Do Insurance Brokers Have a Fiduciary Duty?
Published On: March 11, 2021
An insurance broker can save money for your business by procuring better rates and coverage than you could find and purchase on your own. And the best part? The insurance company usually pays them commissions – not you. But many businesses wonder if brokers have a fiduciary duty to serve in their best interests.
The good news is that insurance brokers do have a fiduciary duty to their clients.
When you hire an insurance broker, they work directly for you – not the insurance companies. So, you can think of an insurance broker as an intermediary between insurers and businesses, with no stakeholder interest in the policy itself.
In this post, we discuss a broker’s responsibilities to clients, how they are paid, and the fiduciary duties of insurance brokers and agents.
What Are an Insurance Broker’s Responsibilities?
An insurance broker's main responsibility is to understand your business and find fitting insurance policies within your budget. They also provide ongoing services to help determine if policies should change, assist you with compliance, and help submit claims and receive benefits.
Some insurance brokers focus on specific industries or types of insurance, while others provide advice on many different business insurance and benefits options. For example, brokers specializing in property and casualty insurance help small businesses find coverage for risks like natural disasters and lawsuits, while group health and life insurance brokers will assist companies with benefit plans.
Many insurance brokers and advisors will also act as an extension of your human resources team. When you need to reconsider policies or file a claim, your insurance broker can be a liaison between you and your insurance carrier. Because brokers work for you, not the insurance company, their advice should serve your company’s best interest.
On the other hand, since they are paid by commissions by insurers based on premium costs, brokers could be confronted with conflicting incentives and fiduciary responsibilities. Understanding whether insurance brokers have a fiduciary duty first requires understanding how they are paid.
How Are Insurance Brokers Paid?
Not all brokers are compensated in the same way, so the commissions or fees they collect may be different.
Insurance brokers typically are paid through a commission based on a percentage of your policy premium. In most cases, commissions are paid by the insurance company that the employer chooses.
Sometimes, brokers will charge fees as they take on consultant (or advisor) roles, providing ongoing services that go beyond buying and renewing policies. You should know if your broker or agent charges fees, and who pays the fees, before they start searching for insurance policies on your behalf.
Some brokers are contracted for several years, so you might need to pay broker fees through the contract term, regardless of policy changes, unless the broker violated your contract. Broker fees are usually non-refundable, so you will still have to pay if you cancel your policy mid-term, unless your insurance broker violated your contract.
Employers should know how their brokers are paid, but insurance policies are seldom simple, so you will need to ask about every potential fee or commission. To avoid unexpected costs, you should know commissions and fees upfront, examine your broker’s relationship with insurers, and understand the difference between insurance brokers and insurance agents. Good brokers have no issue with transparency.
What Does It Mean to Be a Fiduciary?
A fiduciary is a person or group (such as a brokerage firm) that acts on behalf of your company, putting your interests ahead of their own. So, being a fiduciary requires being bound legally and ethically to act in a client’s best interests.
Fiduciary duty requires that a representative in a position of trust, such as an insurance broker or advisor, must act in good faith and honesty on behalf of a client.
Insurance brokers voluntarily accept this fiduciary responsibility and agree to carry out that responsibility in good faith. Legally, that means fiduciaries must act reasonably to avoid negligence and not favor anyone else's interest (including their own) over your company’s interest.
Avoiding conflicts of interest is crucial to acting as a fiduciary, so a broker or advisor must disclose any potential conflicts to them serving your interest ahead of their own or the insurer’s.
Fiduciary certifications, along with insurance broker licenses, are managed at the state level in the U.S. and can be revoked by the courts if a representative neglects their duties.
What Is an Insurance Agent’s Fiduciary Duty?
You might wonder if insurance brokers have your best interest at heart. In most cases, they do. When you hire an insurance broker, they work directly for you – not the insurance companies.
Insurance brokers and insurance consultants perform similar functions, are licensed, and have a fiduciary duty to you as the insurance buyer. Moreover, an independent, fee-only advisor is legally bound to be a fiduciary.
The fiduciary duty between an insurance broker and a client is based on trust and good faith, and requires that they act in your interest as a client. A “standard of care” is established between these two parties and it must be upheld, regardless of external interests.
Their duty ensures that brokers advise and work for you when purchasing coverage, not beholden to a particular insurance company.
The distinction between fiduciary responsibility for an agent compared to a broker, however, becomes blurred when agents are working for insurance carriers to sell their products.
An independent or captive insurance agent is primarily a representative of the insurance companies they work for. As far as fiduciary duty goes, liability typically falls to the insurer if the representative is determined to be an agent. This means the agent will not have a fiduciary duty to the insured.
Brokers, meanwhile, owe their allegiance to the client, even though they are typically paid by carriers. In other words, they are an agent for your company and owe fiduciary duty to you as the insurance purchaser.
As we discussed earlier, most brokers are compensated by commissions, which could present an inherent conflict of interest. In the case of conflicting interests, brokers and agents are supposed to disclose the "dual agency" or risk being accused of neglecting their fiduciary responsibility.
You should be able to trust that your broker is finding appropriate coverage for your company. If they are not attentive, do not provide valuable advice, or only appear when renewals are coming up, it may be time to browse other options.
Broker relationships do change. If you are unsatisfied, know that more than 40% of businesses do not feel satisfied with their current broker, and 21% have changed brokers in the past three years, according to Zywave.
When evaluating and choosing insurance brokers, be sure to explore benchmarking studies that give you an understanding of who is out there and how much you should pay. Mployer Advisor’s proprietary M-Score can show you how different brokers rate in terms of industry expertise, transparency and cost. Looking for more exclusive content? Check out what’s trending on the Mployer Advisor blog.
Founder and CEO, Mployer Advisor