In DOD Technologies v. Mesirow Insurance Services, Inc., No. 05 CH 4677 (February 14, 2008), an appellate court in Illinois held that a policyholder may pursue claims for breach of fiduciary duty against an insurance broker if the broker received contingent commissions from insurers without informing the policyholder. Specifically, the court found that a producer misappropriates premiums when (1) it directs a premium to an insurer, (2) the price of coverage is not in the customer‘s best interest, and (3) the placement earns the producer undisclosed contingent incentives.

Plaintiff DOD Technologies filed a putative class action complaint against its insurance broker, defendant Mesirow Insurance Services, Inc., alleging that Mesirow received contingent commissions from insurers without informing plaintiff. Plaintiff based its breach of fiduciary duty claim on an Illinois statute that required an insurance producer to disclose fees not directly attributable to premiums. The statute precluded breach of fiduciary duty actions against insurance producers, but carved out an exception for claims based on the wrongful retention or misappropriation of premiums. The statute provides, in pertinent part, that:

No cause of action brought by any person or entity against any insurance provider, registered firm, or limited insurance representative concerning the sale, placement, procurement, renewal, binding, cancellation of, or failure to procure any policy of insurance shall subject the insurance producer, registered firm, or limited insurance representative to civil liability under standards governing the conduct of a fiduciary relationship except when the conduct upon which a cause of action is based involves the wrongful retention or misappropriation by the insurance producer, registered firm, or limited insurance representative of any money that was received as premiums, as a premium deposit, or as payment of a claim. 735 ILCS 2-2201 (West 2004) (Emphasis added).

The complaint alleged that plaintiff provided defendant with confidential and proprietary information with the expectation that defendant would seek the desired insurance at the lowest possible price. In addition to the policyholder‘s single payment made to the broker that included both the insurer‘s premium and the broker‘s commission, the broker also received contingent commissions from insurers for its placement of insurance for plaintiff and other putative class members. The contingent commissions were based upon three factors: (1) the aggregate amount of business referred to the insurer paying the “kickback”; (2) the “loss ratio” performance of the book of business referred to the insurer; and (3) renewals. Mesirow failed to disclose its receipt of the contingent commissions to its client.

Mesirow argued that wrongful retention or misappropriation meant diverting funds intended to pay premiums for another wrongful purpose, such as placing money received as premiums into a broker‘s operating account rather than into a premium trust account, or failing to pay money received as a premium to the insurer. The court rejected this argument, and noted that any money that an insurance producer receives for soliciting, negotiating, renewing, continuing, or binding insurance policies could be held in a fiduciary capacity and not be misappropriated, converted, or improperly withheld.

The court found that the critical fact would be whether the undisclosed financial incentives caused the broker to refer business to a paying insurer even if the policy and rates quoted by that insurer were not advantageous to the customer. Thus, these kickbacks, which the insured asserted should have been returned to it like any other rebate, could inflate the cost of insurance to customers and create a conflict that prevented brokers from acting in the customers’ best interest. Consequently, the court found that the placement of policies with companies that were not the most advantageous for the consumer would constitute the wrongful misappropriation of money received as premiums. The court noted that it was not solely the undisclosed incentives that constituted misappropriation, but rather whether the undisclosed incentives led the broker to place certain policies without regard for the customer‘s needs and in breach of its fiduciary duty. Additionally, the court was concerned that the “loss ratio” factor, which was one of the determining factors of whether contingent commission payments would be made, could potentially discourage a broker from pursuing legitimate claims.

This decision emphasizes the nature of the fiduciary relationship between an insured and its broker. Although brokers assert that they are always concerned about protecting their clients’ interests, insureds must be cognizant of the financial incentives attached to the placement of insurance policies.