What does a fiduciary relationship mean in the insurance contract setting?

Posted Saturday, August 25, 2007 by Ed Harper

As stated in earlier postings, an insurance company owes their insured a duty to act in good faith. These are obligations established by laws which have come about through our history of English common law or statutory enactments. These are to protect one from injuring another, also known as tort law.

Contractual obligations, on the other hand, occur because of promises made by the parties who have entered into a contract. The contract of insurance governs the responsibilities of both the insured (the policy holder) and the insurer (the insurance company).

Thus, insurance companies have obligations which arise from both legal obligations and contractual obligations. These responsibilities blur to some extent, and ascertaining the legal implications of the insurance company’s actions often requires legal representation. However, it can be assumed the insurance company is prohibited in acting in a way that is detrimental to its insured.

Therefore, courts have noted that there is a fiduciary relationship that exists between an insurance carrier and an insured. In the typical setting, a fiduciary relationship is established when one holds property or something of value for another. It stems from the days of Rome and the Latin word fiduciarius “(holding) in trust “and from fidere” to trust”.

The insurance company is not a true fiduciary for the insured, but the company must “give equal consideration” to the insured’s interest, as well as its own.

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