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Insurance agents represent the insurers that appoint them. Insurance brokers legally represent the insurance purchaser (or prospective purchasers). A broker solicits and accepts applications for insurance and then places the coverage with an insurer. The business is not in force and the insurance company is not bound until it accepts the application. Technically speaking, a broker does not represent anyone until prospect or client requests coverage and then the broker represents the buyer.
That distinction between agent and broker becomes blurred when independent (unaffiliated) agents are appointed by various companies to sell their products. Often, a clients simple goal is to purchase appropriate P&C coverage to meet her needs and the independent agent will present proposals from several different companies. In these situations, is the sales person an agent representing the company's products, or a broker representing the client's needs? In practice, the regulatory distinction between brokers and agents is not significant, as Florida does not issue separate licenses for brokers. Instead, licensed agents may act as brokers for their clients. There is, however, an important legal distinction: brokers owe their ultimate fiduciary responsibility to their clients; agents owe a fiduciary responsibility to the company that appoints them. Since a company can only pay commissions to appointed agents, a broker legally owes a fiduciary responsibility to both his clients and the company that pays his commission. These conflicting interests can sometimes place an agent or broker in a difficult position.
Fiduciary Responsibility to the Client
A fiduciary is a person in a position of financial trust. Attorneys, accountants, trust officers, pension plan trustees, stockbrokers and insurance agents are all considered fiduciaries. Insurance agents and brokers may owe a fiduciary duty to both to the companies they represent and to the insurance buying public. Agents who make recommendations to clients have an obligation to be knowledgeable about the features and provisions of the products they sell, as well as the prudent use of these products. Agents also must take the time to become acquainted with the client's financial needs, situation and objectives. Agents collect premiums on behalf of the insurers they represent, so they also have a fiduciary duty to submit those monies to the insurer promptly.
Insurance agents and brokers voluntarily accept this fiduciary responsibility and implicitly agree to carry out that duty in good faith. That has been interpreted by the courts to mean that fiduciaries must act reasonably to avoid negligence and to not favor anyone else's interest (including their own) over that of their clients or the companies that appointed them. Fiduciaries owe their principals (the person they represent):
Utmost Care. One standard applied to fiduciaries is the "prudent man rule", which states that the fiduciary should behave as a "prudent person" would under the same circumstances. This can be a very vague standard, but it is one that courts have relied on over the years. Professionals are usually held to a higher standard of conduct to exercise "utmost care". This higher standard is warranted because professionals are assumed to be more knowledgeable and experienced than an ordinary prudent person. One can argue that clients seek out and are willing to pay for professional advice precisely because of the added knowledge and experience the professional brings to the decision-making process and therefore should be held to that higher standard.
Integrity this applies to the fiduciary's soundness of moral principle and character: the agent must act with fidelity to the principal's interest and with complete honesty.
Honesty and Duty of Full Disclosure of all material facts, either known, within the knowledge of or reasonably discoverable by the agent which could influence in any way the principal's decisions, actions or willingness to enter into a transaction.
Loyalty An obligation to refrain from acquiring any interest adverse to that of a principal without full and complete disclosure of all material facts and obtaining the principal's informed consent. This precludes the agent from personally benefiting from secret profits, competing with the principal or obtaining an advantage from the agency for personal benefit of any kind.
Duty of Good Faith includes total truthfulness, absolute integrity and total fidelity to the principal's interest. The duty of good faith prohibits taking advantage of the principal through the slightest misrepresentation, concealment, threat or adverse pressure of any kind.
In the case of conflicting interests, the agent must disclose the "dual agency" (acting for two parties at the same time) or risk being accused of fraud from either or both principals. Most brokers are compensated by commissions. This, in itself, creates a difficulty since there is an inherent conflict of interest. It is common knowledge to most insurance purchasers that agents and brokers earn a sales commission, which may mitigate the conflict somewhat.
Florida courts addressed this commonly held knowledge in the case of Beardmore v. Abbott ruling that a broker does have a fiduciary responsibility to his clients, but the broker's failure to disclose the full amount of his commission does not breach that duty. In this case, the client did not inquire as to the size of the commission at the time of the purchase, and broker did not volunteer the information. If the client had asked that question, presumably the courts would have ruled that the broker must honestly disclose that information as a matter of fiduciary trust. It should be noted that the client was very familiar with the insurance market, and knew that the broker would receive a commission it was disclosure of the exact amount that was the crux in this case. Agents should, at least, make clients aware that they may receive a commission as part of an insurance transaction.
The fiduciary duty of insurance brokers was also addressed in another Florida case: Moss v Appel. In this case, a broker helped a small business set up a pension funded with an annuity contract, and the broker was also hired to handle administrative paperwork for the pension plan. The broker received notice from the annuity company that it was in seeking additional capital to remain in business, but he did not alert the clients to that notice. The annuity company later became insolvent. The courts ruled that the broker owed a fiduciary responsibility to his clients based on the sale of the annuity and the ongoing consulting/administrative contract. As the court noted: "It is undisputed that [the broker] was acting as an insurance broker, not an insurance agent employed by a particular company, when he sold the plaintiffs the annuity." Presumably that distinction means that the broker should have placed the client's interests above any duty he may have felt to keep the contract in force with the troubled annuity company (even if it was the company that compensated him for the sale). In this case, there was a contract with the clients to administer the plan. The court did not indicate how that continuing relationship affected its ruling or for how long after the sale a broker (in the absence of a continuing relationship) owes that duty to his clients.
These cases illustrate some of the problems that can arise for insurance brokers. Independent agents are more likely to "shop around" coverage, which increases the likelihood that the producer will be viewed as a broker, and not as an agent.
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