Insurance Agents Are More Than Your Waitress At Denny’s

The common law must keep up with common times. There may have been a time when the insurance product was much simpler. That is not the case today. As I noted in yesterday’s post, Order Taker Status of Insurance Agents, and Are Insurance Agents McDonald’s Order Takers or Professional Advisors? The Massachusetts View, there is an extreme difference regarding industry standards about how insurance agents and brokers conduct business and the negligible duties some courts impose upon them as “order takers.”

Legal academia has caught on to this illogical standard. The University of Connecticut School of Law held a symposium about insurance intermediaries. A law review reporting on this noted:

The imbalance of knowledge, power, and sophistication that exists between insureds and insurers is apparent between intermediaries and insureds as well. Intermediaries are more like insurers than insureds: they are repeat players in the insurance industry; they are equipped with expertise, experience and a sophisticated knowledge of insurance; they market products that insureds do not understand; they can exploit this asymmetric possession of information to their advantage. Simply put, insureds have no more savvy, knowledge, or power in the relationship with their intermediary than they do with their insurer.

Despite the imbalances in the relationship between insureds and intermediaries, case law often does not impose a particularly high standard of care upon insurance intermediaries. Usually, courts do not regard these intermediaries as fiduciaries and they are merely held liable under a negligence theory. For some courts, it is the insured who bears most of the risks associated with imperfect communications or failure to purchase appropriate coverage. ‘[T]he majority of courts have placed the burden on the client to know potential coverages and ask for a particular coverage’ rather than ‘requiring the agent to clarify the request and educate the client.’

A few courts have flirted with the notion that intermediaries, particularly independent brokers, may be fiduciaries, on compelling facts or for particular tasks. Only a handful of jurisdictions have characterized the broker relationship generally as fiduciary. Arizona has adopted a professional standard of care, that requires brokers to ‘exercise reasonable care, skill and diligence in carrying out the agent’s duties . . . .’1

Does the policyholder really understand the insurance product? Do they really understand how insurance products intertwine with theories of risk management? The answer is obviously no:

Let’s face it: spending time with an insurance agent is probably not on the top of the list of things you love to do. But when you buy a new car, add an addition to your house, or get a new job that boosts your earning capacity, calling your agent is surely near the top of the list of the things you have to do. We call our agents–in statutory parlance, ‘producers’ –tell them about the change of our circumstances and, as painlessly and quickly as possible, aim to get the coverage we need. While we vary in our solicitude, to some extent those of us who use an agent to obtain coverage for our risks inevitably rely on our agents to understand these risks and obtain for us coverage at a reasonable cost; we ask our agents to take care of us, trusting that they will exercise basic diligence in their service to us and will ‘tell the truth and … keep their promises.’ But should we as a matter of course? Perhaps. After all, as a general principle, ‘[t]rust saves time and money … allow[ing] [us] to use the talents of strangers’ on matters about which we lack expertise. Attendant to such trust, however, lies the menace of its abuse and the cost of protecting ourselves from the harm that would result from exploitation.

…

… consumer insurance policies are not available for review pre-purchase. Even if they were, however, there is scant likelihood that the average consumer would know what they say. While the average producer might also have doubts as to what they say, they are in a better position to find out and, therefore, the onus should be upon the producer. This is exactly the scenario wherein it is reasonable for a person to rely on the person selling the consumer a policy. An untrained person, who has spent his time and efforts developing alternative skills to offer the world, cannot be expected to understand everything he needs to know in order to get the coverage he needs.2

It is simple hypocrisy when the entire insurance agent marketplace advertises itself as being one to trust when determining insurance needs and then claims that they are order takers after they fail that trust. This was noted by adjunct law professor Dan Sakhal:

In order to secure a larger segment of the insurance market, insurers and agents bombard the airwaves with commercials indicating that their clients ‘are in good hands’ or that they are there when you need them. For example, Farmers Insurance Group agents recently asked their clients to review their insurance  needs. In a standard brochure that was mailed to all clients, the agents also asked the clients not to think of a Farmers’ agent ‘as just a salesperson’ but as a skilled professional whom the clients could ‘count on and turn to.’ Since insurance agents increasingly ask their clients to trust them in navigating the complexities of modern insurance, the insuring public assumes its agents are professionals. Unfortunately for frustrated clients, the courts generally have not acknowledged a coherent professional tort duty that recognizes the agents’ new role in society.

…

If insurance agents truly wish to become trusted professionals, they should agree to assume the same duties as other professionals and not hide behind the outdated judicially created ‘special circumstances’ test. Only when all their interactions with their clients are evaluated according to the standards of their profession will agents truly to able to get what they desire—clients who count on them and turn to them for advice.3

It is hard for me to reconcile that ordering a McDonald’s cheeseburger, fries, and a Coke for several bucks from a teenage kid is the same standard that we hold insurance agents when paying thousands of dollars for insurance policies, which take years of study to fully understand. Yet, this is what many jurisdictions allow when stating that insurance agents are held to the standard of an “order taker.”

Thought For The Day 

There are worse things in life than death. Have you ever spent an evening with an insurance salesman?

—Woody Allen

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1 Hazel Beh & Amanda M. Willis, Insurance Intermediaries, 15 Conn. Ins. L.J. 571, 583–84 (2009).

2 Mark Franke, Suitability and Non-Maleficence: A Proposal for Insurance Producer Regulatory Reform, 26 Loy. Consumer L. Rev. 73, 98–99 (2013).

3 Daniel Gregory Sakall, Can the Public Really Count on Insurance Agents to Advise Them? A Critique of the “Special Circumstances” Test, 42 Ariz. L. Rev. 991, 991–92 (2000).