On 19 July 2010, the Law Commission published an Issues Paper on the broker's liability for premiums under Section 53 of the Marine Insurance Act 1906. Section 53 makes the broker directly responsible to the insurer for the premiums due under an insurance contract, whether or not the broker has received them from the policyholder. It overrides the normal rule of agency law that an agent is not personally liable on a contract effected for its principal.
The legal basis for this custom was a fiction that the broker had paid the premium to the insurer, thus discharging the policyholder's liability to pay, and that the insurer had lent the money back to the broker. This created a personal debt obligation between the broker and the insurer. The problem which has faced the courts is how, if at all, the common law fiction applies under the modern law.
The Issues Paper addresses the complexity of the section and the problems it creates in particular in respect of payment clauses such as adjusted premium clauses and premium payment warranties. It concludes that in practice, Section 53 is not needed in the market. It therefore proposes that the section be reformed and the default position should be that policyholders are liable for the premium payments due under their insurance policies. This would allow the insurer to sue the policyholder for the premium, if unpaid. The policyholder receives the benefit of the insurance coverage and so it is the policyholder who should primarily be liable for it.The broker would not be liable for the premium unless it had expressly assumed such liability.
The Law Commission seeks responses to its proposals by 19 October 2010. If you would like to view the Issues Paper, please click here.