Yet Another Breach of Fiduciary Duty Case Involving Life Insurance

As discussed with increasing frequency in this newsletter, arbitration and litigation case involving a higher standard-of-care surrounding life insurance advice and management continues to rise.  While there has been much conversation about the fiduciary duty of irrevocable life insurance trust (ILIT) trustees (e.g., see the ABA tele-briefing-Case Law Guidance (Finally) for Trust-Owned Life Insurance), more recently these legal attacks are being waged against the agent/broker who sold the policies either in the courts (e.g., Another Breach of Fiduciary Duty Involving Life Insurance ) or in arbitration proceedings (e.g., More Signs (Beyond FinReg) Pointing to a Higher Standard of Care). 

For instance, a recent such arbitration case was filed on behalf of the [client’s] Rev Trust, Trustee, 2 Individual Retirement Accounts and The [client] Insurance Trust, and includes “allegations of breach of fiduciary duty, breach of written contract, fraud by misrepresentation and omission, failure to supervise and control, violation of federal and state securities laws, statutory and common law and NASD Rules of fair practices and NYSE rules.  The causes of action relate to unspecified securities in Claimants’ accounts held with [agent/broker] and the purchase of a life insurance policy.”

FINRA found the [agent/broker] liable and ordered them to pay $1,098,386 to Claimants, $10,000,000 of punitive damages…, attorney fees of $439,354, and Claimant costs of $20,387. The FINRA arbitration manual pg. 31 states, “…Punitive damages are not intended to right a wrong but are intended to punish a wrongdoer  and to deter future wrong doing…the [agent/broker] has engaged in serious mis-conduct and meets the standard for such an award.”

While this award “relate[s] to [both] unspecified securities in Claimants’ accounts held with [agent/broker] and the purchase of a life insurance policy”, almost half of the damages relate specifically to the breach of fiduciary duty and other allegations involving the standard-of-care surrounding a $4 million life insurance policy requiring $168,000 in annual premium that the [agent/broker] sold to [client] in 2006. Lawyers representing [the client] argued that the life insurance was not needed and therefore unsuitable and generated losses of $437,000 including an exit fee of $168,610.

FINRA has been recording arbitration awards for 21 years and this new case is among the top 10 largest amount ever awarded, according to the NY Times.  As such, while the frequency of breach of fiduciary duty arbitration cases/awards are clearly on the rise (see ), this case may also indicate that the amount of the breach of fiduciary duty awards is also on the rise.  This would certainly be consistent with the general increase in the standard of care to which financial advisors in general and including life insurance agents/brokers are being held (see section 913(b) of the Dodd-Frank Act, i.e., Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010)). 

Agents/brokers who are or may be perceived by clients as life insurance experts who are serving the best interests of the client would, therefore, be well served to provide independent research that supports such recommendations.  Similarly, independent advisors who owe a fiduciary duty to the client would also be well served to suggest/insist that product recommendations/proposals include independent research as to the suitability of the recommended product to the client’s situation relative to peer group product alternatives. 

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

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