Health insurance companies, under both common law and, in many cases, the law of the land, have to play by different rules than other businesses. Like banks, insurance companies are said to have a “fiduciary duty” to their clients. Fiduciary comes from the Latin word fides, which translates as “trust.” Those who have purchased insurance from a company have placed much more trust in that company’s promises than they would have to place in a lawnmower manufacturer. Insurance companies therefore fall under a category of businesses known as fiduciaries; they have a special trust relationship with their clients, who have entrusted them with property in return for future protection. The Random House Dictionary defines a fiduciary as “A person to whom property or power is entrusted for the benefit of another.” [ii] Webster’s Third New Dictionary explains that a fiduciary’s good conscience “requires one to act at all times for the sole benefit and interests of another with loyalty to those interests.” [iii]
The health insured have done more than “purchase a service” from a health insurance company. They have in fact given that company a certain power over them. A health insurance policy is not a contract. Both parties to a contract are seeking their mutual benefit. Fiduciary relations, on the other hand, are designed “not to satisfy both parties’ needs, but only those of the entrustor.” [iv] In other words, the entrustor or insured is made promises by the health insurance company, but not the other way around. It may seem that the premium payments that the health insurance company receives from the one it is insuring is the “tit for tat” of the arrangement. But in actual fact, on closer examination, the relationship between insured and insurer is seen to be inherently unequal.
The insured, or entrustor, pays money upfront to a company with only a promise of aid in the future under specific circumstances in return. The insured are not just giving the insurance company money; they are vesting them with power. The amount of power depends on the extent which the insured, or entrustor, can leave their health insurance company, retrieve their property, and choose another policy. [v] In the end, it is the entrustor or the insured that always stand to lose more in their relationship with the insurance company than the other way around. [vi]
Because of the fiduciary duties health insurance companies owe their clients, they have always been the subject of special legal regulation. Those who adhere openly to these regulations, while they may find their freedom to conduct business limited, gain a reputation for honesty and trustworthiness.[vii] Unlike lawnmowers, where cost and quality may be the chief selling points, honesty and trustworthiness are what keeps insurance companies in business. Lose these in the eyes of the public, and your business could evaporate.
If all this is true of insurance companies in general, is it true of health insurance companies in particular? Do health insurance companies have, and do they recognize, a fiduciary duty to those they insure? Health insurance companies fit the definition of a fiduciary in three ways; by the way they practice and operate, by the way they portray themselves, and by the fact that the courts have concluded that they are. [viii] There is no getting around the fact that health insurance companies owe their policyholders “a high duty of care.” [ix] In Hartford Accident & Indemnity Co. vs. Michigan Mutual Insurance Co., the courts ruled that:
It is well established that, as between an insurer and its assured, a fiduciary relationship does exist, requiring utmost good faith by the carrier in its dealings with its insured. In defending a claim, an insurer is obligated to act with undivided loyalty; it may not place its own interests above those of its assured. [x]
By Chris Ryan and Charles St Onge