Professional Negligence and Liability
Chapter 10
INSURANCE BROKERS
I. INTRODUCTION
10.1 Although some insurance1 contracts are concluded directly between an insured and an insurer without the involvement of any intermediary,2 most are still made through an intermediary. The subject-matter of this chapter is the law relating to the professional liability of those intermediaries.3 10.2 Strictly speaking, only an intermediary registered under the provisions of the Insurance Brokers Registration Act 1977 can properly describe himself, for the purposes of his business, as an “insurance broker”.4 However, in practice unregistered intermediaries (describing themselves, for example, as “insurance consultants”, or “insurance advisers”) fulfil similar roles and owe similar duties to those fulfilled and owed by registered insurance brokers, and few relevant distinctions, so far as concerns the law of professional negligence, can be drawn between them.5 For convenience, therefore, all insurance intermediaries are referred to in this chapter as “brokers”. Any entity which as a matter of fact assumes the responsibility of performing an insurance broker’s function will be liable as if it was a broker. Whether that has taken place or not is a question of fact. In Frost v. James Finlay Bank Ltd the judge at first instance held that the defendant bank had assumed the role of a broker6 but the Court of Appeal disagreed.7 10.3 Brokers fulfil many different functions. Typically they place insurance cover on behalf of the insured, and act upon his instructions. They act as a conduit for payment of premiums and claims and for the communication of information between the insured and the insurer. They may act as an insurer’s underwriting agent, making insurance contracts on his behalf, or may arrange underwriting agency agreements between him and some other underwriting agent. They often place open covers and line slips8 with insurers and subsequently declare insurances to these facilities. It can be seen, therefore, that brokers often act in different capacities. Indeed they may find themselves acting on behalf of different principals in the course of the same transaction. 10.4 After this Introduction, this chapter is divided into five further sections:- Section II identifies five ways in which the broker may commonly arrange insurance contracts and analyses the status and obligations of the broker when so acting.
- Section III identifies the duties that the broker may be held to owe both before and after he arranges the insurance contract.
- Section IV is concerned with limitation of actions.
- Section V deals with the extent of the broker’s liability for damages for breach of duty.
- Section VI provides a brief overview of the regulatory framework.
II. GENERAL
10.5 Brokers can make insurance contracts in a number of different ways. The nature and extent of the duties which they owe is largely determined by the precise role which they fulfil. This section identifies five situations in which the broker commonly finds himself when arranging an insurance contract, and analyses in respect of each of them the nature of the legal duties that the broker owes, and the identity of the persons to whom such duties are owed. 10.6 The five categories are as follows- (1) The broker is engaged to make an insurance contract for his immediate client. Here the insured or prospective insured instructs the broker to arrange the insurance for him. This is the typical, and most frequent, way in which insurance contracts are made.
- (2) The broker is engaged to make an insurance contract for someone other than his immediate client. The broker’s instructions may derive from another broker (and not from the insured directly). Alternatively the broker may be asked by one insured to arrange insurance both on behalf of that insured and for the benefit of another or others.
- (3) The broker (engaged as in (1) or (2) above) is also acting for the insurer when making the insurance contract. Here the broker is acting, in one transaction, on behalf of two principals.
- (4) The broker makes the insurance contract under, or in accordance with, the terms of an open cover or a line slip. Open covers and line slips are not themselves insurance contracts, but merely facilities arranged by brokers with insurers, under which insurances are subsequently made. They give rise to particular difficulties of analysis, principally due to their uncertain legal status and effect.
- (5) The broker arranges a reinsurance contract before the underlying insurance contract is made. This gives rise to the question of the status of a “reinsurance” apparently made before the underlying insurance contract is agreed, and also for whom the broker is acting in arranging the reinsurance.
10. Broker engaged by insured9 to arrange an insurance
(a) Duties to the insured
10.8 The general rule is that the broker is the agent of the insured. “It has been recognised for many years that brokers are agents for the insured.”10 This traditional view,11 though occasionally criticised,12 is so well-established as to be beyond serious question. 10.9 This rule does not mean that the broker acts only, and in every situation, as the agent of the insured.13 Brokers often fulfil several functions and act in different capacities. They may well find themselves acting on behalf of different principals in the course of the same transaction.14“…insurance brokers are regarded in relation to many of their functions as being usually the agent of the insured rather than the insurer. However, while this is the general situation, it also frequently happens that insurance brokers are as to particular activities the agent of the insurer. Whether an insurance broker is at any particular time acting on behalf of the insured or insurer requires careful analysis of the activity concerned against its factual background.”15