Life Insurance Agents: Fiduciary Duty Or Not?

The fiduciary duties of life insurance agents and brokers have been the subject of several lawsuits. Fiduciary duty requires a representative in a position of trust to act in good faith and honesty on behalf of a client, putting the client's interests ahead of their own. While insurance brokers are generally considered to have a fiduciary duty to their clients, insurance agents are primarily representatives of the insurance company they work for, and thus do not have a fiduciary duty to the insured. However, in certain cases, a special relationship between an agent and a customer may be established, expanding the agent's duty to the customer and requiring them to offer advice on insurance necessary to fulfill the customer's needs.

Fiduciary duty and insurance agents vs brokers

The fiduciary duties of insurance agents and brokers are quite distinct. Insurance agents are employees and representatives of an insurance company, whereas insurance brokers are representatives of the consumer or party seeking insurance. In other words, brokers work for the insured and owe them a fiduciary duty, whereas agents are agents of the insurer and have fiduciary duties to their employer.

Insurance agents have a fiduciary duty to their employer, and only a basic level of fiduciary duty to customers. In most states, an insurance agent's only duty is to obtain the insurance that the customer requested within a reasonable time. However, under certain circumstances, courts are expanding the role of the insurance agent, and holding that they also have a duty to offer customers advice regarding the types of coverages that are available and necessary to meet their needs. This is known as a "special relationship" and it expands an agent's duty to the customer.

Insurance brokers, on the other hand, have a fiduciary duty to their clients, as they work directly for them and not the insurance companies. This means that they must act in good faith and honesty, and in their client's best interests. However, as brokers are typically paid by insurance carriers via commissions, there may be an inherent conflict of interest. In such cases, brokers are supposed to disclose the "dual agency" or risk neglecting their fiduciary responsibility.

In summary, insurance brokers generally owe a higher level of fiduciary duty than agents, although ultimately it is the courts that determine whether an insurance professional is an agent or a broker, regardless of their official job title.

Special relationships

The existence of a "special relationship" between an insurance agent and a customer can lead to the agent having a fiduciary duty to the customer. While the precise definition of a "special relationship" varies by state, and there is no uniform test, some common factors that indicate a "special relationship" include:

• A longstanding relationship between the agent and customer
• The agent misrepresenting the nature of the coverage being provided
• The agent voluntarily assuming the role of selecting coverage for the customer
• The agent offering the customer advice on the type of coverage available and exclusions
• The agent holding themselves out as a specialist
• The customer paying the agent for their advice

In the case of Peter v. Schumacher Enterprises, Inc. 22 P.3d 481 (Alaska 2001), the court found that a "special relationship" existed because the agent and customer had a longstanding relationship, the agent held themselves out as a specialist, and the customer paid the agent for their advice.

In Marsh, the Southern District of Florida laid out a multi-factor analysis to determine whether a "special relationship" exists, including:

• Did the agent make representations about their expertise?
• Did the agent make representations about the breadth of the coverage obtained?
• Did the agent and customer have a longstanding relationship?
• How involved was the agent in aiding the customer's decision about their insurance needs?
• Did the agent volunteer advice to the customer?
• Was the agent paid additional compensation for advisory services?

It's important to note that the existence of a "special relationship" and, consequently, an insurance agent's fiduciary duty, may vary depending on the specific circumstances and the court's interpretation.

Basic fiduciary duties

Relationships between the Insurer and the Insured

The relationship between an insurance agent and a policyholder may become a "special relationship" if the agent has established a specific "course of dealing" with the insured individual. For example, if the agent routinely renews an insured party's auto insurance or homeowner's insurance policy without an explicit request, this could create a "standard" and liability if the agent misses the renewal and the policy lapses.

Industry Standards of Care

Insurance agents are expected to adhere to standard industry procedures, processes, and timelines when handling claims. As industry standards are subject to change over time, staying informed about the latest practices is essential. When in doubt, considering what a "reasonable person" would do in a similar situation can provide guidance.

Professional Conduct

Insurance agents are typically required to handle claims with professionalism. However, if they present themselves as more experienced or specialised, they may be held to higher standards of care.

It is important to note that the specific fiduciary duties of insurance agents and brokers can vary based on their roles and the state or country in which they operate. Ultimately, fiduciary duties aim to promote fairness and consistency in dealings with insured individuals and the processing of claims.

Insurance agent negligence

• Failure to procure requested coverage
• Failure to obtain coverage
• Misrepresentation
• Failure to properly advise clients of coverage
• Errors and omissions

According to the law, it does not matter if the mistake was intentional or unintentional. To sue on the grounds of negligence, a client generally must be able to prove the following:

• Duty: The agent had a duty to act or refrain from acting in a certain way.
• Breach: The agent failed in their duty toward the client.
• Causation: The breach of duty caused the client harm that the agent should have foreseen.
• Damages: The client suffered actual damages (such as lost wages and medical expenses).
• Failing to sign a client up for requested coverage available in the marketplace: Insurance agents should assess their client's needs and requests before selling them the appropriate amount and type of insurance.
• Failing to pass on notification of a claim: If a client notifies their agent of a claim under their policy, the agent must inform the insurer of the claim.
• Failing to notify the client that their policy is about to be canceled.
• Failing to notify the client of insurer issues: If an insurer faces financial problems, such as insolvency, the agent must inform the client.

To prevent insurance agent negligence, agents should perform their jobs correctly, carefully, and morally. They should double-check their work and be honest with their clients. Agents should never make false claims or promises to clients and should always find a plan that works for the client, rather than focusing on sales.

Fiduciary Duty

In the United States, an insurance agent is generally not required to do more than what they have agreed to do, which is typically to afford standard brokerage services. However, under certain circumstances, courts are expanding the traditional role of the insurance agent. In some cases, courts are holding that an insurance agent has a duty to offer advice to their customer regarding the types of coverage that are available and necessary to meet their needs.

This expanded duty to the customer arises when a "special relationship" is established between the agent and the customer. While there is no uniform test for determining the existence of a special relationship, courts frequently find that a special relationship exists when:

• The insurance agent misrepresents the nature of the coverage being afforded or provided.
• The agent voluntarily assumes the role of selecting the appropriate coverage for the customer.
• The agent offers the customer advice related to the type of coverage available and the exclusions to that coverage.
• The agent holds themselves out as a specialist.
• The agent and the customer have a longstanding relationship.
• The customer paid the agent for their advice.

Insurance brokers, who are representatives of the consumer, generally owe a higher level of fiduciary duty than agents. However, the courts can have the final say on whether someone is an insurance agent or broker, regardless of their official job title.

Insurance agent liability

While the specific laws vary from state to state in the US, insurance agents are generally not considered to have a fiduciary duty to their customers. However, this does not mean they have free rein to do whatever they want with a customer's claim. Agents are required to act with reasonable prudence and adhere to some basic fiduciary duties when processing claims and dealing with customers.

Special Relationships

In certain instances, courts have held that an insurance agent has a duty to advise the customer on the types of coverage available and necessary to meet their needs. This is usually when a "special relationship" is established between the agent and the customer. While there is no uniform test for determining the existence of a special relationship, courts have frequently found one in the following circumstances:

• The agent misrepresents the nature of the coverage being provided.
• The agent voluntarily assumes the role of selecting the appropriate coverage for the customer.
• The agent offers the customer advice on the type of coverage available and exclusions.
• The agent holds themselves out as a specialist.
• The agent and customer have a longstanding relationship.
• The customer paid the agent for their advice.

Insurance agents can be held liable for failing to abide by the basic fiduciary duties outlined above. If insurance agents breach their fiduciary duties, they can be sued, fined, and face disciplinary action from the relevant regulatory body. For example, in Texas, the relevant regulatory body is the Texas Department of Insurance (TDI).

To avoid liability, insurance agents should carefully outline the services they will and will not provide to their customers. Agents should also avoid holding themselves out as specialists unless they are prepared to answer coverage questions regarding their area of expertise. It is also important for agents to train their employees not to offer advice unless they are qualified to do so.

In addition, insurance agents should ensure that they have the proper licenses, bonds, and insurance to protect themselves and their business. Selling insurance without a license could result in significant financial and even criminal penalties, including a felony charge. Most states require insurance agents to have a resident license to sell personal lines insurance in their home state and a non-resident license to sell insurance in other states.

Frequently asked questions