Proposed insurance law reforms: brokers, insurers’ agents and other intermediaries

United Kingdom

The Law Commission and Scottish Law Commission have recommended sweeping reform of broadly three areas of insurance law:

1. pre-contractual non-disclosure and misrepresentation - for more detail click here;
2. warranties - for more detail click here; and
3. the role of intermediaries during pre-contractual negotiations. These proposals include the following.

Consumer and business insurance

As with the Commissions’ other recommendations, there would be a difference between reforms in the consumer context on the one hand, and in the business context on the other hand.

Capacity of the intermediary

The intermediary receiving pre-contractual information would be treated as acting as agent for the insurer:

1. where the insured is a consumer unless it is clearly an independent intermediary acting on the insured’s behalf; and
2. in business insurance, if the intermediary deals only with a limited number of insurers and does not search the market on the insured’s behalf.

This means that in both cases, tied and multi-tied agents would be agents of insurers rather than the insured. A Lloyd’s broker is, however, in most cases likely to remain the agent of the insured.

The proposal form

Agents of insurers who complete proposal forms would now be treated as acting for insurers rather than the insured. Further, the insured’s signature on the proposal form would no longer automatically mean that it had adopted any incorrect statements contained in that form. Rather, this would be a question of fact in each case. This would not, however, of itself impact on the insurer’s ability to designate as warranties particular statements of fact in the proposal form.

Independent duty of disclosure: section 19 MIA 1906

The agent to insure (usually a placing broker) currently owes an independent duty of disclosure under section 19(a) of the Marine Insurance Act 1906, breach of which entitles the insurer to avoid the policy as against the insured. Where the agent to insure represents a business insured, and is in breach of this independent duty, the Commissions propose to change the insurer’s remedy. Rather than the insurer being entitled to avoid the policy, it would instead only be entitled to damages against the agent. Where the insured is a consumer, the Commissions have invited views on whether the agent to insure’s independent duty should be abolished altogether. If it is to apply, then they ask whether the insurer’s remedy should again be damages against the agent rather than the right to avoid.

In business insurance, the intermediary who receives relevant information from a source other than the insured would be required to disclose that information to the insurer. But the Commissions propose to exclude from this any information that the agent is obliged not to disclose. This would include information received confidentially from a source other than the insured. The Commissions have asked whether this should be specifically stated in the law. The Commissions have also asked whether the same restrictions on disclosure of confidential information should apply in the consumer context, or indeed whether the agent to insure’s duty of disclosure should be limited to information received in the course of the relevant consumer transaction.

In addition, the Commissions have asked for views on the following issues, amongst others.

1. Should producing brokers representing business insureds be obliged to pass information up the broking chain?
2. Should section 19(b) of MIA 1906 be abolished for consumer insurance? That section states that the agent to insure is obliged to disclose any matter that the insured is bound to disclose.

For an overview of the Commissions’ proposals generally, please click here. The Commissions have invited responses to their proposals by 16 November 2007.