For the most part, insurance brokers have ordinary business relationships with their clients, not fiduciary relationships. But there is an exception to this general rule. In certain circumstances, the broker may have a fiduciary relationship with the client if both sides understand that the client is relying on the broker. With a fiduciary relationship comes a higher duty to the client, broadening the broker’s potential liability for failing to secure the right coverage.
This creates a delicate balancing act for brokers. Most brokers do not want just ordinary relationships with their clients; they want extraordinary relationships. At the same time, brokers want to avoid entering fiduciary relationships, so as not to expand their liability. But where is that line? At what point has the broker crossed over from simply being reliable into inviting reliance?
A recent case from an Ohio appellate court gives some guidance on this issue. In FDT Grp., LLC v. Guaraci, 10th Dist. Franklin No. 16AP-679, 2017-Ohio-663, a broker sold property insurance to his client without water backup coverage. The covered property flooded due to a water pipe backup. The client made a claim, which was denied because the client failed to purchase the relevant coverage. The client then sued its broker claiming that he breached his fiduciary duty by failing to offer the water backup coverage.
To establish the heightened fiduciary duty, the client alleged that the broker invited his reliance by
- Choosing which optional coverages to recommend;
- Pursuing the client’s business;
- Emphasizing his trustworthiness and expertise;
- Consistently providing the client with explanations of coverages and requested information;
- Providing a subcontractor agreement template;
- Recommending other agents in certain situations; and
- Visiting the property before issuing the policy.
Id. at ¶ 22.
Based on this list of services, the client argued that the broker had created a fiduciary relationship with the client. But these are just the sort of things the broker might do in attempt to provide good client service. Other brokers undoubtedly do more, providing even better service to their clients. Is providing excellent service—or even good service—sufficient to create a fiduciary duty?
The Guaraci court held that, in this case, there was no fiduciary relationship between the client and broker. Rather, the court concluded, the evidence showed that the client broker had “an ordinary business relationship ….” Id.
The analysis, though, did not focus solely on what services the broker provided. The position of the client needed to be considered, too. And this client was in no position to claim that he was relying on his broker for the following reasons:
- He was “a sophisticated business man running multiple businesses and owning many properties,” and he understood that broker “would make recommendations in his own self-interest.” Id. at ¶ 23;
- The client did not communicate directly with the broker, but used intermediaries;
- The client pitted competing brokers against each other to place coverage; and
- The client admitted that he “was the ultimate decision maker regarding the insurance,” and, since he was aware of the water backup coverage—which he had on other properties—he further admitted that it was his responsibility to ensure the coverage was included.
FDT Grp., LLC v. Guaraci, 2017-Ohio-663, ¶ 23
As in every case, the positions of client and broker need to be balanced to determine whether a fiduciary relationship exists. Some changes to the facts might have led to a different result—for example, if the broker did more to invite reliance from the client, or if the client was less sophisticated. But, based on this holding, brokers are in a good position to argue that providing good service to sophisticated clients is not sufficient to create a fiduciary relationship.