The Difference Between Negligence and Breach of Fiduciary Duty
When someone with a legal obligation to act in your best interest fails to do so, they can be guilty of negligence or a breach of fiduciary duty. Although, in some ways, the two claims may be similar, understanding the distinctions between the two is important when pursuing damages for either type of claim. Are you seeking damages against someone who may have committed negligence or a breach of fiduciary duty? Are you unsure which claim is more appropriate for your case? Our educational guide has the information you need to properly file your suit.
What Is Fiduciary Duty?
Fiduciary duty is the good-faith legal obligation that the fiduciary owes another as part of their relationship. The fiduciary relationship may be formally established by laws, regulations, or contracts. Fiduciary relationships can also be assumed or created informally, such as those implied in law due to the moral, social, domestic, or personal relationship between the parties. The fiduciary is the person or entity who must act in the best interests of the client to the client’s benefit. This benefit is usually financial. The person to whom the duty is owed is the beneficiary or principal. This individual is often a client of the fiduciary, but not always. Some common fiduciary relationship examples are:
- Client-attorney
- Legal guardian-ward
- Healthcare provider-patient
- Employee-employer
- Board of directors-shareholders
- Real estate agent-client
- Financial firm (accounting, investing, advising)-clients
- Executor-beneficiary
- Trustee-beneficiary
The most common types of fiduciary duties include:
- Duty of Loyalty
- Duty of Care
- Duty of Good Faith
The duty of loyalty ensures that the fiduciary puts the client’s best interest above any competing or conflicting interests, including the fiduciary's own interests.
The duty of good faith requires the fiduciary to make decisions honestly and fairly. A fiduciary’s motivation must be for the benefit of the client or both parties, not for the fiduciary’s benefit to the detriment of their client.
The duty of care requires the fiduciary to make decisions regarding their client not only in good faith but also in a reasonably prudent manner. The fiduciary must act in a way that avoids inflicting injury or damages on the client.
When a breach of fiduciary duty occurs and causes damages to the principal, the fiduciary may be held liable for damages in civil court.
What Constitutes A Breach Of Fiduciary Duty?
- The four elements to a breach of fiduciary duty are:
- The involved parties had a fiduciary relationship.
- The fiduciary breached a duty to their client.
- Damages were sustained by the client.
These damages occurred because of a breach of a fiduciary duty.
Examples of situations where the client may have a cause of action against the fiduciary for a breach of their duty include where the fiduciary prioritizes his own interests to the detriment of their principal, reveals confidential client information, or enters into a contract in bad faith resulting in a loss to their client. A successful breach of fiduciary duty claim can result in monetary awards for the client. The award is based on both direct and indirect damage caused by the breach.
What Is Negligence?
In legal terms, negligence is the failure to use the level of care and caution that an ordinary person would use in similar circumstances. The theory is that under certain conditions, people have a duty to act in a reasonable and prudent manner to avoid unreasonable risks of harm to someone else.
The four elements of negligence are similar to a fiduciary breach. They are:
- A legal duty of reasonable care exists between the parties.
- One of the parties breached that duty.
- Damages occurred to the party to whom the duty is owed.
- The breach of duty caused these damages.
Like a breach of fiduciary duty, civil liability can arise from negligence that causes damages or injuries. The extent of liability depends on the situation and type of negligence. Although it is usually the person causing the injury that is liable for damages caused by negligence, in some instances, other parties may also be liable through vicarious liability. Vicarious liability is the liability of a party for damages despite not directly causing the injury or damage. Vicarious liability is imposed on a party who is deemed responsible, based on various legal tests, for the actions of the party causing the negligent act. An example is a trucking company being liable for the negligent actions of one of its drivers while on a delivery.
Negligence Vs Fiduciary Duty Of Care
Whether a legal claim is due to negligence or a breach of fiduciary duty can be confusing to the average person. Their elements are similar, but negligence can exist outside of a fiduciary obligation, and mere negligence does not necessarily constitute a breach of fiduciary duty. For example, motorists generally do not have a fiduciary relationship with other drivers. But they do have the legal obligation to others of reasonable care while driving. In contrast, a financial advisor has a duty to always act in the best interest of a client. If he is unaware of a lucrative investment opportunity because he did not do appropriate research, he may have been negligent, but he has not necessarily breached a fiduciary duty. On the other hand, if he invests his client’s money solely to increase his commission, he has breached his duty of loyalty.
Negligence and fiduciary breach often have different statutes of limitations, penalties, and damage awards. In bringing a claim, it is important to base the claim on the appropriate cause of action – either negligence or a breach of a fiduciary duty. A case based on the wrong legal theory may not win or result in lower damages, even for the same offending act.
Are You A Victim Of Negligence Or Breach Of Fiduciary Duty?
The legal distinctions between a breach of a fiduciary duty, negligence, and other claims are important to the success of your case. To ensure the best chance of winning your case, you will need experienced and knowledgeable attorneys who understand these distinctions and help you file using the appropriate legal theory.
Learn more about a breach of fiduciary duty in our article: The Most Important Elements in a Breach of Fiduciary Duty Claim, or contact us to schedule a consultation.