Insurance contract law – the broker’s liability to pay premiums
Today sees the publication by the Law Commissions of England and Wales and Scotland of another joint Issues Paper (No. 8) on insurance contract law (available here: http://www.lawcom.gov.uk/docs/issues8_brokers-liability.pdf). Under scrutiny this time is the rule contained in s53 of the Marine Insurance Act 1906, subsection 1 of which, in effect, makes a broker directly liable to the insurer for payment of the premium, whilst subsection 2 provides the broker with a lien over the insurance policy, allowing it to recover any money it is owed by the policy holder. Although this point is not entirely free from doubt, the section seems only to apply to cases of marine insurance. As with many aspects of the law of insurance, this area of law is ripe for reform, and it is difficult to disagree with any of the recommendations contained in the Issues Paper.
Readers of the blog will already be aware of the workshop held on 2nd June this year at Edinburgh Law School for discussion of a previous Issues Paper on Damages for late payment of insurance proceeds and the insurer's duty of good faith (commented on here: http://www.law.ed.ac.uk/ecclblog/blogentry.aspx?blogentryref=8261). Reading the Issues Paper on broker's liability, similar themes emerge. One is the fact that this area seems dogged with legal fictions. On the issue of damages for late payment of insurance proceeds, s11 of the Issues Paper explained: "The English courts have held that insurance is an exception to the rule that the party breaking a contract should pay damages for foreseeable losses. This is based on the fiction that an insurer’s primary obligation is to “hold the insured harmless”. In other words, the insurer is said to promise that the loss will not occur. If it does, the insurer is then liable to pay the amount of the claim as damages. Thus an insurance payment is not a primary obligation to pay money, but a secondary obligation to pay damages. It is said that English law does not recognise an obligation to pay damages for a failure to pay damages."
So equally in the context of the broker's liability in marine insurance cases, we find the area governed by a legal fiction. This time the fiction is to the effect that: "…the broker had paid the premium to the insurer, thus discharging the policyholder’s liability to pay, and that the insurer had lent the money back to the broker. This created a personal debt obligation between the broker and the insurer" (s8 of the Issues Paper). The extent to which this legal fiction was amended with the attempt to codify the law in the Marine Insurance Act 1906 seems also subject to doubt. The end result is anomalous considering the issue from an agency law perspective: a disclosed agent is not normally treated as primarily liable on a contract which he has concluded on behalf of his principal.
The reasons for the legal fiction, and the customs which have led to its development, are considered in the Issues Paper. Also, the comments of respondents to a Joint Scoping Paper on this issue published in 2006 are telling, see, in particular those contained in the Issues Paper at 6.23. In the past there may have been logic in holding the broker liable where communication was more difficult and the broker was more likely than the insurer to have knowledge of the creditworthiness of the insured. This justification is similar to that which applied in Scots law to situations where the agent acted on behalf of a disclosed principal resident abroad. The agent became personally liable. this was thought to be necessary because of the difficulties experienced in communicating or indeed suing that principal. That attitude applied even though the agent had disclosed the existence and identity of his principal. In effect, the law treated principals resident abroad in the same was as it treated undisclosed principals, i.e. the agent was primarily liable. Although the rules on undisclosed agents remain in place, they are strictly interpreted by the courts (particularly in South Africa, see Cullinan v Noorkaaplandse Aartappelkernmoerkwerkers Kooperasie Beperk 1972 (1) SA 761 (A)). Francis Reynolds has been bold enough to suggest that the concept of the undisclosed principal ought to be abolished ((2005) ICC International Court of Arbitration Bulletin, Special Supplement, UNIDROIT Principles: New Developments and Applications, 9-16). If s53 is indeed repealed, one further exception to the general rule that the agent acting for a disclosed principal is not personally liable will disappear. It may be that the concept of the undisclosed principal too has had its day.
For students of agency law, the Issues Paper contains a very useful discussion of the different types of authority an agent can possess, illustrating each type by reference to cases from insurance law. At 5.5 there is a useful analysis of express, implied and apparent authority. At 5.22 in a quote from LJ Moore-Bick in Pacific and General Insurance Co v Hazell ( BCC 400 at 413 and 415) we find implied authority in agency law being analysed in much the same way as an implied term in contract law: "The evidence in this case does not support the conclusion that these market rules were intended to create legal relations between brokers and underwriters where none previously existed so as to render the broker personally liable for premium, either in conjunction with, or in place of, the insured… .A party seeking to establish a binding custom is really seeking to demonstrate the existence of an implied term which is known to and accepted as part of the bargain by all those who regularly involve themselves in the trade or market in question. It is for that reason that the custom must be shown to be certain, uniform, notorious and reasonable, since if it fails any of these tests it cannot be a term which all those in the market would accept as invariably forming part of the legally binding terms on which they do business… The evidence in this case falls far short of what is required to prove a binding custom."
Reference should also be made to the Outer House case of Halifax v DLA Piper  CSOH 74, in which Lord Hodge refused to find an agent personally liable where he acted on behalf of a non-existent principal. Again, the general principle that an agent is not liable where he acts within the confines of his authority for a disclosed and named principal was upheld. As an exception to this general rule, and lacking any obvious practical justification, s53(1) of the Marine Insurance Act ought to be repealed.
Responses to the Issues Paper are invited prior to 19 October 2010.