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Risk managers' relationships with insurance brokers key to understanding coverage


When companies are blindsided by a liability claim or financial loss for which they believed they had insurance coverage, it is often due to deficiencies in the relationships they share with their broker, a panel of experts said last week at the Risk & Insurance Management Society Inc.'s conference in Philadelphia.

Commercial clients often believe, erroneously, that they are covered for certain exposures based on the assumption that their broker has a thorough knowledge of their risk profile or is obligated to inform them of any gaps in their coverage, panelists said.

Those types of misunderstandings can lead easily to litigation in which clients accuse their brokers of failing to meet a fiduciary duty or standard of professional care. However, even if the law supports a commercial client's allegations—and that is certainly not always the case—panelists said disputes over brokerage services following a surprise loss event usually end up doing more harm than good to all parties involved.


“It's a lose-lose situation for everyone,” said Akos Swierkiewicz, a principal at the Morrisville, Pa.-based IRCOS L.L.C. risk consulting firm. “The legal environment is very muddy for these kinds of cases. There are no set standards—or at least, not very many—that address the legal duties of insurance brokers.”

Generally, risk managers assume that their broker is required at the very least to exercise reasonable care, skill and diligence when procuring insurance. But in most U.S. jurisdictions, Mr. Swierkiewicz noted, there are no absolutes regarding the scope of duty owed to a client, or vice versa.

“There are some courts that have held that, as a matter of law, an insurance broker owes a fiduciary duty to its clients,” Mr. Swierkiewicz said. “But even in states where that fiduciary relationship has been established, it doesn't mean that the broker is automatically required to recommend or explain insurance coverages to their clients. That may be a surprise to some risk managers.”

Other courts, such as those in New York, have tended to favor brokers in errors and omissions disputes with their clients, holding that brokers must ultimately follow a client's instructions and are bound only to secure a policy that is not materially defective based on those instructions.


Situations such as these are easy enough to avoid, panelists said, as long as risk managers and brokers are willing to undertake a more comprehensive risk assessment process in the procurement stages of their relationship.

“It can't be stressed enough to brokers that when you're selecting coverage for a client, you need to be well-versed in that company's operations,” said Sandra Little, risk management director for Phoenix-based Red Door Spa Holdings. “You also have to provide guidance to your risk manager clients. As far as the client may be concerned, you're the expert in the relationship.”

On the other hand, noted Lynne Lovell, a Phoenix-based independent insurance broker and risk management consultant, the onus is not entirely on the broker to ensure that all risks have been accounted for.

“As a risk manager, it's equally important that you have a detailed knowledge of your company's operations and where they're going with new products that they're developing, international expansion plans and other strategic elements,” Ms. Lovell said. “Those things are going to bring about a whole other set of questions and circumstances that you're going to need to address.”