By Cedric E. Stephens, ContributorQuestion: What are the duties an insurance broker owes to its clients? Are those obligations limited in any way? Thirdly, are there any differences between dealing with a broker and an insurance agent? I am about to compare proposals from an agent and a broker and would like to know the pros and cons of doing business with each.
- M.B., Kingston 5.
Answer: I feel like I am sitting an exam instead of helping you to solve a problem. The questions you posed are that tough. The irony is that if I do not give you some of the tools to properly analyse and compare the two proposals, you [and others] will give me a very big and public F [for fail, of course] - not unlike the grades Sting's promoters and some of the artistes earned at the recent bash.
Brokers owe their clients many duties. The three main ones are 1] a fiduciary duty; 2] to exercise reasonable care and skill in carrying out the orders they get and 3] to ensure that the policies they arrange continue to meet the needs of the clients and do not lapse without the clients' knowledge.
COMMON LAW
These duties are based largely on practice and common law. So for example, our Insurance Act, 2001, which regulates brokers, does not spell out, except in a very broad way, the duties of brokers.
Fiduciary is derived from a Latin word that means trust. "A person [or business] who has power and obligation to act for another - which require total trust, good faith, honesty," [and in my opinion, independence] says dictionary.law.com. A broker's fiduciary duty should be at the heart of his relationship with clients.
The broker has greater knowledge and expertise about insurance than the client. He is held to a higher standard of conduct and trust than that of a stranger. The broker should avoid self-dealing. His actions should be guided by what is best for the client.
For example, a broker should place his client's insurance where the best terms are offered - not with the insurer that pays the highest rate of commission.
A broker would be acting against his client's best interests if he placed insurance with a related insurer when more competitive terms were available from other carriers. Some would argue [me included] that a broker is under a professional duty to disclose any connection he has with an insurer to his clients as a matter of course.
Non-compliance with the client's instructions is not necessarily a breach of duty. This assumes that the broker has used reasonable skill and care but failed to achieve the clients' objectives. If this happens the broker should report it to the client and seek other instructions.
The duty to comply with the client's order has two parts. One starts before insurance is arranged. The other part begins after the insurance has been effected.
Pre-purchase Duties: These include:
Obtaining coverage that suits the clients' needs within the scope outlined and within any time-frame that is stated.
Finding an appropriate insurer and paying attention to the financial standing of that insurer.
Obtaining the widest possible coverage at the most competitive premium.
Communicating with the client where it is not possible to comply with duties 1 to 3.
Post-purchase Duties:
The primary duty must be to ensure that the client understands any restrictions, conditions or special conditions [like warranties] in the policies.
Check that the policies provide the cover requested by the client before they are sent to the client.
Obtain the clients' instructions if renewal of the insurance is required or inform them if policies are due to be lapsed.
Notify insurers about mid-term alterations to the policies promptly and confirm same to the clients.
Advise the insured if the financial condition of the insurers have deteriorated.
Keep the clients advised of any developments which may affect the efficacy of the coverages.
The practice of broking in Jamaica is under 50 years old. As a result, the local courts have not given much guidance on the subject of the obligations brokers owe to their clients.
The duties I have stated are based upon UK practice and the decisions of that country's courts. Our courts would, in all probability, follow those decisions.
In next week's article I will answer your other questions. The author provides impartial advice on risks and insurance. If you need free information or advice to solve a problem, write to The Financial Editor or, contact Mr. Stephens directly at aegis@cwjamaica.com
