Law Commissions Consider the Reform of Section 53 of the Marine Insurance Act

The Law Commissions of England/Wales and Scotland examine section 53 of the Marine Insurance Act 1906 ("MIA") which makes the broker directly responsible to the insurer for the payment of premium.

In the eighth of their series of Issues Papers on proposals for reform of insurance law, the Law Commissions of England/Wales and Scotland have concentrated on section 53 of the MIA, a provision of particular relevance to the marine insurance market.

The section makes the broker directly responsible to the insurer for the payment of the premium, irrespective of whether or not the broker has actually been put in funds by the insured. Section 53(1) states:

"Unless otherwise agreed, where a marine policy is effected on behalf of the assured by a broker, the broker is directly responsible to the insurer for the premium, and the insurer is directly responsible to the assured for the amount which may be payable in respect of losses, or in respect of returnable premium."

The original reasoning behind this rule was that the insurer should be protected against the credit risk of an insured known only to the broker.

The consequences for the insurer if the broker becomes insolvent are not, however, dealt with by the provision. In addition, case law supports the position that the insurer cannot refuse to pay a valid claim simply because a broker has not transferred the premium. It is up to the parties to include clear language in the policy wording if they agree to reverse this default position.

As regards the inclusion of premium payment warranties in marine insurance polices, there has been debate over their effectiveness. It remains unclear whether or not an insurer can rely upon such a warranty where a broker has gone into liquidation, has sued an insured for unpaid premium but that premium has subsequently been passed to the broker's creditors. The insurer may not be able to recover the premium but there is a risk that it could still be required to pay the insured's claims, irrespective of the inclusion of the premium payment warranty in the policy.

It is probable that section 53(1) only applies to marine insurance. In circumstances where the provision has no application, a broker who is acting within the scope of its authority will not, generally, be held liable...