BIBA’s response to the Law Commissions’ consultation on Issues paper 8 – the Broker’s Liability for Premiums: Should Section 53 be reformed?
2nd November 2010
The British Insurance Association (BIBA) is the UK's leading general insurance organisation representing the interests of insurance brokers, intermediaries and their customers.
BIBA membership includes 1700 regulated firms. Insurance brokers and intermediaries distribute nearly two-thirds of all UK general insurance. In 2007, insurance brokers and intermediaries generated £1.5 billion of invisible earnings and they introduce £22 billion of premium income into London's insurance market each year.
BIBA is the voice of the industry, advising members, the regulators, the Government, consumer bodies and other stakeholders on key insurance issues. BIBA provides unique schemes and facilities, technical advice, guidance on regulation and business support and is helping to raise, and maintain, industry standards. BIBA works closely with the Chartered Insurance Institute to provide training to those working in the industry and actively participates in helping the industry and its customers deal with some of the major issues of the day.
BIBA members provide professional advice to businesses and consumers, playing a key role in identification, measurement, management, control and transfer of risk. They negotiate appropriate insurance protection tailored to individual needs and operate to a very high standard of customer service with the aim of ensuring peace of mind, security, financial protection and the professional advice required.
Our response to your consultation questions is set out below.
8.1 We ask for comments on and responses to the following questions:
CURRENT LAW AND PRACTICE ON SECTION 53(1)
8.2 Does section 53(1) reflect current market practice in either the marine or any part of the non-marine markets? (Paragraph 6.34)
On the whole yes, it does reflect the current practice regarding marine risks at Lloyd’s and with the London companies market.
Outside Lloyd’s the agreement between insurers and brokers is that the broker does not have responsibility for the payment of the premium provided they adhere to their terms of business agreement (TOBA). So if the broker has 30 days credit with the insurer they must tell the insurer within that period if it has not been paid. The insurer will then take on the responsibility to collect the premium and will make the decision as to whether and when to terminate the contract for non-payment.
Policies used to refer to a promise to pay a premium, the promise being the consideration, so non-payment was a breach of the promise and the insurers could sue for damages for the breach namely the premium. Modern policies refer to payment of the premium by the date shown in the policy and there may be reference to payment by instalments with failure to pay giving the insurer the option to cancel with notice or in some cases automatic cancellation from the date the default occurred. Section 53 has largely been overtaken by the agreements between insurers and brokers and in policy wordings as allowed by 53 (1).
That said it is not clear cut whether the practice reflected in section 53(1) applies solely to Lloyd’s and London market firms and solely to marine risks. We have been told of a case where non-London market firms have insisted on the broker being liable for the premium for non-marine business, one member told us the following:
Both AXA and Allianz, i.e. AXA Insurance plc and Allianz Insurance plc, not the UK insurers and not the London market branches, insist in their terms of business that brokers be liable for premium. We suffered in this regard recently, when, following the insolvency of one of our clients while owing premium, AXA pursued us very aggressively for the money. The matter was eventually settled without loss to us but it took significant investment of senior management time and resulted in the cancellation of our agency' for a couple of years. Wanting access to these insurers, we feel we have no option but to agree to their terms.’
This is a discussion that BIBA is having with a number of insurers who are considering a similar change in their contractual terms.
8.3 Are there any justifications for automatically imposing personal liability for premium payments on brokers in either the marine or non-marine markets?
No, there is no justification for doing so automatically. The broker’s duty is to act as a conduit between the insured and the insurer(s) unless it has been specifically agreed otherwise. The actual contract is between the policyholder and the insurer, not the broker. The broker is the agent of the insurer therefore if they bind a contract they do so on behalf of their principal and accordingly cannot be held liable for the premium incurred in carrying out their obligations.
8.4 Should section 53(1) be preserved only for marine insurance? (Paragraph 6.36)
No. Brokers need to have clarity about where they stand with regards to liability for premiums. It is illogical that different types of the business conducted by brokers should be treated differently.
8.5 If so, would such a divide between different types of insurance cause problems in practice? What would the nature of those problems be? (Paragraph 6.36(1))
This divide already exists and brokers have had to manage it for many years. It is a question of educating staff to be aware and recognise occasions where the broker’s liabilities with regard to the premium are different for differing classes of business. This may mean treating policyholders differently for example a broker may have to manage expectations of payment terms so that the premium gets paid to the broker as quickly as possible for marine business, or get the insured to agree to the insurer's instalment terms. The difficulty is in explaining this and in remembering to do it for insureds of these companies when the broker does not have to do it for others policyholders. This difference in approach causes confusion, adds cost and complexity. Simplification is needed.
8.6 Alternatively, could the desired result be achieved contractually if section 53 were to be repealed and/or replaced? (Paragraph 6.36(2))
Yes, we believe that the desired result could be achieved contractually. A terms of business agreement (TOBA) could be used to govern the conduct of insurance business between the broker and the insurer as it already does in so many other areas of the industry. These TOBAs can include a provision expressly stating whether the relationship between the broker and insurer continues to be subject to Section 53.
It should be remembered that brokers also have terms of engagement with their principal therefore they could insert the contractual obligations regarding premium payment to counter section 53.
8.7 Does section 53(1) unfairly expose insurers to the credit risk posed by brokers and brokers to the credit risk posed by policyholders? (Paragraph 6.37)
Section 53(1) does not unfairly expose insurers to the credit risk posed by brokers. Ultimately, it is the insurer that decides whether or not it conducts business with a particular broker and that process should involve some form of check on the credit worthiness and financial stability of that entity before they enter into a contractual relationship with them. The FSA’s solvency requirements which are imposed on brokers also allow the insurer some degree of security about the stability of an intermediary.
However, section 53(1) works against the broker unfairly exposing it to the credit risk posed by policyholders. Brokers are not responsible for the solvency of the policyholder unless the terms of the TOBA with their insurer specifies this.
8.8 Are there any other reasons why section 53 should be retained? (Paragraph
8.9 Are the requirements of section 53 with respect to “contracting out” unduly onerous? Should parties be free to negotiate their contracts as they see fit?
Yes. This is generally a commercial contract and as such, each party should be able to decide upon the contract.
THE CASE FOR REFORM OF SECTION 53(2)
8.10 Is the broker’s lien under section 53(2) satisfactory or is it in need of reform? (Paragraph 6.56)
Yes it is satisfactory. The broker’s lien allows access to the money owing to it in the event of a dispute. It could be made clearer, however, whether the same rules relating to the broker’s lien apply to non-marine risks.
8.11 We welcome any information as to how, and how often, the lien is applied in practice. (Paragraph 6.56)
In our experience, the lien is not often applied. What is more likely to happen is that the insured pays their premium late and tries to stretch the limits of the credit as far as is possible. Brokers’ cancellation clauses do play a useful role in the marine market giving the broker the right to cancel the policy if they have not been reimbursed by the policyholder. These clauses must be incorporated into the main body of the policy as your paper rightly points out in part 4.10. The inclusion of this clause has the benefit of policing how the payment is made. Should the premium payment be late in arriving, instead of the insurer chasing the payment, the broker can issue notice of cancellation of the policy to the policyholder and the insurer to enable a last chance for the premium to be paid to the broker’s account. This is recognised market practice.
We must remember that the broker is not privy to the contract and therefore has no rights under the contract. Consequently they cannot cancel a contract, what the broker can do is seek the underwriter’s agreement that the contract is cancelled ab initio due to failure to remit the consideration.
REFORM OF SECTION 53
8.12 Do consultees agree that:
(1) The scope of section 53(1) is unclear?
Yes, it is unclear as a result of common law fiction. Clarity is needed for all parties.
(2) The limited application of section 53(1) is anomalous?
Yes. There needs to be a uniform approach as to how brokers are treated, this is particularly important in a subscription market such as London where different underwriters taking a share in the same risk may have a different interpretation as to the application of section 53(1).
(3) The common law fiction, which was invented to give effect to the custom before it was codified by section 53(1), has produced unprincipled and conflicting case law?
(4) Even in the marine market, it is unclear whether there is any justification for section 53(1)?
Yes, section 53(1) is inequitable to brokers and it is unclear whether the original justification for the custom underlying the provision may no longer apply, even in the context of marine insurance. We believe that there is no reason why brokers should be under personal liability for the premium owed by policyholders to their insurers.
(5) The consolidation of brokers may pose a risk to the insurance industry?
Consolidation in the insurance industry has always occurred. Consolidation can be a positive force creating new opportunities and allowing specialist entities to develop or new start ups to emerge from a merger. Consolidation can also make a small broker stronger and more secure, if that broker is taken into a larger network or group but maintains its independence. Conversely, consolidation can also have a detrimental effect on customers resulting in fewer brokers to advise as a result. Any business can be forced into liquidation regardless of its size and this consolidation should not be used as an excuse not to reform. What is dangerous is if market consolidation is driven or accelerated solely by changes in legislation.
(6) The risk of a policyholder’s insolvency falls on the broker? (Paragraph
Yes and this is unfair. The broker has no influence over the solvency of a client. The policy is a contract between the insurer and the insured. The insurer should exercise the principle of ‘consideration’ under the contract. Payment must be received for there to be consideration.
8.13 If consultees are aware of any other problems with section 53(1), we would like to be informed of them. (Paragraph 7.3)
We are not aware of any other problems with section 53(1).
Proposed default position: brokers are not liable for the premium
8.14 Should the default position be that brokers are not personally liable for the premiums owed by policyholders to insurers? (Paragraph 7.7)
8.15 Should it be possible to “contract out” of our proposed default position so that the broker could become contractually liable for the premium? (Paragraph 7.12)
8.16 We welcome consultees’ views on the effect of removing the broker’s automatic liability for the premium. We are particularly interested in the perceived costs and benefits of such reform. (Paragraph 7.17)
If the automatic liability was removed it would result in brokers’ savings in credit control costs. Improved credit control would have a positive effect on the solvency of brokers making them less vulnerable and more stable. It would also result in fewer disputes between broker and insurer and less likelihood of the broker losing their agency in the event of an extended dispute over payment (see response in question 8.2).
Notification requirements and premium payment warranties
8.17 Should the insurer and/or the broker be under an obligation to notify the policyholder in the event that the premium has not been paid? (Paragraph 7.21)
The contract between the insurer and broker should specify how communications are conducted in the event that the premium has not been paid by a pre-agreed date and whether the risk is to continue or be cancelled within a set period of days. The broker is likely to want to communicate this information to the policyholder.
However, as it is a premium payment warranty this will go to the root of the contract and the policyholder should be aware that if they do not meet the policy warranty, the insurer has a right to avoid the policy.
8.18 Should such notification be required before an insurer exercises its rights under a premium payment warranty? (Paragraph 7.21)
Yes, notification would allow the policyholder to make the late payment or seek alternative cover elsewhere if necessary.
8.19 Alternatively, should such notification obligations be left to contractual arrangements between the parties involved? (Paragraph 7.21)
It is at the insurer’s discretion whether to insert a premium payment warranty into the policy or specify the terms of credit allowed for payment of the premium.
Repeal or replacement of section 53
8.20 Should section 53(1) be repealed? (Paragraph 7.28)
Section 53(1) should be repealed.
8.21 Should section 53(1) be replaced with a new statutory provision to make it clear that the broker is not automatically liable for the premium? (Paragraph 7.28)
Yes, this will help overcome any myths and practices that may still remain in the market about this and clarify the broker’s position.
8.22 If so, should section 53(2) be re-enacted alongside the new provision? (Paragraph 7.29)
THE RELEVANCE OF SECTION 54
8.23 Do modern insurance policies ever include clauses acknowledging receipt of the premium, particularly if the premium has not actually been received by the insurer? (Paragraph 7.31)
8.24 Do consultees think that section 54 has any relevance in modern insurance law? (Paragraph 7.31)
Thank you for taking the time to consider our response. If you have any further queries please contact myself, Vannessa Young BIBA’s London Market Secretariat