As professionals, insurance brokers must be aware of the duties they owe to their clients. Consumer protection legislation and regulation is a local trend and the insurance industry has been placed in the spotlight. What are these duties? Where do they come from? And, most importantly what happens if a duty is breached? These are the questions we will briefly consider below.
Insurance brokers enter into contracts with the insured to provide for their insurance needs. The contractual and legal duties of a broker may be express, tacit or implied by law. Basic duties such as the scope of the broker’s mandate should be expressly stated in the contract, but brokers commonly overlook the common law duties which arise from the contract of mandate. As set out in the second edition of LAWSA’s ‘Insurance agents, brokers and intermediaries’ implied legal duties include:
- The duty to act in good faith arising from the fiduciary relationship. The insured has placed special trust, confidence, and reliance in his broker and he is influenced by the broker who has a fiduciary duty to act for the benefit of the insured. This requires the broker to perform her mandate in the interest of the insured; to be open and honest with the insured and not to make a secret profit. This duty has both a common law and statutory basis. See s16 of Financial Advisory and Intermediary Services Act, No 37 of 2002.
- The duty to advise the insured properly. Brokers must advise a client of the most suitable products to meet that client’s needs. Although seemingly obvious and simple, the broker must be cognisant to discharge this duty with reasonable care and skill. This duty includes warning the client of the risks of being uninsured and underinsured referring a client to experts where applicable and explaining each element of the cover provided.
- The duty to obtain insurance coverage. This includes understanding and evaluating the insurance needs of the client, requesting the necessary documents for the evaluation and recommending the appropriate cover. See Lenaerts v JSN Motors (Pty)  (1) SA 1100 (W) 1109. Failure to ensure that a client is adequately covered - for example underinsuring a client for business interruption - may result in a breach of this duty. This duty does not, however, require the broker to ensure that the client complies with the obligations provided by the policy as this is the insured’s responsibility. See Lappeman Diamond Cutting Works (Pty) Ltd v MIB Group Ltd and Another  (2) SA 1 (SCA).
- The duty to explain the meaning of the policy. This relates to the nature of the contract and all of its material terms. Additionally, if the contract contains any ‘unusual provisions’ which limit or exempt an insurer’s liability then the broker must alert the insured of this this.
New statutory rules regulating these duties
New Policy Holder Protection Rules (Rules), including significant amendments, were promulgated on 1st January 2018. The Rules now formally incorporate the Treating Customers Fairly provisions: a regulatory regime that aims to provide better protection of customers against unfair business practices by life companies and short-term insurers.
These new Rules are in line with National Treasury’s broader policy goals to reform the financial services industry including the introduction of Twin Peaks legislation and the new Insurance Act.
These Rules are yet to be tested. Some fear that the increase in regulation will result in increased insurance costs which will be passed onto the insured driving up the price of an already “grudged purchase”. However, these Rules are in fact not ‘new’ but serve as a more specific manifestation of the general duty to exercise reasonable skill and care when performing services under a contract of mandate. These duties are not unreasonable considering the professional services insurance brokers provide. It is now up to every broker to insure and ensure that they adhere to these duties.