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 procure. 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 disclosed. 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 insurers. 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 premiums. 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 f 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 f 9 (19701 1QB 311. l l0 [l98213 A l ER 201. 1 1 119791 3 A l ER 580. l 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 duty. 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 established. 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 broker. 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 possessing. 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.