New York's highest court recently ruled insurance brokers do not have a common law duty to disclose to their customers the fact that they may have received incentive payments received from insurance companies. The practice of non-disclosure, however, is now prohibited by an Insurance Department regulation, which did not exist at the time of the conduct at issue in the lawsuit. The case, People v. Wells Fargo Ins. Services, Inc., et al, 2011 N.Y. Slip Op. 1070 (Feb. 17, 2011), can be found here.

In 2007, the New York Attorney General (the "NYAG") brought an action against Wells Fargo Insurance Services, alleging that Wells Fargo violated Executive Law 63 by engaging in repeated fraudulent and illegal acts that were in breach of Wells Fargo's fiduciary duties and led to unjust enrichment. (Executive Law 63 allows for the NYAG to bring an action on behalf of the people when a business is conducting a fraud.) In the complaint, the NYAG alleged that Wells Fargo, which deals with insurance companies on its customers' behalf, had entered into a number of incentive arrangements with insurance companies, in which the insurance companies rewarded Wells Fargo for bringing them business. These agreements, which resulted in cash compensation for Wells Fargo tied to the volume of business it brought to the insurer, were not disclosed to the customers. Because the complaint did not allege any overt misrepresentation or any actual injury to the customers, the Court of Appeals concluded: "The case rests on the rule that one acting as a fiduciary in a particular transaction may not receive, in connection with that transaction, undisclosed compensation from person with whom the principal's interests may be in conflict."

The NYAG argued that because an insurance broker is an agent of the insured, it has a fiduciary duty to disclose any interest that would cause its loyalties to be divided. The Court, however, did not consider the broker's status so "simple," pointing out that it looks to the insurer for compensation, and also at times acts as the insurer's broker, and is, in fact, a "dual agent" for both the insured and insurer. Because of this dual agency status, disclosure to customers of contractual arrangements with insurance companies is not generally required. Both the Council of Insurance Agents and Brokers, based in Washington, D.C., and the Independent Insurance Agents and Brokers of New York applauded the Court's decision.

Despite its holding, the Court was clear not to endorse such practices. In fact, it wrote that "this non-disclosure may be a bad practice" and that a rule requiring disclosure "is a sound one in general" even if it did not apply here. The Court's concerns are directly addressed by a new regulation issued by the Insurance Department, which took effect on January 1, 2011, that requires disclosure to a purchaser of insurance if a broker will receive compensation from the selling insurer based in whole or in part on the insurance contract. A spokesman for the Independent Insurance Agents and Brokers of New York noted that many in his group opposed the regulation, but they are complying with it.