We commonly think of a “fiduciary” as someone who has amanagerial role in an employee benefit plan, or as the trustee of aprivate trust. So far, so good. Those people are oftenfiduciaries.

The word has a pedigree that dates much farther back than theenactment of the Employee Retirement Income Security Act (ERISA).It is an offshoot of the Latin word “fiducia,” meaning trust orreliability. In Roman times it described the duties owed between afather and the rest of the family, between allies and between otherrelationships. Today, we might translate the idea as “I've got yourback,” if said sincerely.

In risk management and insurance, we look to fiduciary liabilitypolicies to protect against ERISA exposure, and directors andofficers (D&O) liability policies as financial bulwarks againstclaims alleging breaches of similar duties in a corporate setting.As well established as such products are, fiduciary liability isstill an underrated risk.

In an article published on propertycasualty360.com on Nov. 18,2011 (“Travelers:Agents Say Clients Do Not Understand Fiduciary Exposure“), JohnTrefry, fiduciary liability product manager at Travelers, said that54 percent of the agents believed that their clients do notunderstand their fiduciary exposures, and that 79 percent ofclients felt that they have no such exposures. If so, there is someeducating to be done. Trefry cited industry figures showing theaverage award in such cases to be $994,000 and the average defensecost to be $365,000. Those two statistics alone should makeconverts out of those who don't consider the coverage worth thepremium. Who has their backs?

Related: Read the another article by Louie Castoria“Passing the Buck.”

But ERISA and similar exposures are the proverbial tip of thefiduciary iceberg. One need not have a job title that equates to“fiduciary,” the noun, to owe fiduciary (the adjective) duties toothers. Most simply stated, a legal relationship under which oneperson reposes trust and confidence in another, usually in asetting that requires special expertise, can give rise to fiduciaryduties. Some typical relationships in which fiduciary duties ariseare agent/principal, trustee/trust, certified financialplanner/investor, and lawyer/client.

Right about now, a reader somewhere is thinking, “Hey, wait aminute! I'm an appointed agent of ABC Assurance Co., and I havecustomers who tell me that they rely on my advice. Does all thisLatin stuff apply to me?”

The answer is clear, at least to the plaintiffs' bar, whoroutinely allege claims for breach of fiduciary duty in what areotherwise garden variety tort cases. They are sometimes right.Agents do, generally, owe fiduciary duties to their principals, andnot only in the insurance industry meaning of “agent.” There areHollywood agents, sports agents, and consignment agents, forexample, who protect others' interests.

The business/customer relationship is much more difficult toclassify. Insurance brokers have specialized knowledge andlicensing, and customers often rely on their advice in makingchoices about very complex financial contracts: insurance policies.That alone does not necessarily give rise to a fiduciary duty, oreven a professional standard of care if the broker is acting as an“order taker” rather than a trusted confidant. States' laws vary onthis. In general, the longer the relationship continues, and themore the customer blindly follows the broker's advice withoutquestion or deviation, the more likely it is that a fiduciary dutymay be found to exist.

Why do plaintiffs' lawyers allege fiduciarybreaches when they can more easily prove plain old negligence? Insome states, a winning plaintiff may be awarded attorney's fees andeven punitive damages for breaches of fiduciary duties. In short,it's about money. There is more jury appeal to a word like“fiduciary” than there is in “negligent.” A breach of “fiduciaryduty” sounds “crooked,” as compared to “negligent,” which soundsmore like “sloppy.” The hope is that 12 good citizens, sworn andtrue, sitting in a jury box, will be outraged by the breach of aLatin word that many of them will be hearing for the firsttime.

A debate continues to rage, 2 years after the passage of theDodd-Frank Wall Street Reform Act, as to whether securities brokersalways owe fiduciary duties to their customers. Traditionally, theydo not, unless they take on additional responsibilities in managingtheir clients' portfolios under financial advisory agreements, orwhere the course of conduct over an extended period of timeestablishes that the client always rubber-stamps the broker'srecommendations, without question or input. If the financialindustry cannot agree whether fiduciary duties should always beimplied, how is the insurance industry to do so?

Related: Read the article “What's in a Name?” byRichard Mintzer.

The question might have been answered, at least in California,in 2011, in a Court of Appeal opinion that flat refused to extendfiduciary duties to insurance brokers. The court later granted arehearing in the case, making its original decision unciteable asauthority, and thus I am not even mentioning the case by name.

Here is some practical guidance for agents and brokers: Whenevera customer goes against one or your recommendations, or suggestsany change in his or her insurance, be sure to document that fact,including the date and all details. It is best to do so by letteror email, so that there is a record that the customer received thecommunication. That can be strong medicine against an attack of thefiduciary influenza.

Duty to do what?

Where a fiduciary duty exists, what does it entail? There arelong legal treatises on this subject, but the simplified,three-word answer is “disclosure, loyalty, confidentiality.” Hereis an elaborated version of what those words mean in thiscontext:

• Disclosure means advising the client of allmaterial information regarding the matters that are entrusted tothe agent, including any limitations on the agent's ability toperform his/her function, such as conflicts. In pragmatic termsthere must be some flexibility about the level of disclosure. Someclients do not want to receive every single scrap of information,or have every clause in an insurance policy explained to them inpainstaking detail. Indeed, because insurance looks toward future,contingent events, it is not possible to predict all of thepolicy's clauses that may become material during its term. Still, afunctional, working knowledge of the how the agent is handling theclient's matters is important.
• Loyalty is sometimes termed fidelity infiduciary contexts. Using either word, the idea is the same: thatthe agent may not his/her own interest, or another's interest,ahead of the client's interests with respect to the matters thathave been entrusted.
• Confidentiality has been crucial in fiduciaryrelationships. When someone entrusts his confidential informationto an agent, he expects that information to stay between the two ofthem, except as may be necessary for the agent to fulfill her role.Any broader disclosure requires the client's permission. Althoughthe concept is ancient, it is also as fresh as the morningheadlines, full as they are with privacy breaches, hacking, and thelike.

Please note that the above list does notinclude the word “care.” Having a fiduciary duty does not increasethe level of professional care that already exists between a clientand agent. In lawsuits we often see fiduciary duties referred to asa “heightened duty of care,” but that isn't exactly so. If aprofession has a standard of care, adding the word “fiduciary” tothe relationship doesn't mean being “extra, uber-careful.”Fiduciary duties are different in kind from professional standardsof care. Put another way, a professional may breach a fiduciaryduty without committing malpractice, or vice-versa, or may do both,depending on the act committed.

Another caveat: The existence of a limited fiduciary duty doesnot necessarily extend to everything the agent does. A wholesalebrokerage firm may have a premium trust account in which funds areheld pending transmittal to insurers. As the term “trust account”implies, those funds are held in trust. That does not mean, withoutany further assumption of fiduciary duties on the wholesaler'spart, that it owes a broader fiduciary duty to the policyholder.Conversely, most states consider the broker the “agent” of theinsurer for the limited purpose of remitting premiums and receivingdelivery of insurance policies, even where there is no agencyagreement between the two. That limited, implied agency does notimpose broad fiduciary duties upon the broker, whose true principalis the policyholder.

Related: Read the article “NRRA Grows Up Fast” byLouie Castoria.

Why is all this important to an agent's or broker's job on adaily basis? First, knowing the duties that might apply can helpprofessionals steer clear of the pitfalls. Second, that sameawareness of the risk can spur us to memorialize each time clientschoose not to take our advice, or come up with their own ideas.Finally, we can be more careful in how we advertise and describeour services, or how others describe us. Emphasizing the quality ofwhat we do with the word “fiduciary” is not a great idea, unless wereally mean it.

When reviewing claims under professional liability policies,there may or may not be exclusions for ERISA-style fiduciary dutiesowed to employee benefit plans. A complaint against theprofessional may allege “breach of fiduciary duty” along with othercauses of action, but without any benefit plan or trust beinginvolved in the case. Agents and brokers should review their ownprofessional liability policies to be sure that such exclusionsextend only to actual trusts and ERISA-style plans. And, of course,if they are involved in those kinds of activities, they should heedTrefry's cautionary words about the downside of having a truefiduciary liability insurance policy.

Be sure someone's got your back.