Duties and responsibilities of the insurance and reinsurance broker by lindayy


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									    Duties and responsibilities of the
   insurance and reinsurance broker

                                                                           Stuart Westgarthf

  This is the second part of the paper presented to the 1984 MLAANZ
Confermce. Part I appeared in (1984) 2 (2 & 3) MLAANZ 45.

5. The Broker and the Duty of Disclosure
    It is a matter of basic law that the intending insured must disclose to the
insurer every material matter relating to the risk being insured against. The
Fanhaven casei illustrates how the broker shares with the insured this duty
to disclose. In that case, two of the principals of the insured had long
criminal records involving dishonesty. One of them rang the broker and said
that he had been recommended by his father-in-law, a reputable and valued
client of the broker. The broker went to their business premises and
discussed their insurance requirements. The proposals for five policies were
filled in. The evidence was that the broker said nothing about the subject of
the duty to disclose material facts, nor did he ask any general questions.
Each proposal contained the question: "Are there any other factors material
to insurer's acceptance of this insurance?" to which the insured's answer
was: "No".
  There was also a declaration that the insureds had not withheld any
information likely to affect the acceptance of the proposal. Reynolds J A
said2 -
  The obligation of disclosure in respect of contracts of insurance is not widely known or
  understood by laymen. The ordinary person who answers the questions in a proposal
  form honestly and to the best of his ability believes that no more is required of him. Even
  if there is reference to material facts or to matters likely toaffect the risk this isvirtually
  meaningless to the ordinary person. This being theposirion, the signingof the proposal
  involves a concealed trap. The duty of disclosure is a persuasive duty and a failure
  involves drastic consequences. One of the reasons a broker is employed is so that a valid
  and enforceable contract is procured and if the broker does not alert his client to the
  pidalls he fails to exercise due care and skill because whilst he knows of the

  Solicitor, Sydney.
1 [l9821 2 NSWLR 57.
2 Ibid 62.
38                                  MLAANZ Journal
     requirements of the law in this respect the unwary client does not and the agent
     therefore fails to use his best endeavours to procure that which he was employed to
However, Reynolds J A went on to say3 -
     . . . it is conceded that it is unreasonable to impose an obligation to ask questions of
     apparently respectable businessmen or company directors as to their moral history and
     it is recognised that only by exposition of somewhat refined legal principle can the
     minds of the company's servants be directed to the fact that an insurer might not be
     prepared to accept the proposals of a company controlled by men with substantial
     criminal records and employing as a key employee another man also with a substantial
     criminal record. The whole basis of the appellant's claim is the failure to bring home to
     the mind of the man with whom the broker dealt that the facts relating to the honesty
     and integrity of the company's directors, executives and key personnel ought to be
And his Honour quoted with approval the words of the trial judge, Yeldham
J who said3a-
     I do not think that the exercise of reasonable care required the broker to inform the
     plaintiff of its obligation to disclose material matters, other than those to which the
     questions in the           referred, or toenquire from the plaintiff whether the directors
     or any of its senior management had criminal records.
So, the court held that in the circumstances of the case the broker, not being
aware of anything disreputable, was not obliged to inform his clients of their
obligations to disclose their criminal past.
   The case of Warren v Surton4 is an example of a case which the broker lost.
There M r Wright and M r Warren wished to drive a Triumph sports car to
France from the UK. M r Wright subsequently crashed the car near
Versailles and the insurer denied liability on the ground of the misrepresent-
ation that Wright had had no prior accidents, convictions, or disability. The
evidence was complicated. However, essentially, it was alleged that the
insured made no misrepresentation to the broker but the broker had
voluntarily made a positive misrepresentation to the insurer. Lord Denning
(who was in the minority) said that M r Warren had failed to fulfil a duty he
owed to the broker to disclose Mr Wright's past. However, unfortunately
for the broker, the majority held that the non-disclosure by the broker was
made as a result of not enquiring of the insured as to the facts and the
insured did not cause or occasion the broker's misrepresentations. The case
illustrates that a broker should be careful about making assumptions about
his client's past and based on those assumptions making statements to
  Since 1 April 1984 the law relating to disclosure has been modified in
New South Wales by the introduction of the Insurance (Amendment) Act

3 Ibid 63,64.
3A Ibid 64.
4 [l9761 2 Lloyds Rep 276.
             Responsibilities of insurance & reinsurance broker               39
1983which affects the law governing misrepresentation and non-disclosure.
The Act does not apply to marine insurance.
  Section 18A of the Act provides that a contract of insurance is not void or
voidable by reason only of a false or misleading statement or an omission
unless the statement or omission was material to the insurer in relation to the
contract of insurance and
  (i) the statement was fraudulent or the omission was deliberate or
 (ii) the insured knew or a reasonable man in the insured's circumstances
      ought to have known that thestatement was material to the insurer or
      that matter material to the insurer had been omitted.
   It is not appropriate in this paper, to examine all of the issues raised by
this amendment. However, mention should be made of the most significant
effect of section IBA, which is to alter the Common Law test of materiality.
Under this section, the false or misleading statement, or omission, must be .
material to the actual insurer involved rather than the abstract prudent
insurer. The actual insurer must prove that he regarded the relevant
statement or omission as material.
   For the broker, the section has the effect that he may be unaware of the
particular idiosyncrasies or peculiar requirements of the actual underwriter
with whom he is dealing. For example, the broker may genuinely not
appreciate that a particular omission is material to that underwriter and it
may be the case that the omission would be normally immaterial to the
average prudent underwriter. In those circumstances and provided the
omission was deliberate the broker may find that he is accused by the
disappointed insured of negligence in the procurement of the policy.
Perhaps, brokers might care to seek from insurers in future an indemnity to
the effect that if the broker is liable to the insured because of the particular
requirements of the actual underwriter which are found to be unusually
stringent or atypical then the underwriter will indemnify the broker for
liability to the insured.
   Section 10 of the Insurance Law Reform Act 1977 (NZ) provides that a
representative of an insurer (which includes any person entitled to
commission from the insurer in consideration for procuring a contract of
insurance) shall be deemed to be the agent of the insurer and that an insurer
shall be deemed to have notice of all matters material to a contract of
insurance known to the representative concerned in the negotiation of the
contract before the proposal is accepted.
  The intention of the section is to make brokers who act for the insurer
during the negotiation of the contract of insurance, agents ofthe insurer and
therefore make the insurer liable if there is a disclosure by the insured to the
broker, which is not passed on to the insurer.
  Section 25 of the Marine Insurance Act (C'wlth) contains a positive duty
on the broker. I t provides that where insurance is effected for the assured by
an agent, the agent must disclose -
40                                   MLAANZ Journal
     every material circumstance which is known to himself, and an agent to insure is
     deemed to know every circumstance which in the ordinary course of business ought to
     be known by, or to have been communicated to, him.

6. The Broker and the Premium
   For non-marine insurance, the general rule is that the broker holds the
premium as agent of the insured and if he fails to pay the premium to the
insurer, the insurer is entitled to look to the insured for a second payment.
This has recently been affirmed in the decision of the New South Wales
Supreme Court (Court of Appeal) in the case of Norwich Winterthur
Insurance (Australia)Limited v ConzStan Industries of Australia Pty Limited5.
There, the insured unsuccessfully tried to argue that a commercial usage
had been established which permitted a term to be implied into non-marine
insurance policies that either payment of premiums to a broker by the
insured was a good discharge of the insured's liability to the underwriter or
that the liability of the insured to pay premiums is owed only to the broker.
   Similarly, brokers are not normally liable to pay to the liquidator of an
insurer unpaid premiums in respect of non-marine insurance policies
arranged by the broker and issued through the insurer to the insured. The
case of E H Liemann Pty Limited v Heartsview Insurance; re Palmdalt
Insurance Ltd (In Liquidation)6 affirms this proposition.
  This general rule does not apply to a Lloyds broker. There are authorities
(admittedly, not recent ones) which hold that there is a recognised usage at
Lloyds that an underwriter does not claim premium from the insured but
instead from the b r ~ k e rThere is also authority that a Lloyds broker may.
sue the insured for unpaid premium.8
  Marine insurance is treated differently. Section 59(1) of the Marine
Insurance Act 1909 (C'wlth) provides -
     Unless otherwise agreed, where a marine policy is effected on behalf of the assured by a
     broker, the broker is directly responsible to the insurerforthe premium, and the insurer
     is directly responsible the assured for the amount which may be payable in respect of
     losses or in respect of returnable premium.
Section 53 of the Marine Insurance Act (NZ) is in identical terms. In the
Palmdale case referred to above, the court confirmed that as to marine
insurance policies the broker would be liable to the liquidator for unpaid
  Section 14 of the Insurance (Agents and Brokers) Act 1984 (C'wlth)
provides that payment by the insured to a broker discharges the insured of

5 [l9831 1 NSWLR 461.
6 [l9821 VR921.
7 MacGillivray and Parkingron on Insurance Law (7 ed Swect & Maxwell, London) para 438.
8 Ibid para 440.
             Responsibilities of insurance & reinsurance broker                41
liability to the insurer. This will have the effect of extending to general
insurance the position which has always applied to marine insurance.
   Section 10 of the Insurance Law Reform Act 1977 (NZ) provides that a
representative of the insurer (which may because of the definition in section
lO(3) include brokers) who acts for the insurer during the negotiation of any
contract of insurance shall be deemed as between the insured and the
insurer and at all times during the negotiations until the contract comes into
being, to be the agent of the insurer. I do not think that this section can be
construed as having the effect of permitting an insured to argue that
payment to the broker discharges him of liability to pay premium to the
insurer. I think that such an argument would be unavailable because
normally the broker would not be someone "who acts for the insurer during
the negotiation".

7. The Broker and Reinsurance
   Generally speaking, the legal position under the Common Law of a
reinsurance broker is the same as for the insurance broker. The reinsurance
broker has a legal duty to his client to act with due care and professional skill.
Many of the statutory provisions specifically exclude reinsurance. For
example, the Insurance (Agents and Brokers) Act 1984 (C'wlth) specifically
excludes reinsurance (see section 7).
   Generally, the reinsurance broker will do more than merely procure a
reinsurance contract. He is more inclined to be involved in providing expert
advice to his client, the ceding office. Again, as with insurance brokers,
reinsurance brokers may also be involved in transactions in which they are,
in effect, acting for both reinsurer and insured. For example they may be
involved in obtaining reinsurance for the ceding office and have authority to
accept reinsurance business on behalf of the reinsurer. On the authority of
the case ofAnglo-African Merchants Ltdv BayIeygthe broker must give a full
disclosure to the insured and seek his consent.

8. Liability o Brokers to other Third Parties
  There is a trend, particularly in England, to permit a third party to sue in
negligence even though he did not have an immediate or direct relationship
with the negligent party.
  The recent English cases of Junior Books Ltd v Veitchi COLtd, l0 Ross v
Cauntersll and others illustrate the present extent of this liability.
   For brokers the trend was established in the 1971 case of London Borough
o Bromley v Ellis. '2 In that case Ellis purchased a Ford Prefect and the seller

9 (19701 1QB 311.
l0 [l98213 A l ER 201.
1 1 119791 3 A l ER 580.
12 [l97111 Lloyds Rep 97.
42                                   MLAANZ Journal
agreed to transfer the motor vehicle insurance. Ellis asked the seller's
brokers to undertake this task. The brokers failed to inform Ellis that the
insurer had a query and this query was not cleared up when Ellis collided
with the Mayor of Bromley's Rolls Royce. M r Ellis had no insurance and he
sued the brokers. He was successful. The Court of Appeal held that
although the brokers were not Ellis' agents they were under a reasonable
duty of care to effect the transfer of insurance and were in breach of that
  In New South Wales the law relating to negligence was recently reviewed
by the Court of Appeal in the case of Minister Administering The
Environmental Planning and Assessment Act 19 79 vSan SebastianPty Ltd and
Owl3 where Glass J A said14-
     . . . the first question to be asked is whether the defendant's carelessness poses a
     reasonably foreseeable risk ie possiblity of injury to the plaintiffs person or property. If
     so, their relationship is one of proximity and he is prima facie bound by a Donoghue
     duty of care. . . If no relationship of proximity exists, the defendant may nevertheless
     become subject to a duty of care in giving information or advice so as to avoid causing
     economic loss if the special relationship of Hedley Byrne as later elaborated is
   The San Sebastian and London Borough of Bromley cases illustrate that
brokers, like other professionals, may be held liable in the appropriate
circumstances to persons who are not their clients. This proposition would
seem to have been affirmed by the recent case of General Accident Fire and
Life Assurance Corporation and ors v Tanter and ors (The "Zephyr"). l 5 Here,
the broker received a request from a ship owner to insure a vessel he
proposed to purchase under an "all risks" policy. The broker then
approached both all risks underwriters and total loss underwriters. This was
because some of the all risks underwriters would wish to reinsure their
proportion of the total loss risk that they would undertake. The broker in
effect set out to procure insurance for the ship owner and reinsurance for
some of the primary underwriters.
   It was held that the broker was agent for the insured in respect of the
primary insurance and agent for certain underwriters of the primary
insurance in respect of the reinsurance. He was not the agent of the
reinsurance underwriters.
  The broker was also in the practice of oversubscribing the slip. He would
take the slip around to underwriters until in excess of 100%of the risk was
taken up. This was a common practice. Here, the all risks slip was
subscribed as to approximately 250% so that all underwriters would later
have their respective proportions "signed down" - ie reduced so that an

13 [l9831 2 NSWLR 268.
14 Ibid 300.
15 [l9841 1 Lloyds Rep 58.
             Responsibilities of insurance & reinsurance broker              43
underwriter taking 10%of 250% would ultimately have only 4% of 100%of
the risk.
   An underwriter would normally need to know and would ask the broker
to what extent his proportion is likely to be signed down. He would then
know that although he had agreed to take 10% he would really only end up
with approximately 4%.
  Here the broker told reinsurance underwriters that the reinsurance slip
would sign down to one third. The reinsurance underwriters argued that
based on that advice they had nominated for a higher proportion than they
would have done otherwise. For example, one underwriter who initially
nominated for 10% said in evidence that he had selected that percentage
because he thought that his signed down percentage would be approx-
imately 3%.He thought that because the broker had led him to believe that
that would be the case.
  Before the broker achieved his desired level of oversubscription the vessel
sank and became a constructive total loss. All of the above events took place
over approximately three weeks.
   It was held by Hobhouse J that the broker was liable to the reinsurance
underwriters notwithstanding that he was not their agent. His Honour held
that the broker owed to the reinsurance underwriters a duty to use
professional skill and diligence to achieve the level of signing down
previously indicated. The underwriters had relied on that indication which
had been voluntarily given by the broker. Here the evidence was that the
broker did not use his professional skill and diligence to fill up the slip. He
was held to be negligent and thus liable to the reinsurance underwriters.
   Whilst The Zephyr is a case dealing with a specialised market and
relationships, the principles which were applied are of general application
and highlight the duty that brokers and other professionals have not only to
their clients but generally to those with whom they deal.

Addendum -Liability of a GratuitousAgent; Liability of an Insurance Broker
  Whenever an insurer rejects a claim under an insurance policy, the
ensuing litigation seems to inevitably involve a claim by the insured against
his broker. Probably the most recent case of this kind is Norwest
Refrigeration Services Pty Limited v Bain Dawes ( M A ) Pty Limited and
Geraldton Fishermans Co-operative Limited.16
  I n that case, Norwest sought to insure the fishing vessel Sonoma and
requested the assistance of the Fishermans Co-operative. The Co-operative
had at an earlier stage organised a fleet policy with the assistance of the
broker. Norwest filled out a proposal form and sent it in to the Co-operative
and was later advised that cover had been organised. Later the vessel was

16 (1984) 55 ALR 509.
44                              MLAANZ Journal

destroyed by fire and the insurer declined liability under the policy on the
grounds that the vessel held no current survey certificate. The evidence was
that Norwest dealt only with the Co-operative and had no dealings with the
   Norwest sued the insurer, the Co-operative and the broker and, at first
instance, lost against all three. I t appealed only in respect of the decision in
favour of the broker and the Co-operative.
  The High Court unanimously held -
1. The Co-operative had a duty to take reasonable care on behalf of
   Norwest. Norwest had given to the Co-operative a copy of an expired
   survey certificate and that was sufficient to give rise to a duty in the
   Co-operative to warn the insured that vessels not holding a current
   survey certificate were excluded from cover.
     Brennan J held that in carrying out its commission to arrange the cover
     requested, the Co-operative was under a duty ofcare and it was bound to
     exercise at least the same care as a reasonably careful man of business
     would have exercised in his own affairs. That duty was not as high as the
     duty on an insurance broker who was under a duty to exercise that
     degree of skill and competence which a broker holds himself out as
2. In the circumstances, it was reasonable for the broker to proceed on the
     basis that the Co-operative in the performance of its role of caring for its
     members would have made any specific enquiry that was considered
     necessary in a particular case and that it was sufficient for it to simply a,ct
     as an intermediary between the Co-operative and the insurer consistent-
     ly with any specific instructions received from the former.
     The evidence was that the broker was not sent the copy expired survey
     certificate and that the material supplied to the broker contained no hint
     that the vessel did not have a current survey certificate. The majority
     thought it of relevance that Norwest had no personal contact with the
     broker and did not even know of its existence.
     Again, the judgment of Brennan J is helpful and he stated that the "duty
     of care owed by a broker relates to the doing of what the broker is
     employed to do". I n this case, the broker carried out precisely the
     instructions given to it and no information had been passed to the broker
     which would give rise to a duty of care in the broker to warn or advise the
     insured. The court held that whilst the broker did owe a duty of care to
     Norwest, it had not breached that duty.
     In the result, Norwest was successful against the Co-operative but
     unsuccessful against the broker.

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