We commonly think of a "fiduciary" as someone who has a managerial role in an employee benefit plan, or as the trustee of a private trust. So far, so good. Those people are often fiduciaries.
The word has a pedigree that dates much farther back than the enactment of the Employee Retirement Income Security Act (ERISA). It is an offshoot of the Latin word "fiducia," meaning trust or reliability. In Roman times it described the duties owed between a father and the rest of the family, between allies and between other relationships. Today, we might translate the idea as "I’ve got your back," if said sincerely.
In risk management and insurance, we look to fiduciary liability policies to protect against ERISA exposure, and directors and officers (D&O) liability policies as financial bulwarks against claims alleging breaches of similar duties in a corporate setting. As well established as such products are, fiduciary liability is still an underrated risk.
In an article published on propertycasualty360.com on Nov. 18, 2011 ("Travelers: Agents Say Clients Do Not Understand Fiduciary Exposure"), John Trefry, fiduciary liability product manager at Travelers, said that 54 percent of the agents believed that their clients do not understand their fiduciary exposures, and that 79 percent of clients felt that they have no such exposures. If so, there is some educating to be done. Trefry cited industry figures showing the average award in such cases to be $994,000 and the average defense cost to be $365,000. Those two statistics alone should make converts out of those who don’t consider the coverage worth the premium. Who has their backs?
But ERISA and similar exposures are the proverbial tip of the fiduciary iceberg. One need not have a job title that equates to "fiduciary," the noun, to owe fiduciary (the adjective) duties to others. Most simply stated, a legal relationship under which one person reposes trust and confidence in another, usually in a setting that requires special expertise, can give rise to fiduciary duties. Some typical relationships in which fiduciary duties arise are agent/principal, trustee/trust, certified financial planner/investor, and lawyer/client.
Right about now, a reader somewhere is thinking, "Hey, wait a minute! I’m an appointed agent of ABC Assurance Co., and I have customers who tell me that they rely on my advice. Does all this Latin stuff apply to me?"
The answer is clear, at least to the plaintiffs’ bar, who routinely allege claims for breach of fiduciary duty in what are otherwise garden variety tort cases. They are sometimes right. Agents do, generally, owe fiduciary duties to their principals, and not only in the insurance industry meaning of "agent." There are Hollywood agents, sports agents, and consignment agents, for example, who protect others’ interests.
The business/customer relationship is much more difficult to classify. Insurance brokers have specialized knowledge and licensing, and customers often rely on their advice in making choices about very complex financial contracts: insurance policies. That alone does not necessarily give rise to a fiduciary duty, or even a professional standard of care if the broker is acting as an "order taker" rather than a trusted confidant. States’ laws vary on this. In general, the longer the relationship continues, and the more the customer blindly follows the broker’s advice without question or deviation, the more likely it is that a fiduciary duty may be found to exist.
Why do plaintiffs’ lawyers allege fiduciary breaches when they can more easily prove plain old negligence? In some states, a winning plaintiff may be awarded attorney’s fees and even 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 "fiduciary duty" sounds "crooked," as compared to "negligent," which sounds more like "sloppy." The hope is that 12 good citizens, sworn and true, sitting in a jury box, will be outraged by the breach of a Latin word that many of them will be hearing for the first time.
A debate continues to rage, 2 years after the passage of the Dodd-Frank Wall Street Reform Act, as to whether securities brokers always owe fiduciary duties to their customers. Traditionally, they do not, unless they take on additional responsibilities in managing their clients’ portfolios under financial advisory agreements, or where the course of conduct over an extended period of time establishes that the client always rubber-stamps the broker’s recommendations, without question or input. If the financial industry cannot agree whether fiduciary duties should always be implied, how is the insurance industry to do so?
The question might have been answered, at least in California, in 2011, in a Court of Appeal opinion that flat refused to extend fiduciary duties to insurance brokers. The court later granted a rehearing in the case, making its original decision unciteable as authority, and thus I am not even mentioning the case by name.
Here is some practical guidance for agents and brokers: Whenever a customer goes against one or your recommendations, or suggests any 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 letter or email, so that there is a record that the customer received the communication. That can be strong medicine against an attack of the fiduciary influenza.
Duty to do what?
Where a fiduciary duty exists, what does it entail? There are long legal treatises on this subject, but the simplified, three-word answer is "disclosure, loyalty, confidentiality." Here is an elaborated version of what those words mean in this context:
- Disclosure means advising the client of all material information regarding the matters that are entrusted to the agent, including any limitations on the agent’s ability to perform his/her function, such as conflicts. In pragmatic terms there must be some flexibility about the level of disclosure. Some clients do not want to receive every single scrap of information, or have every clause in an insurance policy explained to them in painstaking detail. Indeed, because insurance looks toward future, contingent events, it is not possible to predict all of the policy’s clauses that may become material during its term. Still, a functional, working knowledge of the how the agent is handling the client’s matters is important.
- Loyalty is sometimes termed fidelity in fiduciary contexts. Using either word, the idea is the same: that the agent may not his/her own interest, or another’s interest, ahead of the client’s interests with respect to the matters that have been entrusted.
- Confidentiality has been crucial in fiduciary relationships. When someone entrusts his confidential information to an agent, he expects that information to stay between the two of them, except as may be necessary for the agent to fulfill her role. Any broader disclosure requires the client’s permission. Although the concept is ancient, it is also as fresh as the morning headlines, full as they are with privacy breaches, hacking, and the like.
Please note that the above list does not include the word "care." Having a fiduciary duty does not increase the level of professional care that already exists between a client and agent. In lawsuits we often see fiduciary duties referred to as a "heightened duty of care," but that isn’t exactly so. If a profession has a standard of care, adding the word "fiduciary" to the relationship doesn’t mean being "extra, uber-careful." Fiduciary duties are different in kind from professional standards of care. Put another way, a professional may breach a fiduciary duty without committing malpractice, or vice-versa, or may do both, depending on the act committed.
Another caveat: The existence of a limited fiduciary duty does not necessarily extend to everything the agent does. A wholesale brokerage firm may have a premium trust account in which funds are held pending transmittal to insurers. As the term "trust account" implies, those funds are held in trust. That does not mean, without any further assumption of fiduciary duties on the wholesaler’s part, that it owes a broader fiduciary duty to the policyholder. Conversely, most states consider the broker the "agent" of the insurer for the limited purpose of remitting premiums and receiving delivery of insurance policies, even where there is no agency agreement between the two. That limited, implied agency does not impose broad fiduciary duties upon the broker, whose true principal is the policyholder.
Why is all this important to an agent’s or broker’s job on a daily basis? First, knowing the duties that might apply can help professionals steer clear of the pitfalls. Second, that same awareness of the risk can spur us to memorialize each time clients choose not to take our advice, or come up with their own ideas. Finally, we can be more careful in how we advertise and describe our services, or how others describe us. Emphasizing the quality of what we do with the word "fiduciary" is not a great idea, unless we really mean it.
When reviewing claims under professional liability policies, there may or may not be exclusions for ERISA-style fiduciary duties owed to employee benefit plans. A complaint against the professional may allege "breach of fiduciary duty" along with other causes of action, but without any benefit plan or trust being involved in the case. Agents and brokers should review their own professional liability policies to be sure that such exclusions extend only to actual trusts and ERISA-style plans. And, of course, if they are involved in those kinds of activities, they should heed Trefry’s cautionary words about the downside of having a true fiduciary liability insurance policy.
Be sure someone’s got your back.