Broker – Beware Potential Conflicting Liability to Both Clients and Insurers

In normal circumstances, a retail or wholesale broker owes a fiduciary duty to his client Aca,!aEURoe the policyholder (we are not concerned here with managing general agents or binding authority holders). That Aca,!A"fiduciaryAca,!? duty is a duty of loyalty in which the broker puts the interests of the client above his/her own and avoids gaining an advantage at the expense of his/her client. This means that, in most cases, the brokerAca,!a,,cs duty is only to the client, and the broker owes no duty to the insurer from whom he/she procures coverage for the client. Thus, while the broker owes a duty to the client to use reasonable care in making sure that the correct and sufficient information is provided to the insurer in an effort to secure coverage, the broker does not owe that duty Aca,!aEURoe or any duty - to the insurer. It has long been accepted (however illogical the premise) that there are some limited exceptions to the principle that the broker owes his/her only loyalty to the client. For instance, the broker holds premium deposits received from the client (from which the broker usually subtracts his/her commission) for the benefit of the insurer and owes a duty to the insurer to deliver the correct amount of proceeds in a timely manner. However, the broker was generally considered to have no obligations to the insurer with respect to matters involving the brokerage relationship, such as the accuracy of an application for insurance or otherwise. In 2004, a California Court of Appeal unexpectedly created a problematic (to say the least) change to the long-established law and custom regarding the relationship among the broker, the client and the insurer by its decision in Century Surety Company v. Crosby Insurance, Inc. (2004) 124 Cal.App.4th 116, 21 Cal.Rptr.3rd 115 (Aca,!A"Century SuretyAca,!?). In Century Surety, the court held that a broker owed a duty of reasonable care to the insurer in submitting information to the insurer (in this case, in the form of an application for insurance) upon which the insurer would be expected to rely in issuing a policy to the client. The court held that the insurer could recover damages from the broker for breach of that duty (i.e. negligence). In Century Surety, the insurer at first provided a defense to a claim against its insured, but later withdrew the defense when it discovered inaccuracies in the application for the policy. The insured sued the insurer, which cross-claimed against the broker for damages for fraud, negligent misrepresentation and common law negligence. The trial court dismissed the cross-complaint for failure to state a valid cause of action, finding that the broker did not owe a duty to the insurer to use reasonable care to make sure that the application for insurance was accurate. The appellate court sustained the finding as to negligent misrepresentation (for reasons not important here), but reversed as to fraud and negligence.

The court concluded that the broker owed a duty to the insurer to make sure that the application for insurance was accurate and complete. As to fraud, that decision was not revolutionary, since it is well established that each person is liable for his/her/its own intentional misrepresentations. The court, however, went further and held that a broker could be liable to the insurer for mere negligence in filling out and submitting the application. Thus, the court for the first time in California held that the broker owed a duty of reasonable care to the insurer as well as the client in the ordinary application transaction.

The danger of the Century Surety dual obligation theory (apart from its doubtful logic or accuracy) is that it is probable that such an obligation by the broker to the insurer will at some point trigger a conflict of interest for the broker with his/her client. This would be the case where there is a dispute between the insurer and client/policyholder as to whether the client sufficiently and truthfully disclosed facts to the insurer upon which the insurer based its decision to issue the policy to the client or to establish the relevant conditions of coverage or the premium.

If there is an issue as to whether something must be disclosed (short of an attempt to defraud the insurer), it is in the clientAca,!a,,cs interest that it not be disclosed, but it will be in the brokerAca,!a,,cs interest to disclose it anyway to avoid being sued if the insurer later contends that it should have been disclosed and a court agrees. Moreover, apart from applications for insurance, the basic principle that a broker owes a duty of care to the insurer might well be found to have ramifications for the broker that were neither intended by the court in Century Surety nor reasonably foreseeable by the broker.

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