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Reasonable care or fiduciary? Always strive for best practices and avoid litigation.

Earlier this year, the appellate courts in both California and New York handed down decisions addressing whether an insurance agent or broker owes a fiduciary duty to its client. Workmen's Auto Ins. Co. v. Guy Carpenter & Co., Inc., 194 Cal. App. 4th 1468 (2011); People ex rel. Cuomo v. Wells Fargo Ins. Servs. Inc., 2011 WL 534198 (2011). That these cases were heard in two of the country's most populous states reflects the current political and business environment affecting insurance and other professionals. Whether the claims are advanced by governments, companies or individuals, insurance agents and brokers are increasingly subjected to efforts to hold them to ever-higher standards.

While juries are frequently criticized (sometimes unfairly, in my opinion) for their perceived inabilities to render fair verdicts, judges will actually be the men and women deciding what kind of duty you owe your clients. Do they understand the concept of fiduciary duty in the context of your relationships with your clients? Do you?

It is universally accepted a broker must exercise reasonable care, skill and diligence when he undertakes to procure insurance coverage for his client. This fundamental duty underpins the concept of negligence. The notion of "reasonable care" is esoteric by itself, and an exploration of the varied fact patterns under which different jurisdictions have found a broker has breached the duty of reasonable care would involve far more than this column permits. But what if a judge determines that a broker or agent owes not just a duty of reasonable care, but also a fiduciary duty to the client? How does that affect your relationship with the client?

The courts in the Guy Carpenter and Wells Fargo cases considered the concept of fiduciary duty under different sets of circumstances. In Guy Carpenter, the court had to decide whether an insurer could sue its authorized agent for breach of fiduciary duty, where the agent allegedly caused the insurer to sustain $35 million in damages. In Wells Fargo, Gov. Cuomo sued on behalf of the State of New York, claiming the broker violated a fiduciary duty to its clients by not disclosing contingent commissions it received from insurers in connection with its clients' insurance placements. In both cases, it was generally alleged that a duty of loyalty lies at the heart of every relationship between an insurance agent/broker and his client. This duty of loyalty, the plaintiffs argued, gives rise to a heightened fiduciary duty. The courts in both cases disagreed, finding no such duty was owed under the circumstances of either case.

The decisions surprised a lot of people who expected these courts to expand the duties owed by agents and brokers to their clients. For sure, most insurance professionals were both refreshed--and relieved--by the decisions.

However, many courts have held differently, stating as a matter of law that an insurance broker does owe a "fiduciary" duty to his client. See Aden v. Fortsh, 776 A.2d 792, 800 (N.J. 2001); A.G. Edwards & Sons Inc. v. Drew, 978 S.W.2d 386, 395 (Mo. Ct. App. 1998); Perelman v. Fisher, 700 N.E.2d 189, 192 (Ill. Ct. App. 1998); Baldwin v. Lititz Mut. Ins. Co., 393 S.E.2d 306, 307 (N.C. Ct. App. 1990).

Some courts have identified the "markers" of a fiduciary relationship:

(1) Party being subservient to the dominant mind and will of the other party as a result of age, state of health, illiteracy, mental disability, or ignorance

(2) Things of value such as land, monies or a business, which are the property of the subservient party, being possessed or managed by the dominant party

(3) A surrendering of independence by the subservient party to the dominant party

(4) An automatic and habitual manipulation of the actions of the subservient party by the dominant party

(5) The subservient party placing trust and confidence in the dominant party.

Complicating matters is the fact that some of the same courts that recognize the foregoing characteristics as defining a fiduciary relationship also have found fiduciary relationships may exist absent these elements and where there is just a principal-agent relationship. And this seems to entirely contradict the holdings of both the Guy Carpenter and Wells Fargo cases. Even the court in the Guy Carpenter case--while holding no fiduciary relationship exists between a broker and client--noted that a broker can be charged with certain fiduciary duties, such as receiving and holding premiums.

So what to make of all of this? Do you owe a fiduciary duty or not? Under all circumstances or only some? Are you confident that the judges (not juries) making and interpreting these decisions have a sufficient understanding of the insurance industry to give opinions--which are literally and figuratively all over the map--on the duties you should owe your clients? To be sure, the last question is rhetorical. But the others are legitimate, substantive questions, which I can't answer generally in a conclusive manner.

Perhaps the best question to ask: Does it make any practical difference whether you owe a fiduciary duty, or just a duty of reasonable care? I suspect the answer for most of you reading this is "no." In fact, one of the reasons the court in Guy Carpenter declined to recognize a cause of action for breach of fiduciary duty was because, to some extent, it mirrors a negligence cause of action which already exists.

There are a few things I know for sure. Brokers and agents (and producers) should always strive to employ "best practices" in their activities, whatever they may be. If you are sued, and the case goes to trial before a jury, and a judge determines you owe your client a heightened fiduciary duty, she will explain that to the jury. The judge's instructions to the jury about the type of duty you owe your client will affect the jury's view of your conduct. If you're held to a higher standard, they will hear that. Whether your practices conformed to the duty owed will be for the jury to decide. And whether you trust the ability of juries to render fair verdicts or not, they certainly can be unpredictable.

Matthew S. Marrone is a partner with Lucas and Cavalier LLC, a regional litigation firm with its main office in Philadelphia. he routinely defends insurance agents and brokers, along with all other professional lines, throughout Pennsylvania and new Jersey, and can be reached at 215-751-9192 or
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Title Annotation:Avoiding E&O
Author:Marrone, Matthew S.
Publication:American Agent & Broker
Date:Aug 1, 2011
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