Insurance Briefing - Anomalies of Insurance Law

Insurance briefing from Debevoise & Plimpton LLP published in the May 2010 issue of The In-House Lawyer

Although the courts are often at pains to point out that insurance law is merely a subset of general contract law and should be applied without any concession or discrimination simply because the subject matter is insurance, there are, in fact, several aspects that are peculiar to insurance. An understanding of these anomalies will assist in penetrating the sometimes arcane depths of insurance law. They include:

the payment of brokerage and premium; secret commissions; the status of warranties and conditions; the role of the broker; consequential loss; mitigation; the Block Exemption Regulation; and the courts' attitude towards insurers in the interpretation of their contracts. BROKERS AND PAYMENT OF BROKERAGE AND PREMIUM

Given that the broker acts primarily for the insured, and owes them fiduciary duties in the negotiation and placement of their insurance, it is counter-intuitive to suggest that they are remunerated by the insurer (in a manner rarely transparent to the insured). Nevertheless, the proposition that the insurer is responsible to the broker for the payment of their brokerage for introducing the insurance business to them (in the absence of an agreement to the contrary) is generally accepted judicially, although never conclusively decided.1 Lloyd's also take the view that the insurer or reinsurer is liable to pay brokerage.2

The liability for the payment of premium is clear in all marine insurance. Section 53 of the Marine Insurance Act 1906 provides that the broker is directly responsible to the insurer for the premium payable for marine insurance, although the insurer is directly responsible to the insured for claims and (perversely) for any returnable premium.

This section codified the practice whereby an insured required an additional period of time to pay the premium, but the Lloyd's marine underwriters were only prepared to extend credit to the person with whom they were actually dealing, ie the broker. This practice gave rise to the extraordinary fiction that the broker pays the premium to the insurer who then loans it back to the broker, who then owes it to the insurer. It has also not been judicially conclusively decided whether the broker placing any insurance at Lloyd's is liable for the premium, because historically the only way to a Lloyd's underwriter was via a Lloyd's broker, but it now seems that this is not true.3

Thus the broker is paid by the party to whom they should be in an adverse negotiating position and in respect of marine insurance to whom they are directly liable for the premium. It is also true that an insured is fully entitled to an indemnity for an insured non-marine loss, even though they have not paid the premium, unless such payment is made a pre-condition of liability, because the consideration for the insurance is the liability to pay the premium. Non-payment is simply a breach of a contractual term, which is not necessarily repudiatory. Another anomaly is that insurers usually agree with brokers that the payment of a premium by the insured to the broker constitutes good payment to the insurer, but that the payment of a claim by the insurer to the broker does not constitute good payment if the broker becomes insolvent before remitting the claim to the insured.

CONTINGENT COMMISSIONS: THERE AND BACK AGAIN

Contingent commissions are payments by insurers to brokers calculated according to the volume of business placed and are often given a veneer of legality by being dressed up as valid payments for services carried out by brokers for insurers, such as for general administration (eg the storage of documentation shown to the insurer on placing), processing premiums, processing claims (eg the collection and disbursement of claims, instructing and liaising with solicitors, adjusters and surveyors, and circulating their reports) and marketing (eg supplying information to underwriters, such as policy development, and general and local market developments and information obtained by the broker).

Notwithstanding the enquiries engendered more than five years ago by Eliot Spitzer as New York State...