Broking ethics decided in landmark insurance case

by Tarquin Taylor23 Aug 2012

When a broking giant was taken to court in the US, it was decided if brokers can pick policies based on how much commission they gain and if brokers always have to at least offer the cheapest policy.

Emerson Electric recently battled with Marsh & McLennan in the Missouri Supreme Court. According to the allegations asserted by Emerson, Marsh steered its business to a few insurers that agreed to pay Marsh extra commissions contingent upon the amount of business Marsh sent to those insurers. When Emerson learned of this relationship it sued Marsh.

Insurance law expert Steven Plitt in Insurance Journal stated: “The Missouri Supreme Court found that while Marsh owed Emerson a duty of loyalty, the duty of loyalty did not include a duty to obtain the lowest cost insurance that met the insured’s needs, absent a specific agreement to do so.

“Emerson alleged that Marsh breached its fiduciary duty when it secretly agreed to accept additional contingent commissions from insurers to which it steered business. According to Emerson, this prejudiced Emerson because it prevented Marsh from obtaining insurance meeting Emerson’s needs at the lowest possible cost.

Plitt said that Emerson argued that even if Missouri statute permitted a broker to earn contingent commissions, the broker’s duty of loyalty required it to inform the insured that it was receiving such contingent commissions. The Court rejected that argument.

“Although the Missouri Supreme Court refused to conclude that the duty of loyalty required the procurement of the lowest cost insurance for the insured, the Court went on to explain that its holding did not mean that brokers were free to obtain insurance that did not meet the insured’s needs or insurance that was unreasonably costly or imprudent,” said Plitt.

“The broker still has a fiduciary duty to use reasonable care, skill and diligence in procuring insurance. Failure of that fiduciary duty would be legally actionable, not because it represented a breach of the duty of loyalty but because it would constitute a failure to exercise the degree of care required in procuring a policy for the insured generally.”

Plitt said a duty to obtain the lowest possible cost insurance can be assumed, however, by brokers. A broker by contract or course of conduct can assume obligations beyond the normal duties of all insurance brokers to use reasonable care, skill and diligence in procuring insurance on behalf of insureds.

“The takeaway from the Emerson case is that insurance brokers should be cautious in advertising their abilities to obtain the lowest cost insurance for their insured because to do so would expand the insurance broker’s obligations by that type of course of conduct,” added Plitt.