June 16, 2014
By Matthew Dugas, McCague Borlack LLP
Today, insurance company ownership of brokerages (partial or otherwise) has become so common that we’ve almost forgotten to step on the brakes over the ethical red light—because connections between insurers and brokers can be construed as a conflict of interest.
An insurance broker’s job is to work for the client, not the insurance company. Brokers help clients assess their insurance needs, find the right coverage and understand their policies. Close relationships between insurers and brokers can often be beneficial to consumers though. A broker who is better informed about insurance companies can provide better information and recommendations to clients.
In Ontario, section 14 of Ontario Regulation 991 under the Registered Insurance Brokers Act outlines a 13-point code of conduct, containing general directions related to competence and ethics that are binding on brokers. When it comes to the disclosure of a conflict of interest, subsection 7.1 provides that:
A member [i.e. a broker] shall disclose in writing to a client or prospective client any conflict of interest or potential conflict of interest of the member that is associated with a transaction or recommendation.
Other subsections of section 14 require a broker to discharge their duties with integrity and owe a duty of competency and good faith to their clients. Regulation 991 and its code of conduct are binding and mandatory to all brokers operating in Ontario.
The Registered Insurance Brokers of Ontario (RIBO), a self-regulating body governing insurance brokers, has issued a Code of Conduct Handbook, which interprets and discusses the guidelines. It states that, “while the provisions of the Code of Conduct are legal rules which must be followed, the guidelines contained in the Handbook are not necessarily intended to be self-contained rules.”
While subsection 7.1 of the code requires that any conflict of interest be disclosed in writing, it does not offer guidance on what exactly constitutes a conflict of interest, including whether ownership by an insurer actually constitutes one. But RIBO’s non-binding Handbook provides suggested guidelines that “any direct or indirect ownership interest of any kind” is a conflict of interest that requires disclosure. This includes a commonly owned brokerage and insurer within a group of companies and a loan/credit or other financial relationship between an insurer and brokers.
So the Handbook’s interpretation is very broad. As a rationale, it notes that subsection 7.1 replaced a provision that required disclosure only in much narrower circumstances. As the Handbook’s interpretations are not binding law, a broker may be able to argue that its ownership structure does not necessarily create a conflict of interest. It would be imperative to demonstrate compliance with the rest of the code of conduct, such as integrity, competence and good faith. Examples could include a brokerage having internal practices/policies that prevent ownership affiliations with insurers from placing brokers in a position where the interests of their clients are not paramount. If the ownership affiliation with an insurer helps to provide the consumer with the best available product, this could help to establish that no conflict of interest exists.
By Catherine Korte and David Olevson, McCague Borlack LLP
Guidelines of the Registered Insurance Brokers of Ontario are not legally binding, but they are persuasive and they would likely be consulted in the event of an alleged breach. RIBO’s guidelines explicitly state that, with regard to the duty to disclose, a client is entitled to any information about a broker’s business that pertains to a transaction or recommendation. Specifically, it states that:
A business relationship means any direct or indirect interest or benefit that is relevant to the transaction or arises from placing, or the recommendation to place, a contract of insurance with a particular insurer (over another).
The interest must be sufficient to raise the perception of “influence” over the broker’s “independent” decision- making process in the mind of a reasonable person who is in possession of all the facts. In other words, the influence must be “material” enough that a reasonable person would believe that a consumer could not make an “informed” decision without that knowledge. In all cases, we include “individual” conflicts of interest, as well as those of the registered “firm,” as the case may be…
Not only does this suggest a prima facie duty on a broker and their brokerage to disclose a potential ownership stake that an insurer may have in a brokerage, but the RIBO guidelines explicitly consider these situations in stating that, with regards to recent changes to the relevant regulations with respect to conflicts of interest:
“1. Any direct or indirect ownership interest or any kind in a brokerage by an insurer, or in an insurer by a brokerage: This disclosure required under section 11 of O. Reg. 991 was revoked when the ownership provisions were revoked to make way for the new disclosure requirement. There is no longer a 10% share ownership threshold before disclosure is required. This threshold has disappeared so that any ‘ownership’ interest would now require disclosure, including those situations whereby shareholders’ agreements provide for direction and control over the brokerage, regardless of voting rights or number of shares held.”
By amending the ownership requirements that need to be present to trigger a duty to disclose, it suggests that the legislature intended that this duty be interpreted broadly. Further, RIBO’s guidelines regarding this point suggest that these provisions need to be interpreted in a manner that facilitates more disclosure to the consumer while, at the same time, limiting the ability of a brokerage to shield itself by claiming its ownership rights are minimal.
Looking at the big picture, there appears to be clear legislative authority for the proposition that insurance brokers are under a strict obligation to disclose to their clients that their brokerage is owned, even if only in part, by an insurer. Furthermore, when considering RIBO’s interpretation of these regulations, it becomes clear that their intention and amendments are to impose such a duty upon brokerages and brokers alike to fully disclose their interests.
Copyright 2014 Rogers Publishing Ltd. This article first appeared in the May 2014 edition of Canadian Insurance Top Broker magazine
This story was originally published by Canadian Insurance Top Broker.