Courts Confusion: Insurance BrokersProfessional Advisors or Salespersons?

It is only at these times that the insurance broker is expected to fill the same sort of advisory role as other "professionals." In fact, in the course of the insurance buying process, the insurance broker may alternatively fill a number of different "professional" roles, depending upon the sophistication of the transaction and the particular needs of the insurance buyer. In many cases brokers may render complex advice. In other circumstances, he may render none at all.

As a result, in everyday practice, there appears to be considerable confusion as to the resolution of a central issue: Should insurance brokers be considered "professionals" or should they be considered simply sellers of an insurance product?

The answer to this question depends upon whom you ask.

For the insurance broker, there is considerable pride taken in his or her ability to advise their clients as to how to plot a course through the difficulties encountered in addressing risk. Such brokers would generally respond that they already consider themselves "professionals" in every sense, and that they are committed to giving their clients the benefit of their experience and training in transferring risks arising in their clients business and professional lives.

The publics perception, however, appears to be far more variable and confused.

Direct writing insurers present insurance to the public as a commodity to be purchased cheaply, quickly and conveniently. Accordingly, the "professional" judgment of an independent insurance agent appears to be completely irrelevant to the process. In this view, insurance protection is considered to be yet one more consumer product to be marketed and sold from the shelf of numerous financial products in the marketplace.

To the extent that an insurance broker is involved in such transactions, there is a clear concept that the broker acts solely as the distributor of one more retail product. He or she is a salesperson.

This is obviously the fact only in a limited number of cases. To be sure, a great number of insureds value highly the advice and counsel of their brokers.

The conflict between these perceptions of a brokers role, however, becomes all the more obvious in the context of legal actions against insurance agents and brokers.

More specifically, the publics confusion as to the responsibility of their insurance brokers has taken form in conflicting legal opinions. These opinions, from various states, take differing standards as to the "correct" manner in which to view the relationship between an insured and his broker.

For example, in some states, the courts have opined that insurance brokers are retained to render professional advice to their clients, and the obligation to use a professional level of care is always present.

In other states, the courts have settled into a more complex approach, using a two-part test.

First, the courts assume that there exists only an "ordinary" relationship between the broker and his client. In such a relationship, the broker typically only has an obligation to fill the insureds specified order for coverage and is under no duty or obligation to suggest varying or additional coverages.

Second, however, the court may infer that the particular facts of a case suggest that the broker and client have a "special relationship." In the usual situation, a "special relationship" is held to be created when there is some additional reliance upon the advice or judgment of the broker; when the broker receives additional compensation for such "advice;" or when the broker is retained based upon specialized or unique knowledge.

The courts also tend to consider whether the insured is "sophisticated" in the purchase of insurance, reasoning that more able insureds are less likely to need the services of an insurance broker as an advisor.

The effect of the finding of a heightened or professional duty of care is legally significant. The court may require that the broker has taken pains to analyze the insureds risk, match the risk with a carefully prepared insurance solution and be sure to warn the insured against the perils associated with the provision of improper or inadequate insurance.

The split in decisions between and among the state courts is glaring. The result is great uncertainty, unstable errors and omissions markets for insurance brokers, and unpredictable legal results on a state-to-state basis. There is also no practical way for an insurance broker or agent to predict what standard of conduct is expected in his everyday practice and procedures.

On a more practical level, however, the solution is clear. Insurance brokers appear to have little choice but to aspire to high levels of service, sophisticated analysis and the provision of valuable advice to insureds.

Regardless of the attitudes of the courts, insurance professionals must continue to develop truly valuable service to meet the expectations of those insureds who prefer and require risk analysis to address the increasingly complex business and personal considerations that confront many individuals today. Only by doing so will brokers have any certainty that they may earn themselves the consistent respect afforded to other professionals.

David Paige is the Chief Operating Officer of the DeWitt Stern Group, a N.Y.-based brokerage firm. He is also an attorney with the law firm Nicoletti Hornig Campise & Sweeney in New York City.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, November 7, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.