Insurance: The relationship between a placing broker and an insured

United Kingdom

The Plaintiff was a firm of Lloyd's brokers; the Defendant was a firm of insurance brokers based in New York.


The Plaintiff placed hull and machinery cover for the 12 month period from 31st August 1996 on behalf of clients of the Defendant. Accordingly, the Plaintiff was the placing broker and the Defendant was the producing broker.


The premium was payable in four quarterly instalments. Brokerage on the premium was divided between the Plaintiff and the Defendant.


In accordance with Section 53 of the Marine Insurance Act 1906, the Plaintiff was directly responsible to underwriters for payment of the premium. Accordingly, the premium due to underwriters was automatically debited from the Plaintiff's account and credited to the underwriters. The Plaintiff was, in turn, paid the first two instalments of premium by the Defendant, but the third and fourth instalments were not paid.


In these proceedings, the Plaintiff applied for summary Judgment under RSC Order 14 against the Defendant in respect of the outstanding debt. The Plaintiff maintained it had a contract with the Defendant which contained an implied term that the Defendant would be responsible for the premium. The Defendant argued that it was acting only as an agent and that the Plaintiff's claim had to be made against the insured. The Plaintiff contended that there was no privity of contract between a principal and a sub-agent (that is, between a placing broker and the insured).


Held:


Judgment was awarded in favour of the Plaintiff.


The general rule is that there is no privity of contract between a placing broker and an insured; where a producing broker instructs a placing broker, there is normally a contractual relationship between them. In order to displace this general rule, it is necessary to show special circumstances such as, direct relations between the placing broker and the insured, or complete delegation of authority from the producing broker to the placing broker. There would also have to be evidence that the insured intended to create contractual relations directly with the placing broker.


On the facts, there was no evidence to indicate an intention that there should be a contract between the Plaintiff and the insured. The Plaintiff looked to the Defendant for payment of the premium and the Defendant looked in turn to their clients for payment. Indeed, there was no direct contact between the insured and the Plaintiff.


Accordingly, the Defendant was obliged to indemnify the Plaintiff in respect of the third and fourth instalments of premium.


Note:


This decision usefully clarifies the contractual relationships between the insured, the producing broker and the placing broker. It is now clear that there will generally be a contract between the placing broker and the producing broker and between the producing broker and the insured. There will not usually, however, be a contract between the placing broker and insured (although the placing broker will probably owe a duty of care in tort to the insured).


The non-payment of premium is a recurring problem for brokers. Last year, Lloyd's and the ILU determined that they would no longer hold brokers responsible for premium in the event of a defaulting assured, unless a broker was in breach of a code of practice. The change was back-dated to all business incepting after 31st August 1996, and therefore, by a single day, did not apply to the present case (Prentis Donegan & Partners Limited v Leeds & Leeds Company Incorporated, QBD: Judgment 5th May 1998).