The Need For an Intermediary
Intermediary as Agent of the Insured
Intermediary as Agent of the Insurer
Regulation
The Future?
Insurance transactions are becoming more complex. In the last decade, policies required for industrial special risks, legal expenses cover, directors and officer's liability and the extension of professional indemnity cover have been widely extended. They now include land surveyors, architects, engineers and housing agents. These types of cover have joined more traditional types of policy (eg, motor, marine, householder and personal accident insurance).
There is a case to be made for the use of intermediaries (particularly brokers) where there is a more complicated type of risk. This is particularly the case in package-type insurances covering a variety of risks. For example, the 'condominium' insurance policy must be tailored to protect the rights of either the subsidiary proprietor, the management corporation or the bank.
As the concept of risk management is becoming more important, brokers are relied on for advice by corporate entities, particularly on the following aspects:
- the minimizing of insurable losses;
- the scope of cover that is required to cover risks that must be insured against;
- the types of risks that a company would find more economical to minimize and bear itself;
- the question of finding the most suitable insurer, who provides the widest cover at the best rates; and
- the renewal of cover.
In the event of a claim, the broker's expertise is required to determine whether the insured is covered under the policy, and if so, the appropriate amount payable. The broker then assists the insured through the process, pressing the insurer to settle the claim. In these ways (depite telemarketing and direct selling by insurers), intermediaries will continue to play a vital role in arranging cover and dealing with claims.
Section 2(1) of the Insurance Intermediaries Act 1999 (31 of 1999) defines an 'insurance intermediary' as a person who, for reward and as an agent for one or more insurers, or as an agent for intending insureds, arranges contracts of insurance in Singapore. This definition includes the insurance broker.
The insurance intermediary can be both an agent for an insurer and, at other times, an agent for the insured. It is therefore necessary to understand what the role entails, as the job involves fine balancing act.
Intermediary as Agent of the Insured
Deciding whether an intermediary is an agent of the insured can be important where there is litigation between the insurer and the insured, and also when a broker is being sued for professional negligence. The following (non-exhaustive) criteria are often used to determine whether the intermediary is the agent of the insurer or the insured:
- who first requests the intermediary's services;
- who controls the intermediary's actions;
- whose interest is being protected by the intermediary; and
- who pays the intermediary.
The last criterion is in some ways the least important, for it is clearly-established that when a person approaches an insurance broker to arrange for cover, the broker beomes the agent of the proponent (ie, the prospective insured). The intermediary at that stage has two tasks: (i) completing and submitting the proposal form, and (ii) negotiating the issue of the policy.
The insured will often argue that since the broker gets his/her commission from the insurer, he/she is the agent of the insurer. The weight of judicial authority counters this proposition, as outlined in the following cases.
Rozanes v Bowen
In the case of Rozanes v Bowen (1928) 31 Lloyd's Law Report 321, the insured, Rozanes, had told his agent of his previous losses. The agent only disclosed one loss to the Lloyd's syndicate and succeeded in obtaining cover. Inevitably, another loss occurred and Rozanes claimed that as the agent was the agent of the underwriters, and knew of the full previous loss profile, the knowledge of the agent should be imputed to the underwriters.
Justice Wright concluded that justice Kennedy's dicta in the case of Empress Assurance Corporation Ltd v Bowring and Co Ltd (11 Com Cas107) should be followed. Kennedy stated:
"... but throughout the business, the brokers are simply the agents of the assured, and they owe a duty to the assured of making full disclosure, and if, they do not make a full disclosure, then the underwriter is entitled to say that the Policy is not binding..."
The underwriter's contention that the policy was void for non-disclosure was upheld.
Globe Trawler Pte Ltd v National Employer's Mutual General Insurance Association Ltd
In Globe Trawler Pte Ltd v National Employer's Mutual General Insurance Association Ltd (1989) 1MLJ 463, the plaintiff was engaged in building coastal fishing trawlers and was constructing 'Coastal Monitor II' and the 'Super Trawl'. In the policy, the Super Trawl was described as "one complete unit of wooden fishing trawler with engine, motor and accessories and equipment".
A fire broke out destroying the bow, the forward deck and the cabin of the Super Trawl. At the time of the fire, the Super Trawl was substantially built but not fully completed. The plaintiff brought an action against the insurer as first defendant and the agents as second defendant, claiming that the agents were negligent as they had failed to advise the plaintiff properly. At first instance, justice Thean said that as there was no material description of the Super Trawl, it was held to be a complete unit.
Thean further held that as the agents knew that the vessels were under construction, this knowledge was imputed to the insurer.
However, on appeal, Justice Chao Hick Tin held as follows:
- The brokers had no authority to bind the insurers. They had to refer back to them to ascertain whether the insurer would accept the risk.
- The Super Trawl was an incomplete trawler as the main engine and propeller had yet to be installed.
- Although the brokers filled in the proposal form, rated the risk and calculated the premium due, these acts were in keeping with market practice (ie, the material used for risk classification and premium calculation was provided beforehand by the insurer to the brokers). This did not mean that the brokers had the authority to bind the insurer.
The broker was held to be the insured's agent for the purpose of obtaining cover, further reinforced by the fact that the agent had requested the insured's representative to read through and sign the proposal form. By these acts, the brokers were relieved of liability as the insured knew the precise description of the Super Trawl as set out in the proposal form.
Intermediary as Agent of the Insurer
An intermediary becomes the agent of the insurer when an agent has the express authority to issue cover notes. In the Malaysian case of Chop Eng Thye Co v Malaysian National Insurance SDN BHD (1977) 1 MLJ 161, the agent had been authorized to issue cover notes by the insurer. The cover note stipulated that it would be in force for 30 days and that it was subject to the terms and conditions stated in the defendant's policy. It was held by justice Ajaib Singh that the insurers were bound by the cover note because it had been issued by agents, who were duly authorized to do so.
Another way in which the agent is determined to have the authority to act for the insurer is where apparent authority has been granted. For example, if the agent is given a particular role he or she has both apparent and implied authority to do all things normally associated with that role, unless the authority bestowed departs from the norm. Apparent authority must be held out as a fact by a person having actual authority in the matter (see British Bank of the Middle East v Sun Life Assurance Co of Canada (UK) Ltd (1983) 2 Lloyd's Law Report 9).
The representation that the agent has authority must be relied upon by the insured. There can be no reliance by the insured if he or she is aware that the agent lacks the authority to bind the insurer (see Wilkinson v Gaflac (1967) 2 Lloyd's Law Report 182).
Agents
Agents are to be registered annually with the General Insurance Association and, in any one period of registration, may not place cover with more than three insurers. The agent is paid his commission by the insurer.
They also sign agency agreements with the insurer. In practice, an agent is appointed as the agent of the insurer and he or she acts for the insurer in the transaction of the insurer's business and in soliciting all classes of insurance underwritten by the insurer. The agent agrees to promote the business of the company and generally enhance the reputation of the company.
However, the agent's authority is restricted. He or she has no authority:
- to bind the insurer in any way;
- to make or alter or discharge any contracts; or
- to waive any lapse for forfeiture except with the prior consent of the insurer.
Thus, he or she is an agent of the insurer in a limited sense and, as described above, remains an agent for the insured.
Brokers
Brokers are, to a large extent, self-regulated. Under their Membership Rules, all chief executive officers must have at least five years experience handling general insurance business at a managerial level, or 10 years relevant working experience with general insurance knowledge. They must also hold the relevant professional qualifications. They have to maintain professional indemnity cover and have a minimum paid-up capital.
Generally, the rules for agents and brokers are geared towards protecting the consumer.
New legislation
The Insurance Intermediaries Act 1999 (31 of 1999) came into effect on December 31 1999. Some of the provisions, particularly those relating to the operation and conduct of the insurance intermediary, are inspired by the Australian Insurance (Agents and Brokers) Act 1984.
The act is designed to regulate the conduct of agents and brokers (including Lloyd's brokers). Agents are required to have written agency contracts with an insurer. Brokers are prohibited from being involved in insurance-broking business unless registered with the Monetary Authority. Brokers are required to have professional indemnity insurance cover, to further protect the public against the effects of wrongful advice and against suffering any financial loss due to brokers' negligence.
Section 3 of the act deals with the requirement that the insurance agent have an agreement in writing which authorizes the agent to not only arrange a particular contract, but any contract of insurance (or class of contracts of insurance) in which that contract is included. The implication is that agents have to operate under a written agreement with an insurer, whereas brokers do not. The Australian equivalent of Section 3 is Section 10 of the Insurance (Agents and Brokers) Act 1984. In the case of MLC Life Ltd v Navani Pty Ltd (1996) 9 ANZ Ins Cas 61-332, it was held that Section 10 only requires that the terms of the agreement between the intermediary and the insurer be in writing. There is no requirement for either one of the parties to sign a memorandum of agreement containing those terms.
Section 4(1) of the act provides that where a contract of insurance is arranged by an insurance intermediary, payment of premiums by the insured to the intermediary is considered a discharge as between the insured and insurer of any liability of the insured (to the extent of the amount of the payment). Section 4(2) provides a similar discharge for a contract that the insured intends to enter into with the insurer at some time subsequent to the payment. This is distinct from Section 4(1), where the contract already exists or is made contemparaneously with the relevant payment to the intermediary (see International Specialist Underwriters Ltd v Heiman (1987) 9 NSWLR 201).
Section 6 of the act deals with representations by insurance intermediaries. Intermediaries should not, with intent to deceive, make a false or misleading statement as to the premium amount payable for a proposed contract of insurance, or as to the effect of any of the provisions of a contract of insurance. In the Australian case of Simeone v Verreiter (199) 92 ALR 288, the phrase 'intent to deceive' meant that the relevant act was done with the purpose of inducing a person to believe that a statement was true that was in fact false, and that the person doing the act knew or believed it to be false. It did not require an intention that someone should suffer financial detriment.
Section 9(1) of the act relates to the control of brochures used by the insurance intermediary. The monetary authority may require an insurance intermediary to submit any brochure which is being used by the intermediary for describing the terms or conditions of, or the benefit which is likely to be derived from, the policies. Where the brochure is not in English, an English translation must also be submitted. Section 9(6) stipulates that a brochure includes any leaflets, circulars or similar advertising matter (whether printed or not).
The act is consumer-focused, as seen above, and evident in Section 20. Registration of any insurance broker may be cancelled if the broker is carrying on business in a manner "...likely to be detrimental to the interest of policy owners for whom it is acting as an agent". The act enables the monetary authority to have an overview of the intermediary's activities and conduct, enhancing protection of the policyholder.
Greater demands may be imposed on brokers. The Singapore position, like the Australian position, is that an insurer is absolved from the duty of notifying the insured of the obligation to make full disclosure (as required by Section 22(1) of the same act) where a broker is employed.
Thus a broker must note the terms and conditions of cover (including the exclusions) and be able to advise the insured accordingly. Direct contact between the broker and the insured is required in order for the broker to confirm that the insured realizes the obligation to disclose all material facts that might be relied upon by the insurer as grounds for avoiding the contract.
For further information on this topic please contact Balu Rao at B Rao & KS Rajah by telephone (+65 535 2188) or by fax (+65 534 3972) or by email ([email protected]).
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