Duties and Liabilities of Insurance Brokers

Excellence in Claims Handling

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Order Taker or Fiduciary?

Cases in which insurance brokers’ liability is in question depend in part on whether brokers are seen to be serving a fiduciary role or simply acting as a conduit between the insured and the insurer.

A person or an entity is a fiduciary with respect to a plan to the extent:

• he exercises any discretionary authority or discretionary control respecting management of such plan or
• exercises any authority or control respecting management or disposition of its assets, or
• he has any discretionary authority or discretionary responsibility in the administration of such plan.[1]

Since 2004, two California appellate courts have taken the still-developing position on the law regarding insurance broker liability in different directions. In Hydro-Mill Company Inc. v. Hayward, Tilton and Rolapp Insurance Associates Inc.,[2] the court reduced insurance brokers’ exposure to their clients whereas Century Surety Co. v. Crosby Insurance Inc.,[3] increased insurance brokers’ duties to the insurers with whom they do business on behalf of their clients.

In California an independent insurance broker is not an agent of the insurer, but rather of the insured.[4] In Hydro-Mill, the California Second District Court of Appeal cast doubt on whether an insurance broker serves in a fiduciary capacity.

By so doing it limited the ability of an aggrieved client to obtain punitive damages as a result of the broker’s error. In reaching its conclusion the court noted that:

A fiduciary relationship has been defined as ‘any relation existing between parties to a transaction wherein one of the parties is . . . duty bound to act with the utmost good faith for the benefit of the other party.’

Such a relation ordinarily arises where a confidence is reposed by one person in the integrity of another, and in such a relation the party in whom the confidence is reposed, if he voluntarily accepts or assumes to accept the confidence, can take no advantage from his acts relating to the interest of the other party without the latter’s knowledge or consent.” (In re Marriage of Varner (1997) 55 Cal. App.4th 128, 141.)

Despite the seeming trend of cases in California to analogize the insurer — insured relationship to a fiduciary relationship, the cases which have directly addressed this point have held that this relationship does not produce a fiduciary duty. [Hassard, Bonnington, Roger & Huber v. Home Ins., 740 F. Supp. 789 (S.D. Cal. 1990)]

In Henry v. Associated Indemnity, 217 Cal.App.3d 1405, 266 Cal. Rptr. 578 (1990), the court held that there was no fiduciary duty between an insurer and an insured. The plaintiffs urge that Henry should not be controlling because it ignored apposite California Supreme Court authority. This is not the case. The Henry court stated "We ... find no support in case law, other than dicta in a few Supreme Court cases, which would support such a theory as to the insurers."

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