Insurance law reform: status of intermediaries

As part of its ongoing review of insurance contract law, the Law Commission has recently published a policy statement on the status of intermediaries when obtaining and passing pre-contract information from consumer to insurer. The Law Commission is drafting a Bill which will be ready later this year based on the policy statement.

The policy statement follows on from the Consultation Paper published by the Law Commission in July 2007 on the reform of insurance contract law and the summary of responses relating to consumer insurance published in May 2008. To read our Law-Nows on these publications please click below:

Insurance/PI: Proposed insurance law reforms

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

Despite the reform proposals the Law Commission is suggesting to a consumer’s duty of disclosure, the question whom an intermediary acts for will still be important where that intermediary acts negligently or dishonestly in obtaining or transmitting pre-contract information and the insurer purports to avoid the policy on the grounds of misrepresentation and/or non-disclosure.

If the intermediary is held to be acting for the insurer at the time then the insurance cover will not be affected. However, if the intermediary is acting for the consumer then the insurer may then be able to avoid the policy. The only remedy available to the consumer in such a case would be to sue the intermediary. The current legal position is based in the law of agency and is that the intermediary normally acts for the insured. The Law Commission has identified problems surrounding the transmission of pre-contractual information as being fairly common and that the current law is uncertain and dated.

A new statutory code

After a detailed consideration of the options, the Law Commission proposes a new statutory code for identifying for whom an intermediary acts in the obtaining and passing of pre-placement information, based largely on the existing law but also drawing on Financial Ombudsman Service (FOS) practice and industry understanding. The proposals are intended to shift the emphasis from the intermediary normally acting for the insured and to strike a balance: insurers should bear responsibility for intermediaries within their control but not for the actions of genuinely independent agents.

The statutory principles will only have direct effect in cases concerning errors/omissions in the obtaining and transmission of pre-contractual information in consumer insurance and not to other areas of agency (such as for whom an intermediary acts for in collecting premiums) or to business insurance.

The Principles

The Commission sets out a series of high-level principles, based on its review of existing case law.

In three circumstances, an intermediary will always be considered to act for the insurer whatever the strict agency position:

• if the intermediary has authority to bind the insurer to cover;
• if the intermediary is an appointed representative of the insurer;
• if the intermediary has express authority from the insurer to collect and pass on pre-contract information.

In all other cases, the intermediary will still remain acting for the consumer unless there is a close relationship between the intermediary and the insurer that indicates that the insurer has granted the intermediary implied or apparent authority to act on its behalf. The Commission sets out a non-exhaustive list of the factors relevant to deciding whether or not such an agency relationship will exist between insurer and intermediary.

Factors that indicate that an intermediary acts for an insurer include:

• An intermediary only placing insurance with a limited number of insurers or an insurer only selling that particular policy through a limited number of intermediaries.
• Brand-sharing and white-label relationships, where an insurer permits an intermediary to brand its services with the insurer’s name or permits its policies to be branded with the intermediary’s name.
• An insurer requesting that the intermediary approach the consumer to market a particular product or an insurer exerting substantial control over the way that the intermediary conducts its business.

Factors which indicate that an intermediary will act for the consumer include the intermediary undertaking to give impartial advice or provide a fair analysis of the market, the consumer paying the intermediary a fee and the intermediary disclosing the commission it has received from the insurer.

The proposal understands that there may be situations of dual agency - the intermediary acting for different parties at different stages of the insurance process and also allows for different intermediary activities to be treated differently. The Commission emphasises that a statement in the Terms of Business Agreement between insurer and intermediary that the intermediary acts on behalf of the insured is not definitive; instead the court must consider all aspects of the relationship. The exercise of control by the insurers over the intermediary will be an important factor - if, however, there are no factors either way then the intermediary will be acting for the consumer.

Comment

The Law Commission conducted a thorough review of the options and considered the relevant policy implications. The new proposals reflect the desire of the Law Commission to seek to update the law, as it effects consumers, as a development of the present case law and the recent practice developed by FOS rather than to undertake a wholescale redefinition of intermediaries’ agency position.

The Law Commission has thus abandoned its attempt to draft a single ‘bright line’ test to establish that any given intermediary always acts for one party or another in obtaining and transmitting pre-contract information, stating instead that whom an intermediary acts for must depend on a range of factors. The Law Commission has listened to responses to previous consultations made by Insurers. This change is welcomed as it reflects more the reality of the insurance buying process and allows for flexibility in outcome, depending on the relevant factors at play, when the previous proposal was that unless independent, intermediaries should be deemed to act for insurers. The new proposal also better reflects the diverse roles undertaken by intermediaries as well as the broad range of entries covered by this term. The introduction of a high level statutory code will also allow the law to develop and is intended to be a framework for the court’s use.

Given the complexities of the changing insurance landscape, this seems the most sensible option and allows FOS practice to become enshrined in the law. Intermediaries will need to consider the precise terms of the code when issued and will then need to assess how the code will impact their processes and adapt them accordingly.