On 17 February 2011, the New York Court of Appeals (the highest state court in New York) ruled that insurance brokers do not have a common-law fiduciary duty to disclose incentive arrangements to their customers. The New York attorney general’s office brought an action against Wells Fargo Insurance Services, Inc. (“WFIS”), alleging that WFIS had entered into incentive arrangements in which WFIS was rewarded for directing business to insurance companies. The court noted that there was no allegation that consumers were persuaded to buy inferior or overpriced insurance by WFIS. The complaint alleged that WFIS had not informed the customers about the incentive arrangements with the insurance companies.
The court held that “the rule that one acting as a fiduciary in a particular transaction may not receive, in connection with that transaction, undisclosed compensation from persons with whom the principal’s interests may be in conflict”, did not apply in this case. The court discussed the broker’s “dual agency status” and stated that “the word ‘broker’ suggests an intermediary – not someone with undivided loyalty to one or the other side of the transaction.”
However, such non-disclosure may be a bad practice, according to the court, and it is prohibited by Regulation 194 with effect from 1 January 2011 (as discussed in Circular Letter No. 18 (2010)). The court held that a “regulation, prospective in effect, is a much better way of ending a questionable but common practice than…by creating a new common-law rule”.
The People v Wells Fargo Insurance Services, Inc., et al.
New York Court of Appeals
February 17, 2011