What Duties Does An Insurance Agent Owe Her Client?

I have defended and prosecuted dozens of cases against insurance agents and brokers. Interestingly, the law in California is unsettled as to whether an insurance broker owes its clients a fiduciary duty. Nonetheless, in my view, an insurance broker undoubtedly does, in fact, owe fiduciary duties to her client.

Roseville Attorney Jeffrey Ochrach Explains the Duties of an Insurance Broker

In Eddy v. Sharp, 199 Cal.App.3d 858 (3d Dist. 1988), Plaintiff insureds, the owners of a commercial building, sued defendant insurance agent and his agency for negligent misrepresentation and breach of a contract to insure them, after they discovered that the policy the agent had obtained for them did not cover a loss they sustained from water that backed up through sewers and drains. The insureds had requested coverage similar to their previous policy, which contained an exclusion for loss caused by water backing up through sewers or drains, as did the policy obtained by the agent. However, in his proposal and cover letter, the agent had offered the insureds “all risk” coverage subject to specified exclusions, which did not include loss resulting from water backing up through sewers or drains. The trial court granted summary judgment to the broker.

The court of appeal reversed. The Eddy court first pointed out that the broker was in fact an independent insurance agent representing several insurance companies. The court then explained, “If an insurance agent is the agent for several companies and selects the company with which to place the insurance or insures with one of them according to directions, the insurance agent is the agent of the insured.” Id. (citations omitted). Therefore, “[w]here the agency relationship exists there is not only a fiduciary duty but an obligation to use due care.”

Likewise, in Westrec Marina Management, Inc. v. Jardine Ins. Brokers Orange County, Inc. (2000) 85 Cal.App.4th 1042, the court of appeal affirmed a jury verdict finding broker liable for breach of fiduciary duty where broker failed to obtain insurance at best available price.

These two cases provide the clearest statements in California that an insurance broker does, in fact, owe fiduciary duties. Yet, the court of appeal in Hydro-Mill Company v. Hayward, et al. (2004) 115 Cal.App.4th 1145, reached the opposite conclusion, ruling that insurance broker do not owe fiduciary duties. A few federal district court judges have followed the Hydro-Mill court. See Pascual v Wells Fargo Bank, N.A., 2013 US Dist. LEXIS 112061; Nor-Cal Products, Inc. v. XL Insurance America, Inc., 2012 US Dist. LEXIS 159964; Motorist Commercial Mutual Insurance Company v. Soltis, 2013 US Dist. LEXIS 181871.

What are the Fiduciary Duties of an Insurance Agent?

The reason I believe an insurance broker unquestionably owes fiduciary duties is because, by the very definition of “fiduciary,” an insurance broker squarely falls within its ambit. Indisputably, “[A]n agent is a fiduciary” of her principal.” Michelson v. Hamada (1994) 29 Cal.App.4th 1566, 1580. As the Ninth Circuit has explained, “[t]he very meaning of being an agent is assuming fiduciary duties to one’s principal.” Chem. Bank v. Sec. Pac. Nat. Bank, 20 F.3d 375, 377 (9th Cir. 1994).

Equally indisputable, an insurance broker is an agent of its client. Carlton v. St. Paul Mercury Ins. Co., 30 Cal.App.4th 1450, 1457 (1994) (“a broker in securing a policy for a client ‘acts only as agent for the [in]sured.’”); see also Insurance Code §1623 (an insurance broker is “a person who, for compensation and on behalf of another person, transacts insurance other than life insurance with, but not on behalf of, an insurer.” (Emphasis added).

Agency law establishes that “[t]he relations of principal and agent, like those of beneficiary and trustee, are fiduciary in character…. [¶] … An agent must disclose to his principal every fact known to him bearing upon the [subject matter of the agency], the concealment of which would lead to the injury of the principal [citation].” Kinert v. Wright (1947) 81 Cal.App.2d 919, 925; Chodur v. Edmonds (1985) 174 Cal.App.3d 565, 571 ([“[a]n agent is a fiduciary”].) Further, an agent has an obligation of “diligent and faithful service the same as that of a trustee. [Citations.]” (Ibid.) As explained by Wolf v. Superior Court (2003) 107 Cal.App.4th 25, 29, a fiduciary is bound to act with utmost good faith for the benefit of the other party.

Thus, the fiduciary duty requires brokers to disclose all material knowledge and advise client’s on specific insurance matters even if the broker is not required to do so by the duty of care. Indeed, “the duty of undivided loyalty the fiduciary owes to its beneficiary … [is] far more stringent” than the duty of care. Wolf, 107 Cal.App.4th at 30. “‘Many forms of conduct permissible in a workaday world for those acting at arm’s length, are forbidden to those bound by fiduciary ties. A [fiduciary] is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive is then the standard of behavior.’ [Citation.]” (Ibid.)

If you’re an insurance broker, or you have a problem with one, don’t forget the fiduciary duty. An insurance broker who acts with less than the highest standard of fidelity and good faith will be liable for the consequences.