Those new to the insurance profession, particularly insurance brokers, will have to know about their fiduciary duties from the very start of their careers. In a nutshell, this means acting in the best interests of your clients.
As an insurance broker, you act as a fiduciary to your clients. This means that you have agreed to act in good faith and agree to work reasonably to avoid negligence when it comes to handling your clients’ affairs. These duties also mean that you will not favour anyone else’s interests, including and especially your own, above your client’s interests.
In this article, Insurance Business discusses and defines fiduciary duties as they apply to insurance brokers. We’ll shed light on relevant topics like:
There are many important talking points relating to this crucial legal term. Keep in mind that these duties can have important legal and ethical implications to your insurance broker practice.
Generally, insurance brokers have an obligation to act in the best interest of their clients. This also means avoiding any actions that would potentially conflict with their interests or result in a lack of transparency.
The legal and ethical obligations related to protecting the interests of your clients would typically include the following duties:
This is essentially at the core of the insurance broker’s fiduciary duty, as the duty of loyalty entails always acting in the best interests of clients. This also extends to avoid acting in ways that would result in a conflict of interest.
The duty of care is the responsibility of an insurance broker to exercise due diligence. Brokers must ensure that they carefully examine all available information, including any options to make informed decisions. Again, this fiduciary duty is mainly exercised to protect clients’ interests.
As a fiduciary, you are obligated to act honestly with and on behalf of your client. In the duty of disclosure, brokers can never withhold relevant information. They must disclose all information that can impact their fiduciary responsibility and affect the beneficiary’s (client’s) interests.
Apart from acting in your clients’ best interest and not for personal gain, this duty entails always acting within the confines of the law to advance the interests of the beneficiary. Note that duties of care or loyalty do not give anyone licence to commit illegal acts. Among the many fiduciary duties, this one reminds the fiduciary to act in the interest of clients, but without crossing legal boundaries.
This duty requires fiduciaries to handle matters and make decisions concerning their clients’ interests professionally and with reasonable caution. To avoid being guilty of negligence or recklessness, they must apply the highest level of skill and prudence, with an awareness of the risks of their actions.
A fiduciary must guard all information entrusted to them by the beneficiary. They must not use any form of information about their clients, whether written or spoken, for their personal benefit.
Speaking of client information, the duty of confidentiality may be even more important in today’s hi-tech, interconnected world. Directors and officers of insurance brokerage firms and other businesses that handle client data can invest in beefier cybersecurity, fulfilling this duty even more.
In cases like these, the duty of confidentiality can intersect with the duty of loyalty, as fiduciaries must proactively apply measures to protect client data and maintain their confidentiality. Thankfully, many organizations in Canada are taking cybersecurity measures more seriously.
Even as you embark on your journey to becoming an insurance broker, it’s important to know these fiduciary responsibilities beforehand. Bear in mind that most provincial insurance authorities maintain high standards for insurance brokers.
When you are issued an insurance broker licence, this signifies you have acquired the necessary skills and knowledge for delivering products and services. Your licence is also proof to consumers that you will conduct your business in a professional and ethical manner.
Knowing and practicing fiduciary responsibility when transacting with clients is crucial. Adhering to these fiduciary standards can be related to compliance with your provincial authority’s code of ethics. Continuing compliance with these codes is often an essential part of maintaining your insurance broker licence.
As an insurance broker entrusted with fiduciary duties, keep in mind that if you are found negligent or intentionally violating any of these duties, there can be serious legal consequences. Knowing the intricacies of fiduciary duties, what then would constitute a violation or breach of these important duties?
For the purposes of this article, let’s assume that the beneficiary is the client, and the fiduciary, the insurance broker. A breach of fiduciary duty is most often when there’s a binding fiduciary relationship and certain actions are done (or not done) which violate or adversely affect the interests of the beneficiary.
When a fiduciary commits inappropriate actions, they are assumed to have benefitted the fiduciary's interests or the interests of a third party rather than the principal's or beneficiary's interests.
Note that a fiduciary breach doesn’t have to be intentional. This can stem from a fiduciary's negligence or failure to provide critical information to a client in some cases.
Whether real or perceived, a breach like this can lead to misinterpretations, misunderstandings or misguided advice. It is for these reasons that differentiating an act of negligence from a breach of fiduciary responsibility can be difficult. Sometimes, a good recourse is to ensure that you have the appropriate insurance to cover for these events.
Related: Directors & Officers have a fiduciary duty to stakeholders too, and they can get D&O insurance in case of negligence, errors, or fiduciary breaches.
In a fiduciary breach, the plaintiff is usually the client or beneficiary. For them to establish that their insurance broker committed a breach of their fiduciary duties, certain elements must be present. These are the essential elements comprising a fiduciary breach:
Whomever claims there was a fiduciary breach must first prove that there was a fiduciary relationship to breach in the first place. In the case of a business relationship between an insurance broker and a client, there is an implicit contract of fiduciary duties.
Brokers must serve as advocates of their clients, and that includes protecting client confidentiality and avoiding any conflicts of interest.
After establishing the existence of a fiduciary relationship, the plaintiff must show evidence of a breach of fiduciary duty within that relationship. The type of breach can vary, such as a breach of:
For example, a broker may be guilty of fiduciary breach if they failed to keep accurate records of their client’s financial and personal information (duty of prudence). They may be liable for another fiduciary breach if they didn’t safeguard the information (duty of confidentiality), and it was stolen in a cyberattack.
No breach would occur if the client failed to give complete and accurate information to the broker and if the client's data was stolen while in their possession.
The third important element proving the existence of a fiduciary breach if there was damage resulting from said breach. There can be no basis for a case of fiduciary breach if there was no damage.
The more specific the damage a beneficiary can attribute to the breach, the stronger their case.
The final element for determining the existence of a fiduciary breach is its causation of the resulting damage. The plaintiff must establish and show proof that the damages or losses they incurred were directly due to the breach of fiduciary duty.
Much of the cases regarding breaches of fiduciary duties are typically financial in nature. These cases often involve lawyers or financial advisors who use their clients’ money or information to enrich themselves. However, there has been one recent and notable case of an insurance brokerage illegally taking client information from its client and using it to make a hefty profit:
In 2023, the concept of an implicit fiduciary relationship was affirmed by a court case, Prairie Risk Management Inc vs Marsh Canada Ltd et al. In this case, PRM sued Marsh for “misappropriating confidential client information and causing significant business losses”.
Here are the significant facts about the case:
Mr. Bill Duthoit, owner of PRM, sued his insurance broker, Marsh, after the brokerage allegedly took and illegally used confidential information to acquire clients from his company.
When it still existed, PRM offered insurance solutions to small businesses in the Manitoba pork industry.
Marsh Canada Ltd served as PRM’s insurance brokerage, securing insurance products for PRM and its clients.
After PRM’s partnership with Marsh ended, Marsh unethically took PRM’s clients’ information then fielded a campaign to acquire 45% of PRM’s clientele, undermining PRM’s business.
When PRM was sold two years later, its selling price was significantly lower than it would have been, if it retained the clients that Duthoit alleged that Marsh illegally poached.
After discovering the information misappropriation, Duthoit sued Marsh, garnering a favourable judgment for damages; the court awarded Duthoit over $1.5 million.
The court decreed that Marsh not only breached contractual terms but also committed breach of its fiduciary duties related to confidentiality and other obligations.
The importance of this case for insurance brokers and the Canadian insurance industry is that there doesn’t have to be an explicit clause about brokers’ fiduciary duty. By the very nature of insurance brokers being advocates of clients and their interests, fiduciary obligation is an implicit contract.
There can be both legal and ethical consequences in case a fiduciary breach is committed. Insurance brokers, be they individuals or entities, are held to high standards of professionalism and ethics.
A typical consequence of breaching fiduciary duties is a temporary suspension of the broker’s licence. There may be other penalties like expulsion from broker groups on ethical grounds. As for the extreme penalty of revocation of a broker’s licence, this is reserved for the most serious fiduciary breaches.
There can be other consequences resulting from a breach of fiduciary duty, which can include:
Apart from the ethical consequences, there can be legal repercussions. If the fiduciary breach is serious enough to warrant a court case, there are more tangible, steeper consequences like:
It may seem that the fiduciary responsibilities expected of you as a Canadian insurance broker is burdensome, but in the end, this is also for your best interests as a broker.
The work of an insurance broker and the insurance industry is solidly based on the trust and confidence of consumers. As part of good corporate governance, the insurance industry in Canada uses fiduciary obligations to ensure its members remain professional and adhere to ethical business practices.
With fiduciary duties in place as a means of ensuring ethical behaviour, the insurance industry as a whole can be kept stable, reliable, and fair.
What do you think about fiduciary duties? Is this a useful tool for ensuring ethical behaviour or are existing laws sufficient safeguards? Let us know your thoughts in the comments
