The question of whether insurance brokers are required to obtain the lowest cost insurance that meets the insured’s needs was answered recently by the Missouri Supreme Court in the case of Emerson Electric Co. v. Marsh & McLennan Cos., 362 S.W.3d 7 (Mo. 2012).
In the Emerson case, the insured, Emerson Electric Co., utilized the brokerage services of Marsh & McLennan in procuring liability insurance. During the course of the relationship as broker and insured, Emerson paid Marsh to place particular types of insurance with insurers to meet a variety of Emerson’s insurance needs. 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, in part, alleging that Marsh had breached its duty of loyalty to Emerson by not purchasing the lowest cost insurance that met Emerson’s needs because Marsh steered business to secure the alleged “contingent commissions” from the insurers involved with the ultimate placement.
Under Missouri law, insurance agents have a duty of loyalty to the insured which is inherent in the nature of the relationship. 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. The Court in Emerson did not address this issue, however, because the Court found that the Missouri Legislature had specifically authorized brokers to obtain commissions from insurers with which the broker placed insurance.
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 as well.
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. 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.
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 insureds because to do so would expand the insurance broker’s obligations by that type of course of conduct. Oftentimes brokers will advise their clients that the broker has shopped their insurance rates with the insurance companies that the broker represents and has selected the lowest cost insurance for the client which is then recommended in a proposal. The problem with this approach is that there are many parts to a standard insurance transaction in terms of coverages that are being procured, i.e., auto liability, UM/UIM, collision, comp, towing, medical payments, etc. The premium for the policy is a composite of the subpremium charges for each of the component coverages. The better approach is for the broker to identify within the proposal the gross premiums charged for the amount of coverage represented by an insurance company with a disclaimer indicating that the proposal only compares the gross premium charge and not the pricing of subcomponents subsumed within the gross premium.
A better approach is to explain to the customer that the insurance policy being offered is “competitive” focusing then upon the quality of the insurer and why the agent has selected that particularly insurer for the agent’s inclusion within the proposal. Representations that the agent got the “best price” for the coverage may give rise to an expanded duty.
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