What legal duties does an insurance agency owe to its clients? Is a client justified in thinking that contingency payments from an insurer to the agency may induce the agency to obtain coverage from the insurer that pays it the most, rather than the best one for the client? These are some of the questions that came up in a Missouri court case.
A multinational corporation engaged a large national insurance agency to obtain several types of insurance policies over a period of many years. Following a highly-publicized lawsuit filed against the agency by a state attorney general over its receipt of contingent commissions, the corporation filed its own lawsuit against them. The lawsuit charged the agency with violating its fiduciary duty to the client. This was allegedly done in two ways:
- Placing insurance with insurers who paid it the highest contingent commissions, not those that offered the lowest rates, and not disclosing those payments to the client
- Depositing premium payments in interest-bearing accounts before forwarding them to insurers, without the client’s knowledge
The client also alleged that the contingent commissions must have increased the insurance premiums, thus violating the agency’s duty to use “reasonable skill, care and diligence” to obtain the coverage the client needed at the lowest possible price. Lastly, the client maintained that, even if the law did not create this duty, the agency voluntarily assumed it and failed.
The agency moved to have the suit dismissed, arguing that:
- Missouri law did not obligate it to disclose its commissions, contingent or other, to the client
- Missouri law did not require it to find the lowest-priced insurance for the client. Rather, it required the agency to use reasonable skill, care and diligence to obtain insurance, which it did
- The agency had no obligation to disclose to the client the fact that it earned interest on the paid premiums, as it was holding those premiums for the insurers, not the client
The trial court ruled in the agency’s favor, and the client appealed.
The appeals court began by noting that the agency represented the client in these transactions, and therefore owed the client a duty of loyalty. However, it said, “Failure to obtain the lowest possible cost insurance does not in itself violate that duty or a duty of loyalty to the insured in the absence of an agreement imposing such a duty.” It also found nothing in the law creating a right for the client to interest earned on premium funds. In addition, it found nothing in the law that would make it impermissible for the agency to accept contingent commissions or to disclose them to the client.
However, the court also said there were open questions as to whether the agency had assumed additional duties to disclose these commissions and obtain coverage at the lowest cost. The client’s argument, the judge said, was “sufficient to raise the issue of whether (the agency), either by contract, course of conduct during its more than 20-year association with (the client) or a combination of both, assumed obligations beyond the normal duty of all insurance brokers …”
She noted that the parties were unable to agree on whether “expectations arose through the parties’ course of dealing” that the agency had assumed additional duties. She also found that evidence showing whether lower-cost coverage was available did not exist. Because of these disputes over the nature of the relationship and the availability of lower-cost coverage, the judge returned the case to the trial court for jury consideration.
To avoid this litigation, the agency could have done a number of things:
- Shown the client multiple proposals for each type of policy, comparing coverages and premiums
- Created a written contract with the client that specified exactly what duties the agency owed
- Voluntarily told the client up-front about the contingent commission arrangements with insurers and the investment income from its premium accounts. Most state laws do not require an agency to do this, but it might have helped.
- Voluntarily told the client its expected commission income from each insurer from whom it was potentially seeking coverage. Again, this is may not be required and agencies don’t necessarily need to do this, but doing may have helped invalidate their argument.
Many agencies rely on contingent commission income from insurers. There is nothing inherently wrong with it. However, some clients may raise their eyebrows at it. Good communication with clients can help avoid the problems that this agency encountered.