Law Commissions propose guidelines on status of insurance intermediaries

The proposal by the Law Commissions of England and Scotland is part of an ongoing project to reform consumer insurance contract law.

The issue is important because it determines who bears the risk of the intermediary being negligent or fraudulent when he relays information about the insured to the insurer before the insurance contract is finalised.

If the intermediary is acting as the agent of the insurer and fails to tell the insurer something material, or provides incorrect information, the insurance cover will be unaffected.

But if the intermediary is acting as the agent of the insured, the insurer can treat the policy as invalid, even if the insured had no knowledge of the intermediary's breach. Instead of being able to claim under the policy, the insured's only remedy is to sue the intermediary for damages.

Most consumers think the intermediary is working for the insurer, but English law generally assumes that an insurance intermediary acts on the insured's behalf when it receives and passes on information.

The law in this area, however, is uncertain and the Law Commissions believe it is becoming increasingly difficult to apply in a rapidly changing marketplace.

Nowadays, intermediaries fulfil a wide variety of roles, from traditional independent brokers providing impartial advice, to 'tied' agents selling the products of a single insurer and consumers can buy insurance from banks, high street retailers, supermarkets and online via price comparison websites.

In June 2007, the Law Commissions proposed a single test to decide the intermediary's status when passing on pre-contract information. The intermediary would be treated as acting for the insurer unless clearly independent and acting on the insured's behalf.

The proposal received a very mixed response. Insurers, in particular, were concerned about taking on responsibility for the actions of intermediaries outside their control. Many respondents thought that, as a result, insurers would become increasingly reluctant to do business with smaller, independent intermediaries.

The Law Commissions have now decided that a single test is not workable. Instead, they propose a new statutory code that sets out a range of factors to be considered. The code is based largely on existing law, supplemented by Financial Ombudsman Service practice and industry understanding.

"The aim is to find a balance," say the Commissions in their policy statement. "Insurers should bear responsibility for those intermediaries within their control, and have appropriate incentives to exercise that control in a way that prevents problems from occurring. Insurers should not, however, be liable for the actions of a genuinely independent agent".

The paper identifies three circumstances where an intermediary would always be considered to be acting for the insurer.

An intermediary with authority to bind the insurer to provide cover, or who is the appointed representative of the insurer, or who is expressly authorised by the insurer to collect pre contract information on its behalf would be treated as the insurer's agent.

In other cases, however, the intermediary would act for the insured, unless a close relationship between the intermediary and the insurer indicates the insurer has granted the intermediary authority to act on its behalf.

The policy statement sets out a non-exhaustive list of factors which should be taken into account when considering whether the insurer/intermediary relationship is sufficiently close.

Branding and white labelling – where the insurer allows the intermediary to brand its services with the insurer's name, or conversely where the insurance product is branded with the intermediary's name – are factors that indicate an agency relationship between insurer and intermediary. As are other situations where the insurer exerts substantial control over the way the intermediary conducts its business.

Tied or multi-tied agents, who only place insurance with one or a limited number of insurers, are more likely to be found to be agents of the insurer. The smaller the number of insurers, the closer the relationship with those insurers is likely to be.

An intermediary, however, is more likely to be acting for the insured where he provides impartial advice, where the insured pays a fee, or where the intermediary fully discloses any commission he has received from the insurer.

The code will only apply to consumer insurance and will not affect other areas of agency, such as when an intermediary collects premiums on the insurer's behalf.

The Commissions are not inviting comments at this stage. The principles will be included as a free standing code in the Commissions' draft bill on pre contractual information in consumer insurance, due to be published this autumn.