Law Poses No Duty on Insurance Brokers to Disclose Incentive Arrangements to Customers
The Attorney General sued the insurance broker of Wells Fargo Insurance Services, Inc., alleging breach of fiduciary duties and also his repeated fraudulent or illegal acts in violation of the common-law statute. The New York Court of Appeals affirmed, as neither did the broker make any affirmative misrepresentations to the customers nor did any customer suffer demonstrable harm from the incentive arrangements. In the absence of it, the case rested on the rule that one acting as a fiduciary in a particular transaction may not have received, in connection with that transaction, undisclosed compensation from persons with whom the principal’s interests may have been in conflict. However, the Court found that such a rule did not apply here, as a broker customarily looked for compensation to the insurer, not the insured. The insurance broker did not have a common-law fiduciary duty to disclose the “incentive” arrangements to its customers. People v Wells Fargo Ins. Servs., Inc., 16 N.Y.3d 166 (February 17, 2011)
The complaint alleged that insurance brokers, including Wells Fargo acted as agents for organizations and individuals seeking to purchase insurance, and therefore customers relied on Wells Fargo. It further alleged that Wells Fargo entered into several incentive arrangements with insurance companies, wherein the latter was rewarded by such insurance companies for bringing in business to them. As a result of which Wells Fargo steered customers to particular insurance companies as opposed to other companies who did not participate in the program.
Moreover, as per the complaint, incentive payments were not disclosed to Wells Fargo’s customers. On January 14, 2008, the New York Supreme Court dismissed Attorney General’s complaint with a leave to replead. The Attorney General chose not to replead but appealed to the Appellate Division on May 5, 2009, which again entered judgment in favor of Wells Fargo and affirmed the dismissal. The Attorney General further appealed to the Court of Appeals.
The Court of Appeals first considered the fiduciary duty claim as discussed in Murphy v. Kuhn 90 N.Y.2d 266 (1997), according to which, the law is reasonably settled on initial principles that insurance agents have a common-law duty to obtain requested coverage for their clients within a reasonable time or inform the client of the inability to do so; however, they have no continuing duty to advise, guide or direct a client to obtain additional coverage.
However, Murphy did not imply that insurance brokers are exempt from the general rule which states that an agent owes a duty of loyalty to its principal. Even if it had no duty to give advice, Wells Fargo clearly could not give advice in bad faith. This complaint did not allege that Wells Fargo did anything of that kind. Indeed, the complaint did not allege anything that breached Wells Fargo’s duty of loyalty, unless it was a breach of that duty to enter into undisclosed incentive arrangements with insurance companies.
The Court was not satisfied with the Attorney General’s description of relationship between an insurance broker and a purchaser of insurance. It referred to the broker’s “dual agency status” and explained that a broker is the agent of the insured, customarily looking for compensation to the insurer, not the insured, and is sometimes the insurer’s agent also (when collecting premiums).
Such disclosure was not required and if there are exceptions to that rule, this case did not present one. The complaint failed to allege that anything Wells Fargo did was contrary to industry custom. However, a recent regulation of the Insurance Department, with effect from January 1, 2011 prohibits such non-disclosure, which did not come into effect at the time of the conduct of the present issue. (11 NYCRR 30.3 (a) (2))
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