial court decision finding an insurance agent did not breach its duty to get proper limits on a policy.