Fiduciary duty represents a legal obligation that requires certain professionals, such as lawyers and financial advisors, to act in their clients’ best interests. This duty is crucial in financial and legal settings as it helps protect clients from potential conflicts of interest and ensures that their advisors act with integrity and transparency.
The Role of Fiduciary Duty in Life Settlements
Life settlements involve the sale of a life insurance policy to a third party for a value that typically exceeds the cash surrender value but is less than the death benefit. Fiduciary duty plays a vital role in ensuring that advisors handling these transactions prioritize their clients’ interests above their own.
Case Study: The Importance of Full Disclosure
A notable example of fiduciary duty in action—or the lack thereof—can be seen in a 2014 California lawsuit involving Larry Grill and his wife against Lincoln National Insurance. The Grills sued because they were not informed that they could sell their policy in a life settlement, which would have offered them significantly more money than surrendering their policy. They were only presented with the options to continue paying expensive premiums or surrender their policy for a minimal amount. The lawsuit highlighted that Lincoln National had a policy of not discussing life settlements, as they typically stood to gain more financially when policies were surrendered rather than sold.
This case underscores the importance of fiduciary duty in ensuring that clients are fully aware of all their options, including potentially more lucrative alternatives like life settlements.
Fiduciary Standards: Duty of Care and Duty of Loyalty
Fiduciaries are expected to adhere to two main standards:
- Duty of Care: This requires advisors to be actively engaged in their clients’ affairs and to stay informed about changes in legislation or market conditions that could affect their clients’ interests.
- Duty of Loyalty: This standard obliges advisors to avoid conflicts of interest. In situations where conflicts are unavoidable, they must fully disclose these conflicts to their clients.
What Constitutes a Breach of Fiduciary Duty?
To successfully claim a breach of fiduciary duty, a client must prove the following:
- Duty: The advisor was indeed acting as a fiduciary.
- Breach: The fiduciary failed to uphold their duties, either through negligence or with intent.
- Damages: The breach resulted in financial harm to the client.
Life Settlements: A Fiduciary’s Responsibility
In the context of life settlements, fiduciary duty could require an advisor to inform clients about the possibility of a life settlement when it is in the client’s best interest. For example, if a client is considering surrendering a life insurance policy, the advisor should discuss life settlements as an alternative that could potentially yield a higher payout.
Broker vs. Provider: Fiduciary Responsibilities in Life Settlements
- Life Settlement Brokers: These professionals have a fiduciary duty to their clients, meaning they must work to get the highest possible offer for a life insurance policy.
- Life Settlement Providers: Representing the buyers, providers do not have a fiduciary duty to the sellers and aim to purchase policies at the lowest price.
Conclusion
Fiduciary duty is a critical concept in financial and legal transactions, ensuring that professionals act in their clients’ best interests. In life settlements, this duty ensures that all options, including potentially more lucrative ones, are presented and considered. Advisors must navigate their roles with integrity, prioritizing their clients’ needs above their own. For clients navigating life settlements, it’s essential to work with trusted professionals who clearly understand and adhere to these fiduciary responsibilities.
