Do Insurance Brokers Have an Obligation to Offer the Cheapest Coverage Available?

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 Emerson Electric Co. v. Marsh & McLennan Cos., 362 S.W.3d 7 (Mo. 2012). In that case, the insured, Emerson Electric Co., utilized broker Marsh & McLennan to place particular types of insurance with insurers. 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 them. When Emerson learned of this relationship, it sued Marsh, in part, alleging that Marsh had breached its duty of loyalty by not purchasing the lowest cost insurance.

Under Missouri law, insurance agents have a duty of loyalty to the insured that is inherent in the nature of the relationship. The Missouri Supreme Court found that while Marsh owed Emerson a duty of loyalty, it 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 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 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 explained that its holding did not mean 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.

A duty to obtain the lowest possible cost insurance can be assumed by brokers. A broker by contract or course of conduct can assume obligations beyond the normal duties of all brokers.

The takeaway from Emerson is that insurance brokers should be cautious in advertising their abilities to obtain the lowest cost insurance for their insureds; doing so would expand the broker’s obligations. Oftentimes, brokers will advise their clients that they have shopped insurance rates and selected the lowest cost insurance.

The problem is that there are many parts to a standard insurance transaction in terms of coverages, 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 with a disclaimer indicating that the proposal only compares the gross premium charge and not the pricing of subcomponents.

The broker should explain to the customer that the insurance policy being offered is “competitive,” focusing on the quality of the insurer and why the agent has selected that particular insurer. Representations that the agent got the “best price” for coverage may give rise to an expanded duty.

Topics Agencies Missouri