IBA West Calls CDI Legal Opinion on Fiduciary Duties “Erroneous”

On Friday, the California Department of Insurance released a legal opinion in response to requests the IBA West, American Agents Alliance and the Western Insurance Agents Association on the department’s position on the fiduciary duties of brokers and independent agents under California law.

The IBA West released a written statement calling the CDI’s opinion “erroneous,” stating it asserts that insurance producers have broad and onerous “fiduciary” duties toward their customers that go “well beyond the duties imposed by current law.”

According to the CDI legal opinion, “when a producer acts as an insurance broker in a transaction, he acts as a common law agent of the insured. All common law agents owe certain fiduciary duties to their principals. Consequently, when a producer acts as a broker in a transaction, he owes those fiduciary duties to the insured. In addition, if an appointed agent of a carrier simultaneously has an express or implied agency relationship with an insured, that agent will be a common law agent of the insured (i.e. dual agent of insurer and insured) and thus owe the same fiduciary duties. Even in the absence of an agent-principal relationship between a producer and insured, fiduciary duties can still exist if the insured reposes trust and confidence in the agent, and the agent accepts that trust and confidence.”

According to the IBA West, a “fiduciary” duty is one that exceeds the duties of candor and reasonable care typically encountered in t he business world. Its defining characteristic is that it requires the party who is labeled the “fiduciary” to place the interests of the other party–the “beneficiary”–ahead of his own in all respects. Such duties are normally reserved for relationships long recognized as involving an extreme dependency on the part of the beneficiary, such as the relationships between priest and parishioner, doctor and patient, and lawyer and client. “Fiduciary duties give rise to liability for potentially crippling awards of punitive damages,” said IBA West.

The IBA West continued with:

“California law holds that the relationship between insurance producers and customers is not fiduciary–a conclusion that flows naturally from the fact that insurance producers traditionally and legitimately receive compensation from, and often transact on behalf of, insurance companies as well as customers. The Commissioner’s legal opinion attempts to suggest a fiduciary duty that requires producers to, among other things, (1) disclose all compensation received from insurers and (2) obtain insurance on the best terms possible in accordance with the insured’s express needs or desires.”

“Thus, the Commissioner now discerns in existing law duties that he has previously attempted to impose—totally unsuccessfully—by way of legislation and regulatory action. Last December, reacting to negative comments concerning the practicality and wisdom of his proposal, the Commissioner abandoned regulations that would have imposed a duty to recommend the “best available” insurance products. And in late April, the California Legislature refused to vote out of committee a bill (SB 938), backed by the Commissioner, that would have imposed “fiduciary” duties and related disclosure obligations on insurance producers. In other words, having failed to impose a broad new fiduciary duty through normal channels, the Commissioner now maintains that the duty already exists.”

“The CDI legal opinion released today attempts unpersuasively to substantiate that view. The Commissioner ignores existing case law that limits producers’ duties to non-fiduciary ones. Instead, the Commissioner relies heavily on inferences drawn from general principles of “agency” law, while ignoring the manner in which courts have adapted those principles to fit the specific circumstances and characteristics of insurance producers. The Commissioner likewise ignores cases prohibiting state agencies or administrative agencies from imposing new common-law duties of care. These cases recognize that creating a new legal duty is a fundamental policymaking power that cannot be undertaken by an executive agency unless the Legislature authorizes it to do so. The Legislature has flatly refused to provide the Commissioner with that authority.”

“Our priorities are absolutely clear,” said Stan Simpson, IBA West President, Chairman Emeritus Buckman-Mitchell, Visalia. “We will continue to oppose the Commissioner’s attempts to illegally impose fiduciary duties; we will also continue to oppose any and all proposals to impose mandatory new disclosure requirements.”

IBA West says it will continue to oppose the commissioner’s position on fiduciary duties of agents and brokers, and will remain strongly opposed to the creation of any new laws or regulations requiring brokers or agents to make mandatory disclosures of compensation.

The association is now developing a technical “white paper””—based on current California law, and current litigation against insurers and producers seeking to make new law—designed to provide useful information and various options for voluntary consideration by brokers and agents.

For a copy of the CDI legal opinion please visit http://www.ibawest.com/pdf/Articles/CDIopinionletter093005.pdf