More Signs (Beyond FinReg) Pointing to a Higher Standard of Care for Life Insurance

Customer complaints that had to be resolved through arbitration increased 43% between 2008 through 2009. While available data does not indicate how many complaints involved life insurance, the number of complaints went up in nearly all categories again in 2009. The most common complaint involved breach of fiduciary duty, with more than a 50% increase from 2007 – 2009 and the amount of fines and damage awards almost doubling in that last year.[1]  

In addition, the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act (commonly referred to as FinReg) gives the Security and Exchange Commission (SEC) the authority to impose a fiduciary “client’s best interest” standard-of-care on brokers when providing personalized investment advice and product recommendations.  The SEC is still studying this matter, yet these breach of fiduciary duty arbitration cases are already on the rise under current rules. 

At least part of the reason for this is likely explained by more claimant attorneys applying the common-law definition of fiduciary duty when filing claims[2]  both in arbitration and litigation.  For instance, as discussed in Another Breach of Fiduciary Duty Case Involving Life Insurance, an “[agent/broker] … presented himself as a seasoned expert”, “presented [his] recommendation as being in the [client]’s best interest” and the client “followed [agent/broker]’s direction and recommendation” “believing that [agent/broker] was acting in their best interest”. 

Similarly, a 2009 arbitration case involving breach of fiduciary duty “concentrated on the fact that two brokers had clearly stated on their business cards and similar correspondence that they were ‘financial consultants’ [which] identified a competency and knowledge that a prudent man would reasonably assume” and were “no longer just ‘salespeople’”.  The arbitration panel found that “[defendant] breached its fiduciary duty toward [claimant]” and “the plaintiff was awarded a substantial claim.”[3]  

While the SEC has yet to decide whether or not to impose a fiduciary “client’s best interest” standard-of-care on brokers when providing personalized investment advice and product recommendations, brokers who hold themselves out as life insurance experts (versus simply a salesperson for some limited number of insurers) and who make product recommendations (which clients generally believe to be in their best interest without disclosure to the contrary) are already being perceived and treated as common-law fiduciaries. 

As such, even if the SEC does not impose such a fiduciary standard-of-care on brokers in the near term, the days of brokers representing the products from some limited number of insurers while implying they are representing the best interest of the client are likely numbered.  So what are life insurance brokers to do in an environment of increasing arbitration claiming breach of fiduciary duty and increasing litigation claiming breach of fiduciary duty whether or not the SEC imposes a statutory “client’s best interest” standard-of-care? 

Some are concerned it is impossible to prove which product was/is “best” for a client.  However, a fiduciary standard does NOT require that a recommended product be the “best” product.  Instead, it prescribes a “prudent process” which, if followed, can protect fiduciaries against future claims that some product was not the “best” for a given client in a given situation.  In other words, fiduciaries who follow a “prudent process” can actually be wrong about product selection and not be liable for recommending a product that may not have been the “best” in hindsight. 

For instance, in a recently adjudicated case of breach of fiduciary involving life insurance[4] , beneficiaries lost between $3.25 MILLION to $5.46 MILLION yet the court concluded the fiduciary was NOT liable for such losses.  How is it possible for beneficiaries to lose MILLIONS while the fiduciary was found to have been serving the client’s best interests?  Because the fiduciary was able to prove they followed a “prudent process” and did so using information from an "outside, independent entity with no policy to sell or any other financial stake in the outcome." 

THEInsuranceAdvisor.COM is simply the fastest, easiest, and most credible, comprehensive and cost-effective way to independently verify to clients and their advisors whether or not the pricing and performance of existing or proposed life insurance is in their best interest.  Only THEInsuranceAdvisor.COM is accepted for independent client representation, endorsed by the New York Bankers Association (NYBA) and compliant with the rules of leading regulatory agency for the financial services business. 

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