New York's attorney general, Eliot Spitzer, spoke to theNational Press Club in February, discussing the recent businessscandals on which he has launched a crusade. He cited thebusinesses in question for serious “breaches of fiduciary duty,”including the insurance industry and the brokerage firms that hehas tackled. At his dinner table one evening, he told the audience,he asked his 15-year-old daughter what her favorite word was. Shegave him that typical teenager look and responded that she did nothave one, but she sure knew what his were: fiduciary duty.

Spitzer's attack on the insurance industry has been headlinenews. Scanning recent National Underwriters reveals stories suchas: “Conn. Sues Marsh, ACE” (Jan. 31), “Spitzer Eyes PersonalLines” (Jan. 24), “Agents on the Defensive” (Jan. 3), and SamFriedman's Jan. 10 editorial, “Is Spitzer Unethical?” (Well, maybe,maybe not. Yes, he was buddy-buddy with the new guy at Marsh. AsFriedman said, however, “Spitzer has done a lot of good in exposingwrongdoing in the financial services industry but, like anypolitician, he is a media hound.”)

The transgressions that Spitzer and his colleagues are exposingare embarrassing to our industry, as well they ought to be,although some of us had been aware of the sugary deals betweeninsurers and brokers for years. Spitzer's complaint, however, isfar more than just brokers' lack of disclosure, and agents are notoff the hook, either. On Jan. 3, National Underwriter's Mark E.Requet reported that three major property-casualty associations sawa need for “repairing the damage to their members' reputationcaused by allegations of wrong-doing on the part of a few, whilekeeping regulatory over-reaction in check.” California's insurancecommissioner, John Garamendi, “is considering language to requireproducers to deliver 'the best available coverage,'” he continued.Apparently agents are not sure what that means. Hey, guys, it meansthat if you are pushing insurers that are likely to go bust or willnot pay claims, you are doing your customers a disservice.

Spitzer is not exactly thrilled with the bunch of bums who aresupposed to be guarding financial hen houses either. In the PressClub talk, he was especially severe on the Securities and ExchangeCommission and the New York Stock Exchange, which did nothing aboutall those “stock analysts” who told us to go buy Enron, HealthSouth, and World Com. They approved of the whole business ofallowing analysts into investment banking, plugging new dot-comfirms with no assets. We were lied to by those in whom we had putour trust, and whom we had paid to tell us what to buy. They had aduty to us, a fiduciary duty.

In the insurance industry, our watchdog is the state insurancecommissioner and his National Association of InsuranceCommissioners. Has he been doing a good job for the public? Notsure? Never hear from the guy? Is he in the pocket of thelobbyists? The insurance industry has lots of lobbyists. Are theylooking out for our best interests? Spitzer is only one cop in onestate; for those not in New York, go get your own cop.

It is not just the commercial line insurance industry that hascome to the attention of the attorneys general. Steve Turckey, inN.U.'s Jan. 24 issue, wrote, “Any focus on personal lines has manyagents concerned that traditional profit-sharing practices, whichare the lifeblood of many agencies, could fall victim to this newwave of reform.” He added, however, that Spitzer had told New Yorklegislators “that he isn't ready to propose a legislative fix tocounter the insurance industry fraud and corruption that he isinvestigating. 'As we proceed, we will focus on precise legislativeremedies that will be most appropriate,' he said.” Industry fraudand corruption? If the insurance industry has a fiduciary duty, ithas a lot to do with money. As Yogi told us, “It ain't over tillit's over.”

What Fiduciary Duty?

A few years back, when I was revising one of the texts I tookover from the late Pat Magarick (Excess Liability, West Group), Ihad a long section on the fiduciary duty of insurers. An insurancedefense attorney had complained to me, “Oh, no! Don't put that inthere.” Why not? I believed in it, had been taught it, andconsidered it the correct ethical approach to what it is that weadjusters, who are the embodiment of the insurance contract, areabout.

No, the industry legal spokesmen would argue. Insurance is not afiduciary relationship. Their point is that, if they have to defendthe industry on the basis that it has a fiduciary duty to itsinsureds, they would have a hard time showing that the duty hadbeen met. Their job is tough enough already.

I ended up stating the proposition as a sort of question:“Evaluating whether a fiduciary duty exists.” I commented brieflyon this topic in an Iconoclast column as well, and got a fewresponses from Californians who told me that, out there, insurancewas not a fiduciary relationship. Ahh, the joys of the law: therewere California cases on both sides of the issue.

Whether there is or is not a fiduciary duty between insurers andtheir policyholders seemed to be just an academic issue when Iwrote about it five or six years ago, but Spitzer implies that itis more than academic, at least as far as he is concerned. He seemsto have the vague notion that, when one party takes the money ofanother party, agreeing to act in that party's best interests forsome actual or potential need, it must do so in the most honest,forthright, and fully disclosed manner possible. Goodness!

But what is a fiduciary? As explained in Winning By The Rules:Ethics and Success in the Insurance Industry (National UnderwriterCo., 2001), “Fiduciary is primarily a legal term that means one whoacts on behalf of another in a matter of trust, usually in anutmost good faith relationship.” The dictionary notes that it comesfrom the Latin fiduciarius, “trust,” or the thing that is held intrust, the designation of the person who holds something in trustfor another. My first Insurance Institute of America coursetextbook, Robert Mehr and Emerson Cammack's Principles ofInsurance, 4th Ed. (1966), stated that one “important reason forgovernmental regulation of insurance companies is the fiduciarynature of the insurance business.”

In the Third Edition of Casualty Claims Practice (Irwin Press,1964), James Donaldson cited an unnamed case in which the court hadsaid, “By asserting in the policy the right to handle all claimsagainst the insured, including the right to make a bindingsettlement, the insurer assumes a fiduciary position towards theinsured and becomes obligated to act in good faith and with duecare in representing the interests of the insured.” Donaldsonadded, “It is for these reasons that the courts place an obligationon the insurer to act in the utmost good faith in dealing with theclaim, so that the rights of the insured are not impaired.”

By the time the later editions of Donaldson's text wererewritten in 1984, after his death, the new author had elected notto include the same fiduciary/utmost good faith language. In thefifth edition, however, Donald Hirsch did define a fiduciary asincluding “an agent handling the business of another … to whom heor she stands in a relation implying and necessitating greatconfidence and trust on the one part, and a high degree of goodfaith on the other.” So, whether a fiduciary duty is one of“utmost” good faith, or a “high degree” of good faith, it seems tobe something a bit more than just plain old simple “goodfaith.”

Although Donaldson did not identify the source of his quote, itis similar to that of a Missouri appellate decision in Duncan v.Andrew County Mutual Ins. Co., (665 S.W.2d 13, 1983), in which thecourt said, “An insurer's right to control settlement andlitigation under a policy of liability insurance creates afiduciary relationship between the insurer and the insured.”However, Duncan involved a first party property claim, not aliability claim, and the court continued by stating that the“fiduciary duty is notably absent in claims by an insured againstan insurer under policies of property and related types ofinsurance.” Their point was that the parties are consideredequal.

My mentor, co-author and prior columnist for Claims, PatMagarick, said of that Duncan decision in Missouri, “While I haveno problem following the court's reasoning [about there being nofiduciary duty in a first party claim], I cannot agree that thefiduciary relationship depends entirely on settlement control. Goodfaith should be a requirement of both parties involved in afirst-party settlement.”

Courts have debated the fiduciary nature of insurance fordecades, some finding that there is such a duty, and others thatthere is not. California courts have gone in both directions, andat least 12 states have addressed the issue in recent years.Magarick noted that a “majority of courts have rejected thefiduciary theory and ruled that the insured/insurer relationship isnothing more than that of any business transaction,” wherein theinterests are equal, neither superior to the other. See, forexample, Bailey v. Allstate Ins. Co., (844 P.2d 1336 [Col., App.1992]), or, more recently, Martin v. State Farm (808 N.E.2d 47 [IllApp. 2004]). In Martin, the court ruled that an insurer acting onbehalf of a negligent driver did not owe a fiduciary duty to theclaimant, even though the claimant was insured by the same companyand, thus, the insurer had no duty to advise its insured/thirdparty claimant of his right to seek diminished value benefits.

Breaching the Duty

Spitzer apparently believes that the interests, although perhapsthey ought to be equal, are not always that way. Insurers are quiteready to step up to the plate and tell their insureds where to fixtheir damaged vehicles, whom to hire to repair their damagedhouses, and where to go to replace stolen property. Most insureds,or claimants who might otherwise sue the insureds, are quitepleased with this. They do not know one body shop from another,know nothing of how to fix their fire- or water-damaged residences,or how to get the best deals on replacing their stolen televisionsets.

Insurers go far beyond that, however. They now tell theirinsureds what doctors to see, what prescriptions they will approve,what treatment or surgery insureds may receive, and, some day Iwould not be surprised, what undertakers they can hire if they arekilled. All these “go where we tell you” deals are fine — insuredsare like sheep, they will follow the herd — but there is afiduciary duty imposed, because the insurer has taken on the roleof saying, “Trust me; it is in your own best interests.”

A lot of words are associated with faith. Trust, belief,reliability, even ethical terms such as integrity. Some of these,such as trust and belief, can apply equally to bad or negativekinds of faith, such as blind faith. Look at all the kids who puttheir trust and belief into clergymen who later abused them, or thegood folks who send their money to television preachers who promisethat their big donations will bring them riches or free them ofproblems. That is the same sort of deal Martin Luther complainedthat John Tetzel was doing with his sale of indulgence 500 yearsago.

Faith, whether it is “utmost good” or just “a high degree ofgood,” is more than just belief and trust. Faith requires apersonal relationship, understanding based on investigation andevaluation, and maybe even a little negotiation, acceptance bybasis of reason, not just emotion. When that occurs, then what wein the claim business do with the faith of those who put theirtrust in us and believe what we tell them will determine whether wehave met our fiduciary duty.