ABI RESPONSE TO THE ENGLISH AND SCOTTISH LAW
COMMISSION’S ISSUES PAPER ON THE BROKER’S LIABILITY FOR
PREMIUMS AND POSSIBLE REFORM TO SECTION 53 OF THE
MARINE INSURANCE ACT 1906
1
Introduction
1.1
The ABI is the voice of the insurance and investment industry. Its members
constitute over 90 per cent of the insurance market in the UK and 20 per cent
across the EU. They control assets equivalent to a quarter of the UK’s capital.
They are the risk managers of the UK’s economy and society. Through the
ABI their voice is heard in Government and in public debate on insurance,
savings, and investment matters.
2
General comments
2.1
The ABI welcomes the Law Commissions’ proposals to review the law of
broker’s liability for the payment of premiums in the non-marine insurance
sector, but advocates that the reforms should not extend to marine insurance.
In particular, we believe that:
3

Section 53(1) of the Marine Insurance Act 1906 no longer represents
current non-marine insurance practice but remains fundamental to
marine insurance business;

The common law fiction, confusion over section 53(1) and the resulting
uncertain case law has led to a lack of clarity in this area of the law;

Allowing parties to negotiate where the risk of premium payment lies in
their commercial insurance contracts and terms of business
agreements (TOBAs) encourages underwriter innovation and will offer
the policyholder more value in the long term.
Current law and practice on section 53(1)
Does section 53(1) reflect current market practice in either the marine or
any part of the non-marine markets?
3.1
Section 53(1) does not reflect current market practice in the non-marine
insurance market. In many TOBAs between insurer and broker, the broker
accepts liability for the non-payment of premium which it has collected from
the policyholder. On the other hand, section 53(1) remains fundamental to
1
marine hull business. Liquidators of insurance firms also rely on section 53(1)
to pursue uncollected debts.
3.2
The “legal fiction” itself, the concept whereby the premium is paid at the outset
and simultaneously loaned backed to the broker, is not recognised by
underwriters as an element of current practice.
Are there any justifications for automatically imposing personal liability
for premium payments on brokers in either the marine or non-marine
markets?
3.3
We consider that there is little justification for the insurer to pursue the broker
by default in respect of unpaid premiums in non-marine insurance.
Individually negotiated TOBAs between the insurer and broker should instead
determine where the risk lies. Aside from the TOBA, we believe that the
insurer should pursue the premium from the party which benefits from the
cover.
3.4
In the marine insurance market, however, section 53(1) protects the insurer
from relatively unknown insureds, particularly where the broker is the sole
channel of communication between them. This situation is far more common
in marine insurance business. Additional protection for the insurer in this
context is justifiable, given that the insured values can be exceptionally high,
the assets insured are highly mobile, and business is often on a short-term
basis, with little scope for long-standing commercial dealings.
Should section 53(1) be preserved only for marine insurance?
3.5
The ABI accordingly believes that section 53(1) should be preserved for
marine insurance, although its scope needs to be addressed and clearly
established.
If so, would such a divide between different types of insurance cause
problems in practice? What would the nature of those problems be?
3.6
The ABI does not envisage that issues will arise if section 53(1) applies to one
class of insurance only, provided that its scope is clear.
Alternatively, could the desired result be achieved contractually if
section 53 were to be repealed and/or replaced?
3.7
Unless a TOBA contains contractual provisions to the contrary, the normal
rules of agency would apply if section 53 were to be repealed or replaced.
The broker would not, therefore, be liable for the policyholder’s obligation
under the policy to pay the premium.
3.8
Current market practice indicates that insurers’ TOBAs with brokers
contractually deal with the broker’s liability for payment of the premium in
specific circumstances. We believe that this method works efficiently, and
accommodates individual scenarios.
2
3.9
The ABI therefore considers that the broker’s liability for premiums can be
effectively and flexibly managed in the contractual arrangements between
insurer and broker.
Does section 53(1) unfairly expose insurers to the credit risk posed by
brokers and brokers to the credit risk posed by policyholders?
3.10
Section 53(1) does unfairly expose the insurer to the credit risk posed by
brokers. Where section 53(1) applies, and where the broker has become
insolvent, the insurer is unable to recover unpaid premiums from the
policyholder despite being on risk.
3.11
Conversely, we do not consider that brokers are unfairly exposed to the credit
risk posed by policyholders. If the broker has reason to doubt the
creditworthiness of the policyholder, perhaps it should decide not to retain its
custom.
3.12
Moreover, there are numerous protections afforded to brokers with the
objective of mitigating credit risk. First, the law permits brokers to negotiate to
opt out of section 53(1) in the TOBA. Otherwise, they may require the
policyholder to pay the premium up front and / or purchase credit insurance.
Are there any other reasons why section 53 should be retained?
3.13
There is no reason to retain section 53 in non-marine insurance, but we
reiterate our above opinions supporting the retention of section 53 in the
marine sector.
Are the requirements of section 53 with respect to “contracting out”
unduly onerous? Should parties be free to negotiate their contracts as
they see fit?
3.14
We believe that that the requirements for contracting out of section 53 are
onerous on the insurer, particularly if it applies to non-marine insurance. We
agree with the Commissions’ stance that freely negotiated contractual
provisions, such as premium payment warranties and adjusted premium
clauses (in marine insurance particularly), should not be rendered ineffectual
by section 53. The lack of clarity in the case law as to whether section 53
recites the common law fiction is unfortunate and reform should make it clear
that this is not the case.
3.15
We advocate that parties should be unrestricted in negotiating contracts to
tailor policies to the individual needs of the customer, especially in commercial
contracts. Providing flexibility in the market to underwriters will encourage
innovation and will ultimately offer more value to the policyholder in the long
term.
3
4
The case for reform of section 53(2)
Is the broker’s lien under section 53(2) satisfactory or is it in need of
reform?
4.1
Section 53(2) is unproblematic and is not in need of reform per se. However,
if section 53(1) does not apply to non-marine insurance, the normal rule of
agency would apply. This would require the insurer, rather than the broker, to
pursue the policyholder for the unpaid premium. It would not, therefore, make
sense to permit the broker to operate a lien over the policy in these
circumstances.
We welcome any information as to how, and how often, the lien is
applied in practice.
4.2
We understand that the lien is applied very rarely.
5
Reform of section 53
Do consultees agree that:
(1) The scope of section 53(1) is unclear?
5.1
Given the lack of clarity evident from the case law in this area, we agree that
the scope of section 53(1) is ambiguous. Its application to non-marine
insurance should be clarified.
(2) The limited application of section 53(1) is anomalous?
5.2
The lack of cohesion to the case law creates uncertainty as to whether section
53(1) applies to both marine and non-marine insurance. We are concerned
that the effect of premium payment clauses and adjusted premium clauses
are weakened or even undermined in light of recent case law.
5.3
We do not consider that applying section 53(1) solely to marine insurance
would be problematic. Its relevance remains fundamental to marine business,
and there are many other provisions of the Marine Insurance Act 1906 which
apply only to marine insurance.
(3) The common law fiction, which was invented to give effect to the
custom before it was codified by section 53(1), has produced
unprincipled and conflicting case law?
The common law fiction, the basis of many past court decisions, has cast
doubt on the effectiveness of premium payment warranties and adjusted
premium clauses. We agree that conflicting case law has resulted. As
expressed above, it does not reflect modern underwriting practice.
4
(4) Even in the marine market, it is unclear whether there is any
justification for section 53(1)?
5.4
The ABI disagrees with this assertion and reiterates arguments at paragraphs
3.6 to 3.7 and 3.14 to 3.15.
(5) The consolidation of brokers may pose a risk to the insurance
industry?
5.5
We agree that the consolidation of brokers may pose a risk to insurers.
(6) The risk of a policyholder’s insolvency falls on the broker?
5.6
We agree. This risk would promote the principles of “knowing your client” and
diligent risk selection by the broker.
If consultees are aware of any other problems with section 53(1), we
would like to be informed of them.
5.7
We are unaware of any further issues with section 53(1).
6
Proposed default position: brokers are not liable for the premium
Should the default position be that brokers are not personally liable for
the premiums owed by policyholders to insurers?
6.1
In the non-marine context, we believe that the party which benefits from the
cover must be the party liable to pay the premiums. This is subject to the
qualification that if the broker has received and holds the premium as client
monies, the broker should be made liable to pay these to the insurer.
6.2
Marine insurance is different. The high insured limits and mobility of assets
insured, compounded by the unfamiliarity between insurer and policyholder,
are specific concerns of the marine insurance market and would unduly
expose the insurer if the broker were not made personally liable for the
premium.
Should it be possible to “contract out” of our proposed default position,
so that the broker could become contractually liable for the premium?
6.3
We welcome the ability to “contract out” of the Commissions’ default position,
as it would allow commercial entities to be flexible in their contractual
dealings, notably between the insurer and broker via their TOBAs.
5
We welcome consultees’ views on the effect of removing the broker’s
automatic liability for the premium. We are particularly interested in the
perceived costs and benefits of such a reform.
6.4
The tendency of most insurers is to contract out of section 53(1), so the costs
are likely to be comparatively less than a more substantial transformation in
the law.
7
Notification requirements and premium payment warranties
Should the insurer and/or the broker be under an obligation to notify the
policyholder in the event that the premium has not been paid?
7.1
The ABI considers that there should be no statutory requirement on the
insurer to notify the policyholder that the premium has not been paid. It is,
however, in the insurer’s interests to make extensive attempts to
communicate with the broker or policyholder to secure the premium before
cancellation of the policy is considered.
Should such a notification be required before an insurer exercises its
rights under a premium payment warranty?
7.2
Such a notification should only be required where it is provided for in the
warranty.
Alternatively, should such notification obligations be left to contractual
arrangements between the parties involved?
7.3
Contractual notification obligations in the insurance policy would permit
flexibility in the market. Accordingly, the parties would be able to negotiate
and tailor the policy to their individual requirements, and the ABI would
support this proposal.
8
Repeal of replacement of section 53
Should section 53(1) be repealed?
8.1
We agree that section 53(1) should be amended to take account of current
practice in the non-marine sector, which may or may not be provided for in
statute at present. In the non-marine market, there appears little justification
to attach liability to the broker in respect of the policyholder’s failure to pay the
premium when it is the policyholder who benefits from the cover.
8.2
For reasons we have detailed above, section 53(1) should be retained for
marine business, given its niche characteristics.
6
Should section 53(1) be replaced with a new statutory provision to make
it clear that the broker is not automatically liable for the premium?
8.3
We would support a statutory change to clarify that the broker is not
automatically liable for the premium in non-marine insurance, on the condition
that the new statute included express provision for permitting parties to
maintain their own contractual position if they wish to do so.
8.4
As already expressed, we would support the continuing application of section
53(1) to marine insurance business.
If so, should section 53(2) be re-enacted alongside the new provision?
8.5
As stated above, the ABI does not consider that section 53(2) is problematic,
and is not in need of reform. In any case, the position should be made clear
in contract without the need for legislation.
9
The relevance of section 54
Do modern insurance policies ever include clauses acknowledging
receipt of the premium, particularly if the premium has not actually been
received by the insurer?
9.1
We are unaware of such clauses.
Do consultees think that section 54 has any relevance in modern
insurance law?
9.2
The position should be made clear in contract, without the need for legislation
in this area. We accordingly consider that the operation of section 54 no
longer has a place in modern insurance law.
ABI – October 2010
7