Filed Under:Agent Broker, Agency Management

Fiduciary: Underrated Risk?

Learn to whom agents owe fiduciary duty and its complications

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.

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?

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.

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