Insurance Salesmen: Dispense Financial Advice at Your Own Risk

In the recently decided case of Yenchi v. Ameriprise Financial, Inc. et al, the Pennsylvania Superior Court held that an insurance agent selling an insurance policy could, under the right circumstances, expose himself or herself to liability as a fiduciary of the individuals buying the insurance policy.  This outcome departs from prior cases, which held that the purchase of an insurance policy was typically “an arm’s length transaction” where the agent did not owe such a duty.

In the Yenchi case, the Yenchis began working with an insurance agent who (importantly, for the case’s outcome) identified himself as a financial advisor from American Express and who went on to charge $350.00 to complete a financial plan for the Yenchis.  Thereafter, the agent convinced the Yenchis that it would be beneficial for them to surrender their existing life insurance policies and use the proceeds to buy a single universal life policy.  The Yenchis were told that the premiums on the new policy would never increase and would cease entirely after 11 years.  The Yenchis followed this recommendation.  Additionally, the agent convinced the Yenchis to purchase a variable annuity for the Yenchis’ retirement.  In its recommendation the agent represented that the annuity would mature when Mrs. Yenchi reached age 65 at which point Mrs. Yenchi would begin receiving a monthly check.

To the Yenchis’ dismay, the annuity only matured when Mrs. Yenchi reached age 84 (not 65), and the premiums under the insurance policy increased and had no end date.  Each of those outcomes was obviously contrary to what the insurance agent had told the Yenchis.

Not surprisingly, the Yenchis sued. The Allegheny County trial court found for the Defendant insurance companies based in part on the idea that the relationship between an insurance agent and a customer is not a “confidential relationship” that gives rise to a fiduciary duty.  (A “confidential relationship” is one where the parties do not deal on equal terms, and one party has an “over-mastering influence” over the other or, perhaps more pertinent in this case, the second party justifiably reposes its trust in the first party.)

However, on appeal the Superior Court found otherwise.  In a case like this one where the Yenchis asserted that they were dependent on the agent because the agent promoted his services as a financial advisor and because they paid him to provide a comprehensive objective financial plan, the Court felt that the Plaintiffs could prove that there was a “confidential relationship” with the agent.  This confidential relationship is what gives rise to the agent’s liability.  In reaching this decision the Court highlighted that “(i)t is significant that Mr. Holland [the agent] cultivated a relationship with the Yenchis first as a financial adviser, not an insurance salesperson.”

The outcome of this case is important.  For years life insurance has been sold not simply as a way of covering risks, but also as an investment vehicle and a method of legitimately avoiding taxes.  Many insurance companies and individual agents aggressively market such life insurance policies on those bases.  This case establishes the principle that when an agent advises a client on the investment aspects of life insurance, that agent may cross the line into acting as a financial advisor with a fiduciary duty to the client.  Thus, the risks of being an insurance agent may just have increased.  If insurance sales are your profession, you may wish to (i) review your marketing to ensure that your claims for your services are accurate; (ii) provide necessary disclaimers to avoid the impression that you are giving financial advice if you are not intending to; and (iii) provide a suggestion that your clients may wish to obtain separate, independent financial planning.

– Rod Fluck

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