The rule that an insurance agent or broker has a duty to exercise reasonable care is the traditional standard, but a greater standard is more frequently applied—if not expressly, then implicitly—in the evolving case law. For years, courts relied on the principle that if a broker fails to exercise reasonable care, and if such insufficient care is the direct cause of loss to a customer, then the broker is liable for such loss. In other words, the agent has a duty to use the degree of care expected of a reasonably competent agent under the same or similar circumstances.
This evolution of the law arises from the notion that in some cases, the agent’s duty goes beyond mere procurement to include a duty to advise or warn. Under a duty to procure, the broker’s role is more passive—finding the coverage requested by the insured, with a concomitant duty to notify clients of an inability to obtain the coverage or secure renewal. This duty is largely limited after the policy is bound, barring any affirmative misrepresentations during the policy term.
On the other hand, a growing number of courts have held that a special relationship between a broker and customer may trigger a heightened duty to advise that more closely resembles a fiduciary relationship, as well as a duty to safeguard the insured’s interests, suggest coverages, or make recommendations, even in the absence of specific requests. The struggle comes as courts identify factors that may give rise to a special relationship and duty to advise.
Apart from payment in addition to commission, many of the following factors are common to ordinary duty-to-procure relationships:
- The client pays a broker’s fee for services beyond standard commission (10 percent to 15 percent of total premium).
- Advertisements by an agent that suggest expertise or invite reliance by a client on the agent—e.g., hospitality, aviation, marine, schools, condominium exposures, etc.—recognizing that holding oneself out as having expertise is an important factor in determining whether a special relationship exists.
- An agent provides advice on a specific coverage issue.
- A longstanding or exclusive relationship between broker and client.
- Purchasing decisions and coverage selections made by the agent.
- Engagement letter/contract language.
A recent case involving a midsize insurance agency brokerage hinged on a “management fee agreement,” which read, in part:
We often charge fees to cover various expenses such as inspections, credit reports, customer service, risk management…appraisals or valuations. Additionally, we charge a management fee as part of our overall compensation, in addition to receiving commission. This is not intended to increase your overall cost of placing insurance through our company. The fee is separate and apart from all premiums and installment fees charged by insurance companies.
In accordance with state insurance laws, we must ask that you sign this memorandum prior to coverage going into effect, acknowledging your acceptance of the above as part of procuring the…insurance coverage through our facilities.
The plaintiff’s counsel seized on this agreement as a smoking gun, claiming that it triggered a special relationship and a duty to advise, appraise, and evaluate the customer’s insurance needs, as well as to recommend and instruct the client as to the type and amount of commercial coverage needed for its commercial building, business personal property, and business income interruption exposure.
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