In the insurance industry, our watchdog is the state insurance commissioner and his National Association of Insurance Commissioners. Has he been doing a good job for the public? Not sure? Never hear from the guy? Is he in the pocket of the lobbyists? The insurance industry has lots of lobbyists. Are they looking out for our best interests? Spitzer is only one cop in one state; for those not in New York, go get your own cop.

It is not just the commercial line insurance industry that has come to the attention of the attorneys general. Steve Turckey, in N.U.'s Jan. 24 issue, wrote, “Any focus on personal lines has many agents concerned that traditional profit-sharing practices, which are the lifeblood of many agencies, could fall victim to this new wave of reform.” He added, however, that Spitzer had told New York legislators “that he isn't ready to propose a legislative fix to counter the insurance industry fraud and corruption that he is investigating. 'As we proceed, we will focus on precise legislative remedies that will be most appropriate,' he said.” Industry fraud and corruption? If the insurance industry has a fiduciary duty, it has a lot to do with money. As Yogi told us, “It ain't over till it's over.”

What Fiduciary Duty?

A few years back, when I was revising one of the texts I took over from the late Pat Magarick (Excess Liability, West Group), I had a long section on the fiduciary duty of insurers. An insurance defense attorney had complained to me, “Oh, no! Don't put that in there.” Why not? I believed in it, had been taught it, and considered it the correct ethical approach to what it is that we adjusters, who are the embodiment of the insurance contract, are about.

No, the industry legal spokesmen would argue. Insurance is not a fiduciary relationship. Their point is that, if they have to defend the industry on the basis that it has a fiduciary duty to its insureds, they would have a hard time showing that the duty had been met. Their job is tough enough already.

I ended up stating the proposition as a sort of question: “Evaluating whether a fiduciary duty exists.” I commented briefly on this topic in an Iconoclast column as well, and got a few responses from Californians who told me that, out there, insurance was not a fiduciary relationship. Ahh, the joys of the law: there were California cases on both sides of the issue.

Whether there is or is not a fiduciary duty between insurers and their policyholders seemed to be just an academic issue when I wrote about it five or six years ago, but Spitzer implies that it is more than academic, at least as far as he is concerned. He seems to have the vague notion that, when one party takes the money of another party, agreeing to act in that party's best interests for some actual or potential need, it must do so in the most honest, forthright, and fully disclosed manner possible. Goodness!

But what is a fiduciary? As explained in Winning By The Rules: Ethics and Success in the Insurance Industry (National Underwriter Co., 2001), “Fiduciary is primarily a legal term that means one who acts on behalf of another in a matter of trust, usually in an utmost good faith relationship.” The dictionary notes that it comes from the Latin fiduciarius, “trust,” or the thing that is held in trust, the designation of the person who holds something in trust for another. My first Insurance Institute of America course textbook, Robert Mehr and Emerson Cammack's Principles of Insurance, 4th Ed. (1966), stated that one “important reason for governmental regulation of insurance companies is the fiduciary nature of the insurance business.”

In the Third Edition of Casualty Claims Practice (Irwin Press, 1964), James Donaldson cited an unnamed case in which the court had said, “By asserting in the policy the right to handle all claims against the insured, including the right to make a binding settlement, the insurer assumes a fiduciary position towards the insured and becomes obligated to act in good faith and with due care in representing the interests of the insured.” Donaldson added, “It is for these reasons that the courts place an obligation on the insurer to act in the utmost good faith in dealing with the claim, so that the rights of the insured are not impaired.”

By the time the later editions of Donaldson's text were rewritten in 1984, after his death, the new author had elected not to include the same fiduciary/utmost good faith language. In the fifth edition, however, Donald Hirsch did define a fiduciary as including “an agent handling the business of another … to whom he or she stands in a relation implying and necessitating great confidence and trust on the one part, and a high degree of good faith on the other.” So, whether a fiduciary duty is one of “utmost” good faith, or a “high degree” of good faith, it seems to be something a bit more than just plain old simple “good faith.”

Although Donaldson did not identify the source of his quote, it is similar to that of a Missouri appellate decision in Duncan v. Andrew County Mutual Ins. Co., (665 S.W.2d 13, 1983), in which the court said, “An insurer's right to control settlement and litigation under a policy of liability insurance creates a fiduciary relationship between the insurer and the insured.” However, Duncan involved a first party property claim, not a liability claim, and the court continued by stating that the “fiduciary duty is notably absent in claims by an insured against an insurer under policies of property and related types of insurance.” Their point was that the parties are considered equal.

My mentor, co-author and prior columnist for Claims, Pat Magarick, said of that Duncan decision in Missouri, “While I have no problem following the court's reasoning [about there being no fiduciary duty in a first party claim], I cannot agree that the fiduciary relationship depends entirely on settlement control. Good faith should be a requirement of both parties involved in a first-party settlement.”

Courts have debated the fiduciary nature of insurance for decades, some finding that there is such a duty, and others that there is not. California courts have gone in both directions, and at least 12 states have addressed the issue in recent years. Magarick noted that a “majority of courts have rejected the fiduciary theory and ruled that the insured/insurer relationship is nothing more than that of any business transaction,” wherein the interests are equal, neither superior to the other. See, for example, Bailey v. Allstate Ins. Co., (844 P.2d 1336 [Col., App. 1992]), or, more recently, Martin v. State Farm (808 N.E.2d 47 [Ill App. 2004]). In Martin, the court ruled that an insurer acting on behalf of a negligent driver did not owe a fiduciary duty to the claimant, even though the claimant was insured by the same company and, thus, the insurer had no duty to advise its insured/third party claimant of his right to seek diminished value benefits.

Breaching the Duty

Spitzer apparently believes that the interests, although perhaps they ought to be equal, are not always that way. Insurers are quite ready to step up to the plate and tell their insureds where to fix their damaged vehicles, whom to hire to repair their damaged houses, and where to go to replace stolen property. Most insureds, or claimants who might otherwise sue the insureds, are quite pleased with this. They do not know one body shop from another, know nothing of how to fix their fire- or water-damaged residences, or how to get the best deals on replacing their stolen television sets.

Insurers go far beyond that, however. They now tell their insureds what doctors to see, what prescriptions they will approve, what treatment or surgery insureds may receive, and, some day I would not be surprised, what undertakers they can hire if they are killed. All these “go where we tell you” deals are fine — insureds are like sheep, they will follow the herd — but there is a fiduciary duty imposed, because the insurer has taken on the role of saying, “Trust me; it is in your own best interests.”

A lot of words are associated with faith. Trust, belief, reliability, even ethical terms such as integrity. Some of these, such as trust and belief, can apply equally to bad or negative kinds of faith, such as blind faith. Look at all the kids who put their trust and belief into clergymen who later abused them, or the good folks who send their money to television preachers who promise that their big donations will bring them riches or free them of problems. That is the same sort of deal Martin Luther complained that John Tetzel was doing with his sale of indulgence 500 years ago.

Faith, whether it is “utmost good” or just “a high degree of good,” is more than just belief and trust. Faith requires a personal relationship, understanding based on investigation and evaluation, and maybe even a little negotiation, acceptance by basis of reason, not just emotion. When that occurs, then what we in the claim business do with the faith of those who put their trust in us and believe what we tell them will determine whether we have met our fiduciary duty.