Insurance intermediaries: continuing duty to remit funds

The recent case of Equitas Ltd v Sande Investments Ltd considered what duties are owed by an entity, that may not be a full Lloyd's broker, but that carries out the same market activities as a broker.

The judgment considered whether such entities owed the same continuing duties to (re)insureds, specifically in circumstances where there may be a continuing duty to remit funds.

The case is one of very few analyses of the judgment of Mr Justice Males in Equitas Ltd v Walsham Brothers & Co Ltd on the special characteristics required in a relationship, (for example, that of broker/client), that would give rise to a continuing duty to remit funds. To read our Law-Now on the decision in Equitas v Walsham Brothers & Co Ltd, click here.

Background

In the 1990s, Sande, through a subsidiary, collected old reinsurance debts that other brokers had failed to collect. In 1992 it had acquired, by agreement, the right to recover debts on the books of certain insolvent Lloyd's brokers and under which it operated as the insolvent broker's agent.

By 2010, Equitas (as the assignee of rights of Lloyd’s syndicates) was investigating collections made by the subsidiary between 1998 and 2004 that it believed it had not been paid on. Neither Sande nor the subsidiary had kept proper records and were unable to confirm or deny this.

In 2019 Equitas issued its claim for recovery and for a general account to establish what had happened to the monies.

When is an entity a broker?

The case is a reminder that because an entity may be carrying out work that is akin to the function of a broker, it does not automatically owe the same duties as a broker.

Equitas acknowledged that Sande was not technically a Lloyd's broker but that, as a run-off broker, it was doing the same job as a Lloyd's broker. In its defence, Sande argued that it was not a broker, as it was not subject to the Lloyd's Code of Practice, did not have to maintain insurance broking accounts (IBAs) and was never required to give a Trust Deed.

Equitas relied on the fact that Sande’s subsidiary used the Broker Code from around 1992 but Sande argued it was simply a processing tool. Expert evidence on the significance of the Code was inconclusive and the judge concluded that the use was 'neutral'.

Duties owed

The judge was concerned with the key questions as to what Sande's duties were at the time.

Equitas sought to rely on the decision in Equitas Ltd v Walsham Brothers & Co Ltd (2013), where Males J had held that Lloyd’s brokers owed continuing duties, including:

• To collect and pay premium reasonably promptly to reinsurers.
• To notify reinsurers reasonably promptly of claims advised by a reinsured and to inform the reinsured reasonably promptly of any questions raised by the reinsurers.
• To collect and pay valid claims reasonably promptly to a reinsured.
• To administer reinsurance contracts in a professional and business-like manner, including keeping proper records.

On the facts of the present case, the judge found that none of these duties were owed by Sande to Equitas.

Equitas' claim relied upon a breach of implied contractual duties, asserting that there was an implied retainer by conduct. The judge found that Equitas had to show that Sande acted in a way which was consistent only with having been retained by it. Ultimately there was no evidence of any direct dealings between Sande and Equitas, nor any direct contact between Sande and the syndicates. Equitas therefore failed to show that the parties acted in ways consistent with there being a retainer.

Equitas also failed to establish that tortious duties were owed, the judge applying the principles of assumption of responsibility by the alleged tortfeasor and actual reasonable reliance by the alleged victim. Sande did not therefore owe tortious duties that would have circumvented contractual duties.

The judgment is a salient reminder that not all obligations owed by a fiduciary, including the obligation to remit monies, are fiduciary duties. Ultimately no fiduciary duties were found to be owed.

It was also found that Equitas' claim in restitution failed because the subsidiary operated not as agent of the syndicates but, contractually, as the original broker’s agent. As such, it was not enriched at the expense of either the syndicates or Equitas.

Limitation issues

Equitas needed to establish the duties above in order to ensure the claim did not fail on limitation. However, having failed to prove that there were any continuing duties owed, sections 32 and 21(1)(b) of the Limitation Act 1980 did not apply and all claims were found to be time-barred.

If a continuing duty to remit funds had existed, a fresh cause of action would have arisen each day funds were not paid over, so a claim for recovery would not have been time-barred.

Conclusion

The case is a reminder that although a contracting entity may carry out some of the functions of a broker engaged in run-off, there is not necessarily a broker-client relationship and the duties that accompany that relationship. It should also serve as a warning to brokers and those carrying out broker functions to keep diligent records when carrying out professional duties, such as collecting debts, to avoid the potential of future litigation.

Further reading:

Equitas Ltd & Anor v Sande Investments Ltd & Ors [2021] EWHC 631 (Comm)

Equitas Ltd & Anor v Walsham Brothers & Co Ltd [2013] EWHC 3264 (Comm)