8/14/2019 Law Poses No Duty on Insurance Brokers to Disclose Incentive Arrangements to Customers

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The Attorney General sued the insurance broker of Wells Fargo Insurance Services, Inc.,alleging breach of fiduciary duties and also his repeated fraudulent or illegal acts in violation ofthe common-law statute. The New York Court of Appeals affirmed, as neither did the broker makeany affirmative misrepresentations to the customers nor did any customer suffer demonstrableharm from the incentive arrangements. In the absence of it, the case rested on the rule that oneactingas a fiduciary in a particular transaction may not have received, in connection with thattransaction, undisclosed compensation from persons with whom the principal 's interests mayhave been in conflict. However, the Court found that such a rule did not apply here, as a broker

customarily looked for compensation to the insurer, not the insured. The insurance broker did nothave a common-law fiduciary duty to disclose the "incentive" arrangements to itscustomers.People v Wells Fargo Ins. Servs., Inc.,16 N.Y.3d 166 (February 17, 2011)

The complaint alleged that insurance brokers, including Wells Fargo acted as agents fororganizations and individuals seeking to purchase insurance, and therefore customers relied onWells Fargo. It further alleged that Wells Fargo entered into several incentive arrangements withinsurance companies, wherein the latter was rewarded by such insurance companies forbringing in business to them. As a result of which Wells Fargo steered customers to particularinsurance companies as opposed to other companies who did not participate in the program.

Moreover, as per the complaint, incentive payments were not disclosed to Wells Fargoscustomers. On January 14, 2008, the New York Supreme Court dismissed Attorney Generalscomplaint with a leave to replead. The Attorney General chose not to replead but appealed to the

Appellate Division on May 5, 2009, which again entered judgment in favor of Wells Fargo andaffirmed the dismissal. The Attorney General further appealed to the Court of Appeals.

The Court of Appeals first considered the fiduciary duty claim as discussed in Murphy v. Kuhn 90N.Y.2d 266 (1997), according to which, the law is reasonably settled on initial principles thatinsurance agents have a common-law duty to obtain requested coverage for their clients within areasonable time or inform the client of the inability to do so; however, they have no continuingduty to advise, guide or direct a client to obtain additional coverage.

However, Murphydid not imply that insurance brokers are exempt from the general rule whichstates that an agent owes a duty of loyalty to its principal. Even if it had no duty to give advice,Wells Fargo clearly could not give advice in bad faith. This complaint did not allege that WellsFargo did anything of that kind. Indeed, the complaint did not allege anything that breached WellsFargo's duty of loyalty, unless it was a breach of that duty to enter into undisclosed incentivearrangements with insurance companies.

The Court was not satisfied with the Attorney Generals description of relationship between aninsurance broker and a purchaser of insurance. It referred to the broker's "dual agency status"and explained that a broker is the agent of the insured, customarily looking for compensation tothe insurer, not the insured, and is sometimes the insurer's agent also (when collectingpremiums).

Such disclosure was not required and if there are exceptions to that rule, this case did notpresent one. The complaint failed to allege that anything Wells Fargo did was contrary to industrycustom. However, a recent regulation of the Insurance Department, with effect from January 1,2011 prohibits such non-disclosure, which did not come into effect at the time of the conduct ofthe present issue. (11 NYCRR 30.3 (a) (2))

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