British Insurance Brokers' Association
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Terms of Business Agreements - with Insurers

BIBA issued a Technical Advice Note headed ‘Core Principles to be included in any Terms of Business Agreements Between Insurance Brokers and Insurers’ on 7 June 2004 .

The note stated:

This document has been produced with the intention of setting out some possible indicative high level principles to which insurers should have regard when developing Terms of Business Agreements and intermediaries when entering into such arrangements.

Please note that the examples are not recommended as being suitable for general or specific application in the marketplace; insurers and intermediaries are responsible for ensuring that the content of any terms of business agreement that they use or to which they agree is appropriate to their businesses and the circumstances of each individual deal . It is not therefore a definitive or exhaustive statement of legal issues. Accordingly, specific independent professional legal advice should be sought on any issue or course of action you may be considering and this summary should not be relied upon as a substitute for such specific advice.

Compliance issues fall outside of the ambit of this document and should be referred to your compliance or legal departments for separate compliance advice.

Background

It is recognised that due to the many different relationships and methods of working between insurance brokers and insurers, it is not possible to produce a generic Terms of Business Agreement (TOBA) which would adequately cater for all concerned. Such TOBAs should, however, reflect a number of core principles to protect the legitimate commercial interests of both parties.

General

When drafting and entering into all TOBAs, the arrangements in them should be as transparent as possible. To this end, they should:

  • be drafted as clearly and succinctly as possible;
  • reflect the true nature of the business relationship between the parties;
  • clearly define and allocate their respective responsibilities and rights; and
  • ensure compliance with the rules and spirit of applicable regulatory or statutory requirements as a continuing obligation.

In particular, TOBAs should, so far as possible, make clear which party to the TOBA is responsible for each function. For example, circumstances when the agent is acting on behalf of the policyholder and circumstances when the agent is acting on behalf of the insurer.

Status

  • All TOBAs should reflect the professional status of the broker in accordance with the FSA’s requirements. There should be an obligation on the broker to advise the insurer of their regulatory status and any changes to that status.

All TOBAs should be referred to as ‘Terms of Business Agreements’ rather than ‘Agency Appointments’ and the like.

The classes of short-term (general) insurance business (as defined in the Financial Services and Markets Act and Regulated Activities Order and in any amending or relevant subsequent legislation) to which the TOBA applies should be clearly stated – by separate schedule if easier, which may be updated from time to time.

Commission

Where commission (including all forms of remuneration from the insurer to the broker) is payable, to the broker in accordance with a scale of rates it should be clearly stated in the TOBA – by separate schedule or agreement if easier, which may be updated from time to time.

Where commission in respect of certain classes of insurance is variable (i.e. to be agreed by the parties in writing on a case to case basis) this should be stated in the TOBA.

The TOBA should state when commission becomes due and is payable.

There should be a minimum notice period in respect of any alteration to commission scales on both new and renewal business.

Material Information

There should be an obligation whereby the broker undertakes to pass promptly to the insurer any material information provided by the policyholder in accordance with the terms of the insurance contract.

The TOBA should make it clear in what capacity the broker is required to pass material information provided by the policyholder to the insurer.

Unless there is a clear delegated authority in place, brokers should undertake this task as agent of the policyholder.

Premiums , Claim Money & Credit

The TOBA should specify clearly whether either the insurer or the broker is to bear the credit risk in relation to the premiums (paid and refunded) and claims money held by the broker.

Furthermore, the circumstances in which, and time at which, the premium paid by the policyholder in the hands of the broker is to be treated as having been paid by the policyholder to the insurer should be laid out and reflected in the credit risk responsibilities of insurer and broker.

If the risk rests with the broker, regulation will specify the necessary safeguards required to protect the policyholder’s premiums in the hands of the broker.

If the risk rests with the insurer, the TOBA should specify what protections the insurer requires (if any) to protect premiums and claims money received by the broker as the insurer’s agent.

The terms of credit agreed between the broker and insurer should be incorporated in the TOBA. Such terms should not be varied without prior written notice. The TOBA should make it clear who is entitled to the investment income earned on premiums and claim money received by the broker as the insurer’s agent.

Credit terms should be capable of variation unilaterally by the insurer but an agreed minimum period of notice should be given to the broker.

Brokers should release promptly all statutory documentation – such as motor insurance and employer’s liability certificates, in order that policyholders may be in full compliance with the relevant statutes.

The responsibilities of both insurer and broker for cancelling or recovering any such documentation in the event of breach by the policyholder should be clearly laid out.

Claim Money

  • The TOBA should specify clearly whether either the insurer or the broker is to bear the credit risk in relation to claims money held by the broker.
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  • If the risk rests with the broker, regulation will specify the necessary safeguards required to protect the policyholder’s premiums in the hands of the broker.
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  • If the risk rests with the insurer, the TOBA should specify what protections the insurer requires (if any) to protect claims money received by the broker as the insurer’s agent.
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  • The TOBA should make it clear who is entitled to the investment income earned on claim money eceived by the broker as the insurer’s agent.

Broker/Client Relationship

Insurers may wish to consider the optional principle below. The suggested text is only a draft and should be amended to reflect the nature of their trading relationships:

Insofar as the policyholder has chosen to appoint the broker to advise upon and arrange his insurance, the policyholder remains the client of the broker. Insurers should undertake not directly and knowingly to solicit such insurance business away from the broker during the currency of the TOBA and for a period of five years following termination of same, except in special circumstances detailed in 12 hereunder. Furthermore, insurers should not, without the prior written consent of the broker, make use themselves of, or pass to any third party, any information supplied by the broker or his client, for the purpose of knowingly soliciting insurance business away from the broker.

Direct Administration Arrangements

Apart from the provisions contained in clauses 4 and 8 9, insurers may deal with policyholders only in respect of policy administration, cancellation, claims or policy renewals which enables them to fulfil their regulatory or contractual responsibilities.

Claims

Any notification of a claim or incident should be brought to the attention of the broker, unless otherwise agreed by the parties.

Termination

The TOBA should make provision to allow for

  • termination by the parties on notice for no fault of either party and without the need to give reasons; and
  • to allow one party to terminate without notice if the other party is at fault i.e. in material breach of the TOBA.

  The scope of the termination provisions can be decided on an individual basis. Set out below are examples of ways in which the TOBA can be terminated:  

“ Where there is no fault:

  • By mutual agreement at any time,
  • By either party, the TOBA or any part of it, giving a specific period of written notice to the other.

"Where there is fault:

  • By either party, the TOBA or any part of it, by giving a specific period of written notice to the other stating:

- it has reasonable grounds for suspecting fraud, or dishonesty by the other, or by the other’s employees, agents or independent contractors,

- the status (regulatory or otherwise) of the other party has changed,

- the administration of the account is being operated by the other in a manner causing or likely to cause, prejudice to the policyholders,

- the other has failed to remedy a breach of the terms of the TOBA (other than payment of monies due) within an agreed timescale of a written request from the party not in breach to do so,

  • the other has committed an irredeemable breach of the TOBA,

- a receiver has been appointed, or a voluntary arrangement has been entered into with creditors, there has been a bankruptcy order, there are insolvency issues, or there has been a dissolution of partnership.

  • By the insurer, the TOBA or any part of it, on failure to pay monies due within the agreed timescales set out above.
  • By the insurer, in the event of death of the broker where broker is a sole trader.”

The TOBA should also specify the consequences of any such termination. For example, it could provide that all outstanding premiums will be paid immediately, including all known premiums not included in a statement of account. In addition, the insurer may wish to provide that it will make suitable arrangements for the servicing of policyholders to satisfy applicable regulatory responsibilities. NB. The termination of TOBAs with sole traders and small partnerships may require special consideration.

Regulatory Requirements

TOBAs should comply with the FSA’s regulatory requirements. For example, the FSA’s rules relating to the right of audit.

In addition, TOBAs should include terms requiring compliance by the parties with all other applicable regulatory and legal requirements when transacting insurance business under the TOBA.

Accounting Procedures

The TOBA should clarify which party is responsible for preparing accounts and the terms on which settlement will be made.

Assignment – Options

If the TOBA is assignable, the circumstances to which it can be assigned should be clearly specified. For example:

  • The TOBA may be assigned only upon the written consent of both parties.
  • The TOBA may be assigned without notice where the insurer undergoes an intra-group reorganisation.

Arbitration Option

The TOBA may provide for the appointment of an arbitrator, expert or mediator agreed by both parties, to consider and settle any dispute concerning the application of the TOBA.

Variation of Terms

Any unilateral variation in the terms of a TOBA (which the TOBA provides in advance can be made by one party to the TOBA) should be sent to the last known address of the addressee, at option by either recorded delivery or registered post, giving a minimum notice period of the variation/alterations.

Signature

Both parties to sign the TOBA.

Authority

The extent of any limited delegated authorities (including premium handling, claims handling, cover note issuing, sub agent arrangements as relevant) should be specified in the TOBA by the use of additional optional clauses on a ‘menu’ approach basis.

Indemnity

Brokers and insurers Each partyshould consider have a including in the TOBA right s of indemnity for each party against the other in respect of any claim, demand, expense or loss that the insurer/broker (as applicable) becomes liable to pay as a direct result of acts or omissions by the insurer/broker (as applicable) that are outside the terms of the TOBA and outside its respective authority.

Other Clauses

The TOBA should reflect other contractual terms to include, without limitation, Force Majeure, Invalidity and Severability clause, exclusion of Rights of Third Parties clause, E-Commerce arrangements, no waiver clause and jurisdiction etc..