Conflict Of Interest
Written by Justin Goodman, CIC, CISC, CLCS, CEO and Co-Founder, Total CSR
Published: August 31, 2026 · Last reviewed: August 31, 2026
In plain language: A conflict of interest happens when someone handling your insurance, like an agent, adjuster, or defense attorney, has a reason to favor another party over you. That reason could be money, a business relationship, or a legal duty pulling in two directions at once.
Technical definition: Conflict of interest describes a situation where an insurance professional's duty to one party competes with a duty owed to another, undermining objective judgment. It arises most often between agent and client, insurer and insured, or defense counsel and the party paying for the defense, particularly during claims and coverage disputes.
Conflict Of Interest at a Glance
| Attribute | Detail |
|---|---|
| Also known as | Divided loyalty, competing interests |
| Category | Agency ethics and E&O exposure |
| Lines of business | Commercial General Liability, Professional Liability, Personal Lines, D&O |
| Industries most affected | Insurance agencies, construction, real estate, healthcare, financial services |
| Who bears the risk | Agent, broker, insurer, or defense counsel with divided duties |
| Common solution | Independent counsel, written disclosure, reservation of rights letters, dual agency disclosure |
| Also interacts with | Fiduciary duty, duty to defend, errors and omissions coverage |
Key Takeaways
- Conflict of interest occurs whenever a party serving an insured also owes a competing duty to someone else, such as an insurer, another client, or itself.
- Agencies encounter this daily through contingency commissions, dual representation of both parties in a transaction, and carrier relationships that can shade advice.
- The most common misunderstanding is assuming disclosure alone cures a conflict; in many states, disclosure is necessary but not sufficient without informed client consent.
- A quick win is documenting, in writing, any situation where the agency represents competing interests and confirming the client understood and accepted the arrangement.
What Is Conflict Of Interest in Insurance?
Conflict of interest describes any circumstance where a professional's obligation to act in a client's best interest is compromised by a competing loyalty. In insurance, this shows up in three recurring patterns: an agent who owes a duty to both the insured and the carrier paying the commission, an insurer defending a claim while reserving the right to deny coverage, and defense counsel hired by an insurer but representing an insured whose interests may diverge.
The doctrine exists because insurance relationships are inherently triangular. An agent is typically the insurer's contracted representative but also functions as the client's trusted advisor. That dual role works fine until a claim is denied, a coverage gap surfaces, or a carrier relationship influences which markets get quoted. Courts and state insurance departments scrutinize these moments closely because the party with less power, usually the insured, relied on the professional's neutrality.
A concrete example: an insurer defends a contractor under a reservation of rights because part of the lawsuit may fall outside the policy. The insurer-appointed defense attorney now has an incentive to develop facts that support the coverage denial, which directly harms the contractor. Many states require the insurer to pay for independent counsel, sometimes called Cumis counsel, chosen by the insured, in exactly this scenario.
How Does Conflict Of Interest Work?
- The dual role. An agent, insurer, or attorney occupies a position serving two parties whose interests are not fully aligned, such as an agency appointed by multiple competing carriers or an insurer defending under reservation of rights.
- The triggering event. A claim, quote, or coverage question arises where the interests of the two parties diverge, such as a coverage dispute that benefits the insurer if resolved one way and the insured if resolved another.
- The disclosure decision. The professional must recognize the conflict and decide whether to disclose it, decline the engagement, or bring in an independent party such as separate counsel.
- The response. The agency or insurer documents the conflict, discloses it to the affected party, and either obtains informed consent or steps aside from the conflicted role.
- The outcome. The client either accepts the disclosed arrangement, the matter proceeds to independent representation, or the failure to disclose surfaces later as an E&O claim or bad faith allegation.
Real Claim Examples Involving Conflict Of Interest
Reservation of rights defense on a construction claim
A general contractor faced a bodily injury lawsuit, and the insurer agreed to defend but issued a reservation of rights because part of the claim involved work the contractor performed outside the policy period. The insurer-selected defense attorney had an incentive to build a record supporting the coverage exclusion. The contractor's agency intervened, the carrier retained independent counsel at the insured's choice, and the conflict was resolved before it affected the underlying defense.
Agency placing coverage with an affiliated premium finance company
A commercial client financed premiums through a company owned by the same holding group as the placing agency. The agency failed to disclose the ownership relationship or the financing terms compared to outside lenders. When the client discovered the connection after a cancellation dispute, the agency faced a complaint to the state insurance department alleging undisclosed conflict of interest and unfair placement practices.
Dual representation in a real estate transaction
An agency represented both the buyer and the seller of a commercial property, placing property coverage for one and liability coverage for the other within the same transaction. A coverage gap surfaced after a fire loss, and each party claimed the agency should have flagged the exposure to them specifically. The lack of separate, documented advice for each party became central to the resulting E&O claim.
Conflict Of Interest vs. Fiduciary Duty: What Is the Difference?
Conflict of interest names the situation of competing loyalties, while fiduciary duty names the legal standard of care owed once a trust relationship is established. Understanding both matters because a conflict of interest is often the fact pattern that leads to a fiduciary duty breach claim.
| Comparison area | Conflict Of Interest | Fiduciary Duty |
|---|---|---|
| Primary use case | Identifying situations of competing loyalty | Defining the standard of care owed to a client |
| Coverage / concept type | Ethical and disclosure issue | Legal duty, often tied to E&O claims |
| Typical exclusions | N/A, not a policy provision | Varies by state law and agency-client agreement |
| Who is most affected by errors | Agents, insurers, defense counsel | Agents and brokers acting as advisors |
| Common mistakes | Failing to disclose a competing relationship | Assuming no fiduciary duty exists without a written agreement |
What Are the Most Common Mistakes With Conflict Of Interest?
- Assuming verbal disclosure is enough. Many states and E&O carriers expect written, signed acknowledgment when a conflict exists, and verbal-only disclosure is difficult to defend in a dispute.
- Treating contingency commissions as automatically disqualifying. Contingency arrangements are common and legal in most states, but failing to disclose them when a client asks creates unnecessary exposure.
- Continuing to represent both sides of a transaction without separating advice. Agencies sometimes place coverage for both a landlord and tenant without documenting distinct recommendations for each.
- Ignoring reservation of rights conflicts. Agencies sometimes assume the carrier's appointed defense counsel is neutral and fail to advise the client about independent counsel rights.
- Underestimating affiliated business relationships. Referring clients to an affiliated premium finance, claims, or risk management company without disclosing common ownership invites regulatory scrutiny.
How to Explain Conflict Of Interest to a Client
Explaining Conflict Of Interest to a personal lines client
You can tell a personal lines client that your agency works with several insurance companies, and while you earn commission from whichever one they choose, your job is to find the best fit for their needs, not the company that pays the most. Let them know you will always tell them if a recommendation involves any special arrangement worth knowing about.
Explaining Conflict Of Interest to a small business owner
Explain to a business owner that if their claim ever gets a reservation of rights letter, the attorney assigned by the insurance company works for the insurer first, and that is a normal but important distinction. Let them know your agency will flag it immediately and explain their right, in many states, to request their own independent attorney if the interests start to diverge.
Explaining Conflict Of Interest to a CFO or risk manager
Tell a CFO or risk manager that conflict of interest management is a documented part of your agency's E&O risk protocol, not an afterthought. Walk them through how affiliated relationships, contingency income, and dual representation situations are disclosed in writing before binding coverage. Offer to provide the agency's conflict disclosure policy for their vendor risk file if they need it.
Frequently Asked Questions About Conflict Of Interest
Does an insurance agent have a fiduciary duty to me?
Whether an agent owes a fiduciary duty depends on state law and the nature of the relationship, with some states recognizing a fiduciary standard for independent agents who hold themselves out as advisors. Even where fiduciary duty is not automatic, most states still require honesty, competent advice, and disclosure of material conflicts.
Can an insurer's defense attorney have a conflict of interest?
Yes, this happens most often when an insurer defends a claim under a reservation of rights, because the same facts that help the defense may also support the coverage denial. Many states require the insurer to offer independent counsel, chosen by the insured, when this conflict is significant enough.
Is it a conflict of interest for an agency to receive contingency commissions?
Contingency commissions alone are not automatically a conflict of interest and are legal in most states, but failing to disclose them upon request can create regulatory and E&O exposure. Best practice is proactive disclosure in the agency's client agreement rather than waiting to be asked.
What should an agency do when it discovers a conflict mid-transaction?
An agency that discovers a conflict mid-transaction should pause the placement, document the conflict in writing, and disclose it to the affected party before proceeding. In some cases, the appropriate response is referring one party to a different agency entirely rather than attempting dual representation.
How does conflict of interest connect to E&O claims?
Conflict of interest often becomes the underlying fact pattern in an E&O claim when a client alleges the agency favored a carrier, an affiliated vendor, or another client over their own interests. Total CSR's training assessments consistently show that CSRs who cannot articulate their agency's disclosure policy in plain language are the same group most likely to skip disclosure steps under time pressure.
Can a client waive a conflict of interest?
In many jurisdictions, a client can waive a disclosed conflict if the waiver is informed, specific, and in writing. A blanket waiver signed at policy inception without explaining the specific conflict at hand is unlikely to hold up if challenged later.
Related Insurance Terms
- Fiduciary Duty: A legal obligation to act in another party's best interest, often the underlying standard breached when an undisclosed conflict of interest causes client harm.
- Duty to Defend: An insurer's contractual obligation to provide legal defense for a covered claim, which becomes conflict-prone when combined with a reservation of rights.
- Reservation of Rights: A written notice from an insurer that it may later deny coverage while still defending, the classic scenario producing conflict between insurer and insured.
- Independent Counsel: An attorney chosen by the insured, rather than the insurer, retained specifically to resolve a defense conflict of interest.
- Errors and Omissions Insurance: Professional liability coverage for agents and brokers that often responds when an undisclosed conflict of interest leads to a client's financial loss.
- Dual Agency: A real estate and occasionally insurance placement arrangement where one party represents both sides of a transaction, a frequent source of conflict of interest disputes.
Sources and References
- IRMI. Conflicts of Interest.
- American Bar Association. Model Rules of Professional Conduct, Rule 1.7: Conflict of Interest.
About the Author
Justin Goodman, CIC, CCIP, CISC, CLCS, CRIS, PCIA, QCLS, MFHR CEO and Co-Founder, Total CSR, Inc.
Justin Goodman is a third-generation insurance broker with over two decades in agency operations. He has trained more than 100,000 CSRs, account managers, and producers in commercial and personal lines coverage, from workers' compensation to construction risk. He was named 2024 Insurance Journal Agent of the Year and one of the nation's top five construction insurance experts by Risk & Insurance. He is the author of Retain, which applies cognitive science research on memory and knowledge transfer to insurance training, and speaks nationally on how agencies build durable technical expertise in their teams.