The recent High-Court judgment of ARB International Limited v Baillie confirmed that there is no common market practice for what was described as a “Mid-Term Broker Change” in the London Market (an “MTBC”), as well as addressing the exact point at which commission is earned by a broker, how business should be transferred between brokers, and what duties are owed by the Managing Director of a broker.
Change of broker mid-term during the policy period is a frequent problem for London Market brokers. The general approach is that a broker may in certain circumstances be entitled to brokerage even where the broker’s retainer has been terminated before the risk is finally placed. Pursuant to the decision in Velos v Harbour, brokerage is usually regarded as fully earned at inception.
When there is a change of broker, the incoming broker will usually request the former broker’s files. On termination of the retainer and in response to any request for his files, a broker need only hand over those documents generated as a result of the agency relationship. A term is also implied into Lloyd’s insurance contract between the insurer and its insureds which obliges them to make the relevant documents available to the insurer.
Subject to the express terms of any retainer or service level agreement, it is usual practice for a broker to remain responsible for presenting claims arising under policies which he has placed. In this event, the broker should ensure adequate remuneration is received.
These general rules applicable to policies of insurance will not necessarily apply equally to contracts for insurance. In the recent case of ARB International Limited v Baillie, Mr Robin Knowles CBE QC (sitting as a deputy High Court Judge) pointed out that:
“The contract that is a binding authority, quota share treaty or declaration-based policy is unlike the contract that is a simple policy of insurance or reinsurance. The binding authority, quota share treaty or declaration-based policy does not on its own bind the risk in question so as to earn premium. Business still has to be written under the binder, ceded to the treaty, or written (declared) under the policy.”
The judge was satisfied that there is no relevant standard or common market practice for an MTBC in those situations. The practice varies from case to case, and from broker to broker. The “Best Practice Market Guidelines” published by the London & International Insurance Brokers’ Association (“LIIBA”), which include a form of draft transfer agreement, have not become the market standard and each case will continue to depend on its own facts.
Parties may decide to agree between themselves (for example in a Terms of Business Agreement) a particular point at which commission is earned, but the general position is that it is earned when the premium-generating business is written, ceded or declared. This does not change where the premium is paid in instalments.
It is the duty of the outgoing broker to carry out its client’s instruction to transfer the files promptly. They have no right to delay transfer as a lever in a negotiation with the incoming broker. The outgoing broker and the incoming broker may decide between them whom should be responsible for, and bear the costs of, further work required. They might also decide whom should enjoy commission earned on business that is not written, ceded or declared until after the MTBC. Consideration to the interests of the policyholders must be given throughout.
The ARB International case was a claim by a broker against its former Managing Director for agreeing to a MTBC on terms it considered to be unduly favourable to the transferee. The judge held that in such circumstances the Managing Director’s approach will not be called into question provided he has acted in the best interests of his company, with sufficient knowledge and understanding of the company’s business, and makes business judgments within the range of those open to him. This includes decisions on whether to delegate responsibilities to others, and whether to seek legal advice in an area where legal advice is not always necessary.
The decision clarifies the position on several points of conduct for brokers in managing an MTBC.
A well-drafted TOBA which expressly addresses the question of commission is the most suitable way to avoid any disagreement over which party should be paid, and for what business. Adherence to sensible commercial principles in managing the MTBC (whether or not the LIIBA’s guidelines are used) should ensure that the change of brokers does not lead to disputes over individual directors’ decisions in their handling of the transition.
Further reading: ARB International Ltd. v Baillie  EWHC 2060 (Comm)