Marine Insurance: Law and Practice
CHAPTER 8
THE PREMIUM
I GENERAL
Consideration for insurance
8.1 A marine insurance is essentially a bilateral agreement under which each party makes a promise supported by consideration in the form of the other party’s counter-promise. Accordingly, the Marine Insurance Act 1906 opens by defining a contract of marine insurance with reference to the nature of the promise/consideration provided by the insurer.1 Thus, it acknowledges that, under a contract of insurance, the insurer agrees to indemnify the assured in accordance with the terms of the insurance in return for consideration provided by the assured. However, the statute does not stipulate explicitly whether the contract should be supported by any particular form of consideration, though it assumes the consideration normally provided by an assured is payment of a sum of money, called the premium.2 Even so, the Act recognises that the financial arrangements usually differ. In particular, “The provisions of this Act relating to the premium do not apply to mutual insurance, but a guarantee, or such other arrangement as may be agreed upon, may be substituted for the premium”.3 Conventionally,4 the consideration provided by a member of a P&I Club is his liability to contribute to the club in response to calls made by it for contributions to the payment of losses suffered by its members and to the expenses of management of the club.5 Nevertheless, even in the case of P&I Clubs, practices may vary.6 It needs to be borne in mind, therefore, that parties to a marine insurance contract are generally free to determine the precise nature of the insured’s consideration but that, traditionally at least, it is a form of liability to pay money. This chapter considers the most familiar form of such consideration, the premium.Liability for premium
8.2 As a matter of general principle, a contracting party is personally liable to pay a sum due from him at the time expressly or impliedly required by the contract. If he employs an agent, the agent is not normally under any personal liability to the payee for the payment, though he will of course be liable to his principal to the extent that he is required to pay the third party and has received payment from the principal to do so. 8.3 However, the position is different where a contract of marine insurance is effected by a broker. In such a case, the underwriters’ dealings are nearly always with the broker alone and they may well be unaware of the assured’s identity. Consequently, a custom developed, which has been formalised by the Marine Insurance Act 1906, section 53(1), that, “Unless otherwise agreed, where a marine policy is effected on behalf of the assured by a broker, the broker is directly responsible to the insurer for the premium, and the insurer is directly responsible to the assured for the amount which may be payable in respect of losses, or in respect of returnable premium”.7 The rule is based on the fiction that the broker is deemed to have paid the premium to the underwriter and to have borrowed from him the money which he pays. The fiction involves the assumption that the assured has been discharged of his duty to pay the premium to the insurer by reason of the fact that it has been paid by the broker.8 8.4 The Law Commissions have queried whether in fact the common law fiction has survived the enactment of section 53(1), since section 54 of the Act9 states that, where a marine policy acknowledges receipt of the premium, the acknowledgement is conclusive as between the insurer and the policyholder, but not as between the insurer and the broker; and, if the common law fiction applied, that would produce the same outcome, whether or not the policy included such an acknowledgement.10 8.5 The traditional understanding is that the broker “is a middleman between the assured and the underwriter. But he is not solely an agent; he is a principal to receive the money from the assured and to pay it to the underwriters”.11 Consequently, if insurance is placed by Lloyd’s placing brokers on behalf of producing brokers instructed by the assured and a premium is not paid to the insurer: it is the placing brokers who are liable to pay the premium; in the absence of a term requiring actual payment, the premium is deemed to be paid by the placing brokers; the producing brokers cannot be held liable for it; and a policy clause providing for termination of the policy for non-payment of premiums will not be triggered so as to terminate the contract for non-payment by the assured.12 8.6 The custom was applied to a case of reinsurance in Universo Ins Co of Milan v Merchants Mar Ins Co.13 Brokers insured the defendant insurers with the plaintiff reinsurers. Subsequently, the brokers suspended payment and executed an assignment to a trustee for the benefit of their creditors. The plaintiffs wrote to the brokers purporting to cancel their authority to collect premiums on behalf of themselves. Premiums under the policies thereafter became due and the plaintiffs claimed them directly from the defendants, who alleged that their liability was to the brokers’ trustee, against whom they were entitled to a set-off for premiums due to them on primary insurances. The Court of Appeal upheld Collins J’s judgment in favour of the defendant. Chitty LJ said:14“The ground of the custom appears to be that in most cases the assured is not, and the broker is, known to the underwriter, and accordingly, that the underwriter gives credit to the broker alone; and that there is an account between the broker and the underwriter in which credit is given for the payment of the premium. In order to sustain this course of business, and to enable the underwriter to recover from the broker the premium, when it is not in fact paid, it is considered in law that the premium has been paid to the underwriter by the broker, and that the underwriter has lent the premium to the broker … Collins J15 calls this a fiction. I do not dissent from his term; but, like all fictions of law, it was raised for the purpose of justice: to give effect to the true understanding of mercantile men, and to sustain the universal course of business between business men.”