Purchasing business insurance is an essential step to take to protect the long-term stability and financial security of your company. It can also be a complicated and tedious process, however, and so most people choose to complete the purchase through a broker or agent. While in practice, there’s often not much difference in working with a broker or an agent, the main technical difference is that the agent works for a particular insurance company while the broker works for you.
A broker can be a great asset when it comes to acquiring the proper coverage for your business and ensuring that it stays up-to-date over time. This relationship is necessarily built on trust, and the broker must always be acting with your best interests in mind. But exactly how far that obligation extends is a question of some contention, and so it’s important to understand what you can and can’t expect from your broker.
What Is Fiduciary Duty?
The main question concerning the obligations of brokers to their clients centers on the issue of fiduciary duty, which is defined as a “legal obligation of one party to act in the best interests of another.” It applies to lawyers, for example, but courts in California have never upheld the right of an insured party to sue a broker for breach of fiduciary duty.
Rulings on this issue have been careful not to specifically eliminate the existence of fiduciary duty in this relationship in individual cases, but there has never been one that met the court’s requirements on this issue. What is clear from rulings in various cases over the years is that a broker has a definite obligation to act in the best interest of their client using “reasonable care”, but that an overarching liability does not necessarily exist.
Your Relationship with Your Broker
What this means for you as a consumer is that you are responsible for asking questions and providing as much information about your company as you can to the broker you choose to work with. The broker, in turn, must acquire the insurance coverage you asked for, but they are under no obligation to seek out any more details about your situation than you offer.
They are also not obligated to verify the financial situation of a given insurer before purchasing a policy on your behalf. That’s because regulations governing the financial requirements for insurance companies are monitored by the insurance commissioner, and so it’s reasonable to presume that any company currently operating in the marketplace meets those state-imposed requirements. Your broker also does not need to notify you when an insurer is about to cancel a policy, as that responsibility falls to the insurer.
This is all broadly applicable, unless your broker takes steps to enter into a special relationship with you or implies that they are acting with fiduciary duty even though they are not obligated to. In that case, it’s important to clarify exactly what your broker intends and have that relationship formalized by putting it in writing.
Potential Areas of Broker Liability
None of this means that brokers can’t be liable for wrongdoing in certain circumstances. In fact, courts in California have found that a broker’s duties are “defined by negligence law, not fiduciary law,” and so they can certainly be found liable for professional negligence. This would apply in situations in which the broker failed to procure the coverage you requested, for example, leading to a loss for your company when a claim was denied that should have been covered. It is not relevant, however, in the event that you request coverage that’s inadequate and the broker does not have enough information to make that determination on their own.
To learn more about the types of business insurance we offer and how we can help your company succeed going forward, contact our offices today or visit our resource library to read more about selecting the right insurance for your needs: