Insurance: Personal Responsibility For Breach Of Binding Authorities: Who Pays What?

Last year the Commercial Court held that individuals employed by

an agent under a binding authority and named on the binding

authority agreement may owe fiduciary duties personally to the

insurers who granted the authority, as their sub-agents. For more

information on the liability decision,

click here. The court has now handed down its decision on the

quantum of the insurers' claims against those individuals.

Insurers agreed binding authorities under which an agent,

through three named individuals (two directors and one employee),

was granted authority within defined financial limits to issue

bonds. They issued bonds outside the terms of delegated authority.

It was held that two of the individuals were involved in a

conspiracy to defraud insurers by issuing the bonds outside the

authorised limits and diverting premium from insurers to

themselves. As such they were in clear breach of their fiduciary

duties owed as sub-agents to the insurer. The third individual was

not found to be involved in the conspiracy to defraud and did not

directly benefit from the fraud. He was, however, found to have

deliberately closed his eyes to the fraud by continuing to sign

certain bonds in excess of the specified authority. The court found

he had been dishonest and that he too acted in breach of fiduciary

duty by signing the bonds. A fourth individual was found to be

party to the fraud although he did not owe any fiduciary duties to

insurers.

In its judgment on the quantum of insurers' claim the court

held:

Insurers were bound to pay claims to third parties under the

bonds since the agents were apparently (although not actually)

authorised to issue them. Insurers were entitled to an indemnity

from the individuals in respect of those claims settlements

insurers had already made (all of which had been reasonable). They

were also entitled to a declaration for an indemnity for all

reasonable settlements of any future claims. On these facts, the

court was not prepared to go further and make a declaration that it

would be reasonable for insurers to settle future claims at

anything up to 100% of the claim.

Insurers could recover all net premium that had been diverted

away from them, as damages. It is noteworthy that this element of

the insurers' claim had nothing to do with whether or not

claims had been presented on the unauthorised bonds; the relevant

loss was the loss of the net premium.

The individual who was not party to the conspiracy to defraud

but who had...