Industry Associations Object to CDI Legal Opinion on Fiduciary Duties

The California Department of Insurance (DOI) recently released a legal opinion on insurance fiduciary duties that industry associations say is over-reaching and will adversely affect their members.

In its opinion, the Insurance Commissioner said an insurance broker in a transaction acts as a common law agent of the insured, and subsequently “owes certain fiduciary duties to the insured. In addition, if an appointed agent of a carrier simultaneously has an express or implied agency relationship with an insured, that agent will be a common law agent of the insured (i.e. dual agent of insurer and insured) and thus owe the same fiduciary duties. Even in the absence of an agent-principal relationship be-tween a producer and insured, fiduciary duties can still exist if the insured reposes trust and confidence in the agent, and the agents accepts that trust and confidence.”

The Alliance of Insurance Agents and Brokers, Indian Wells, Calif., IBA West, Pleasanton, Calif., and Western Insurance Agents Association, Rancho Cordova, Calif., unanimously object to the proposal to impose new requirements mandating greater disclosure of commissions and income by brokers and agents, as would be required by a fiduciary relationship.

“With unanimous agreement now among the broker agent community, we can send the strong message that we will not stand for illegally imposed regulations,” said Michael Golden, chairman of the West-ern Insurance Agents Associa-tion. “The forced disclosure issue is a prime example of why agents need to speak with a united voice.”

According to Steve Young, general counsel for IBA West, a fiduciary duty is one that exceeds the duties and candor of reasonable care typically en-countered in the business world. Such relationships are normally reserved for relationships recognized as involving an extreme dependency on the part of the beneficiary, such as the relationships between a priest and parishioner, doctor and patient, and lawyer and client, he explained. “Fiduciary duties give rise to liability for potentially crippling awards of punitive damages,” he said, noting that breaches of fiduciary duty are considered high offenses with different jury instructions.

IBA West believes that California law holds that the relationship between insurance producers and customers is not fiduciary. “Insurance agents and brokers are in a curious position because they are defined one way but function in a dual agent capacity,” Young said. “The duties they owe to the customer are somewhat elevated above the normal arm’s length negotiation that you would have [between a customer and a salesperson] at a grocery store or car dealership, but they fall short of being a fiduciary relationship, which is the highest of all duties that the law finds.”

Ken Nigohosian, executive director of the Alliance of Insurance Agents and Brokers, agreed. The DOI legal position “is yet another attempt by the department to assert brokers and agents have broad fiduciary responsibilities to customers. That position, again, misses the mark,” he said. “Existing statutory and case law do not support their position.”

The Alliance’s counsel Robert Hogeboom, senior partner at Barger and Wolen, said “Courts have uniformly explained that ordinarily, both agents and brokers have the duty to use reasonable care, diligence and judgment in producing the particular insurance specified by their insured. However, this duty is not a fiduciary duty.”

IBA West’s Young said the DOI’s push to impose fiduciary duties stems from the fallout in New York, in which employees of Marsh and McLennan were indicted for illegally entering into agreements with other insurance companies to create false bids so customers were steered toward companies Marsh brokers wanted to do business with based on their compensation packages. That case created a push for more disclosure by insurance agents and brokers.

California Insurance Commissioner John Garamendi has proposed the new fiduciary duties in attempt to prevent such illegal activity. “[Garamendi’s] whole approach is that there is a real problem out there that needs to be solved,” said Patty Lombard, communications consultant for IBA West, “but no similar cases have been brought to trial, and now examples of any problem have been found in California. The DOI opinion could change the way most insurance agents and brokers do business and for no good reason.”

Furthermore, Young added, the commissioner, by himself, does not have the legal authority to decide what unfair business practices should be prohibited in the state. “The legislature decides what is and what is not an unfair business practice,” he said. “The insurance commissioner then should enforce the laws and, where a statute is unclear, can bring greater clarity to the provisions that the legislature has articulated. The insurance commissioner does not have the authority to create law.”

The three associations said they will continue to oppose the commissioner’s attempts -both legislative and regulatory actions-to impose new legal duties for insurance agents and brokers that could create potentially expensive lawsuits and punitive damages, Young said.

The Alliance believes “consumers’ interests primarily rest with four factors: price, product, service and carrier financial stability,” Nigohosian said. “And agent/broker compensation has not been-nor should it be-part of that decision-making equation.”

Nevertheless, IBA West is currently developing a technical white paper designed to provide useful information and sample disclosure clauses and language for brokers and agents to use on a voluntary basis. The paper will be reviewed by the group’s board of directors at their October 20 meeting.

“Nothing prevents a customer from asking questions of a transaction, and if particular agents or brokers feel that it is prudent to make greater disclosure to their customers, they should be free to do that on a voluntary basis,” Lombard said.
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Both agents and brokers have the duty to use reasonable care, diligence and judgment … However, this duty is not a fiduciary duty.