Along the continuum of ethical duties to customers, insurance professionals fall somewhere between the extremes of "complete stranger" and "conservator." It is both a sliding scale and a slippery slope, especially when courts struggle with the decision whether to apply the broker's duty as a fiduciary one.

Fiduciary describes a relationship in which one person reposes trust and confidence in another to perform some important service, but that barely scratches the subject's surface. Not every trusting relationship is a fiduciary one. A fiduciary's special status imposes three main duties:

  • Loyalty: Always put the client's best interest at least on an equal footing with one's own.

  • Disclosure: Inform the client of all material facts that arise during the fiduciary relationship.

  • Confidentiality: Maintain the client's private information in confidence, unless authorized by the client or required by law to disclose it.

But here's what a fiduciary relationship is not: It isn't an Über-standard of care in the performance of professional services. In procuring insurance coverage for a client, a broker who has a fiduciary relationship with the client is still held to the standard of care of a competent broker performing the same services in the same community.

A fiduciary does not guarantee that his or her services will protect against all possible loss. Lawyers, who usually are considered to be in fiduciary relationships with their clients, are still held to the professional standard of care in the community for attorneys who specialize in the particular service.

State(s) of confusion

In some states a fiduciary duty is presumed on the part of agents and brokers—this is usually true when it comes to handling clients' premium payments—while in other states the opposite is true. California has long been in the no-automatic-fiduciary-duty camp (except in regard to transmitting money). Agents and brokers in the Golden State have been the beneficiaries of court decisions that declined to find a fiduciary duty lurking beneath every insurance placement.

Among the more recent of these decisions, Mark Tanner Construction Inc. v. Hub International Insurance Services, decided on March 10, slams the door on the presumption of a fiduciary duty in a normal broker/policyholder relationship. The case revisits California's continuing difficulty in finding markets willing and financially able to underwrite construction contractors' liability risks.

Mark Tanner Construction (MTC) had been insured for workers' compensation by a self-insurance program, Contractors Access Program of California, or CAP. The brokerage firm that had placed MTC in CAP had a consulting agreement with CAP's program administrator, but allegedly did not disclose that fact to MTC. After CAP became insolvent, MTC and other construction contractors sued the brokerage firm (which had been acquired by defendant Hub), and sought to defeat the broker's summary judgment motion by alleging breach of a fiduciary duty to disclose the consulting agreement and other material facts, and to monitor CAP's solvency.

The Court of Appeal relied on two principles of California law. First, the fiduciary duty to disclose material facts does not arise where there is no fiduciary duty at all. The contractor-plaintiffs had failed to establish any basis on which the court could find that a fiduciary relationship existed. It is thus of no moment whether the brokerage firm failed to disclose material information to the insureds. But the Mark Tanner court went a step further, stating that even if the broker's legal duty was a fiduciary one, it did not impose a higher standard of care.

The decision also reaffirms the principle that where the state has established a regulatory agency to monitor the solvency of insurers (typically the Commissioner of Insurance, though in this case it was the Department of Industrial Relations), the courts will not impose a similar duty on brokers.

Although California rejects the automatic imposition of a fiduciary duty on insurance professionals, it has not stated generically that such a duty can never exist. Other states have been willing to imply such duties, ranging from New Hampshire and Connecticut in the Northeast to Florida and Mississippi in the Southeast.

Be mindful of your promises

"We have a fiduciary duty to act in your best interests and provide sound practical advice which is independent of any insurance company's influence." That's a bold statement on an insurance brokerage firm's website. Although the firm is in Indonesia, I have seen similar declarations made by U.S. domestic brokers.

I wonder if they understand the meaning of "fiduciary." But they can rest assured that the plaintiffs' lawyers in their states know what it really means.

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