Many insurance agents are confused about their role, which brings about misplaced loyalties and greater E&O exposures.
Let’s start with a question: Does the agent owe the policyholder the common law duty of good faith and fair dealing? Most insurance agents would respond with a resounding “yes” – but they’re wrong.
The duty of good faith and fair dealing is a non-delegable duty that applies only between the parties to the contract, and the parties are the insurance company and the insured – not the agent. Put simply, the agent is not the agent of the policyholder. The duties of good faith and fair dealing belong to the insurance company, not the agent.
So what duties does an insurance agent owe to the policyholder/applicant? Under common law, there are really but two:
- Use reasonable diligence in attempting to place the requested insurance.
- Inform the client promptly if unable to do so.
That’s it!
Some states may provide for a “special relationship” to have been created, which may provide for some additional duties. However, such a relationship is state-specific, requires some acts of commission to create and is beyond the parameters of this article.
Under statutes, there is really only one duty: Refrain from deceptive trade practices.
Every agent knows that the insurance code has a lot of pages devoted to prohibited practices. However, a careful review of the NAIC model law (upon which all states base their deceptive trade practices code) finds that all deceptive trade practices applicable to an insurance agent involve commission of an act, not the omission of an act. Under the model law, doing something incorrect is worse than not doing anything. Insurance agents may assume some duties that are not imposed upon them by law, thinking that they have such duties. If duties are “assumed,” even through ignorance, the law will hold agents to a professional standard for those assumed duties. If you make yourself out to be a coverage expert, the law will hold you to that expert standard.
Some 90% of E&O suits against agencies could be prevented through careful attention to practices and procedures.
By contrast, the duties owed by the agent to the insurance company are many. As a fiduciary of the principal, the agent owes the company:
- Loyalty
- Utmost good faith
- Candor/full disclosure
- Refraining from self-dealing
- Integrity, skill and care
- Fair and honest dealing
- Duty to follow instructions
Something many insurance agents may not have considered: Your responsibility to not breach your fiduciary duties to the insurance company are the largest part of your professional/ethical responsibilities as an agent.
(It is not a two-way street. The insurance company is NOT a fiduciary of the agent. In other words, an agent acts on behalf of the insurance company, but the insurance company does not act on behalf of the agent. Under common law, the insurance company only owes the agent: indemnification, payment of compensation and fair dealing.)
Some confusion may occur about agents’ responsibilities because of two issues: vicarious liability, which holds that a principal may be held liable for actions by its agent, and the legal maxim that a wrongdoer is ultimately responsible for his own wrongdoing. If an insurance company is held liable for the wrongdoing of its agent (vicarious liability), the insurance company can seek recovery from the agent, (holding the wrongdoer ultimately responsible).
If the insurance company is held vicariously liable for the agent’s wrongdoing, a decision to seek recovery from the agent may depend on:
- What did the agent do wrong?
- What recovery did the insured get?
- What recovery is available to the principal (the insurance company)?
- What was the agent’s thinking?
A common misconception is that all one has to do to avoid personal liability is to establish a corporation or limited liability entity. That is incorrect because:
- Professional liability is personal liability.
- Fiduciary liability is personal liability.
Summary
Insurance agents may assume many duties not imposed upon them by law. Assuming those duties holds the insurance agent to a professional standard not otherwise imposed.
The majority of an agent’s duties are owed to the insurance company, and it is the company’s vicarious liability for the actions of the agent that may ultimately get the agent sued. In other words, the biggest E&O exposure an agent may face is ultimately an action brought by the insurance company because of a wrong action or breach of fiduciary duties. Knowing this makes it all the more important that the agent fully understand and trust the insurance company before assuming the responsibilities and duties imposed upon agents.
