4 - Contract and Agency Law

Question 1

What is the ‘law of agency’?

Answer 1

The agent (broker) brings the principal (client) into a contractual relationship with a third party (insurer).

Question 2

Under the ‘law of agency’, what does the ‘duty of obedience’ require the agent to do?

Answer 2

Perform all their principals lawful instructions and do this in a timely fashion.

Question 3

Under the ‘law of agency’, what does the ‘duty of accountability’ require the agent to do?

Answer 3

Account to their principals for all monies they may have received on their principal’s behalf and keep a record.

Question 4

Are agents allowed to delegate their tasks to someone else?

Answer 4

No, unless their principal has given them permission.

They are, however, allowed to delegate tasks that are purely mechanical & involve no question of judgement, advice or discretion.

Question 5

When should brokers disclose the amount they are paid? And what about commissions?

Answer 5

Upon request of the principal.

But, many brokers now disclose their commissions as a matter of course in an effort to become more transparent & establish a relationship of trust.

Any additional commissions, such as profit commission, must be disclosed automatically.

Question 6

What is the name of the relationship that an agent is in with their principal? What does the term mean?

Answer 6

Agents stand in a ‘fiduciary relationship’ with their principal, and therefore must not use their position for their own benefit.

‘Fiduciary’ relates to holding something in trust for another.

i.e. Brokers must account to their principal for all money they receive on their principal’s behalf and must keep a proper record of all transactions.

Question 7

Under the law of agency, what duties does the principal have towards their agent?

Answer 7

Remuneration:
- Brokerage is earned on inception of the contract.
- When it is actually ‘earned’ is usually stated in a TOBA.

Indemnity:
- An agent has a right to claim from their principal an indemnity against all expenses or loss incurred when acting on their behalf.

Question 8

When is an insurance broker considered to be an agent of the insured?

Answer 8

When…

• giving advice on types of cover or the placing of insurance.
• giving advice to the insured on how to make a claim.

Question 9

What is a wholesale broker?

Answer 9

The wholesale broker has the direct contact with the insurer. The wholesale broker acts on the behalf of a retail, producing, or sub-broker.

Question 10

What is a retail broker?

Answer 10

The retail broker has the direct contact with the insured (client).

Question 11

Describe the chain of brokers, insurer, and the client?

Answer 11

Insurer –> Wholesale broker –> Retail broker –> The insured

Question 12

Who does a reinsurance broker act on the behalf of? Describe the chain of broker, insurer, and reinsurer?

Answer 12

Reinsurer –> Reinsurance broker –> Insurer

Question 13

Explain the ‘Law of Tort’?

Answer 13

Under the ‘law of tort’, brokers are legally responsible to their principle in the event that they fail to use reasonable care.

i.e. the agent is personally liable for his wrongful acts and must reimburse the principal for any damages.

• The broker must not withhold any material information.
• The broker must present to the underwriter all information at their disposal which the underwriters need to make a fair & reasonable assessment of the risk.

Question 14

What is ‘Statute Law’ (another law brokers are required to abide by)?

Answer 14

Statute law requires brokers to abide by the law of the land in which they are operating.

Question 15

How many types of ‘Statue Law’ affects insurance brokers?

Answer 15

1. the Marine Insurance Act 1906.
2. the Data Protection Act 2018 (DPA 2018).

Question 16

What is a ‘Conflict of Interest’ for a broker?

Answer 16

When the broker is acting as the agent on behalf of an insurer as well as their client.

The Law of Agency requires brokers to avoid potential conflicts and fully disclose to their principal any circumstance that may give rise to the possibility of a conflict.

Question 17

Name some situations where a conflict of interest can arise for a broker?

Answer 17

Delegated authorities:
- If the broker is acting as an underwriter, or if they have authority to settle claims, there can be a conflict of interest for the broker between meeting the needs of their client and those of the insurer.

Close links with an insurer:
- A situation where a broker is owned by an insurer, or an insurer is owned by a broker.

Insurance & Reinsurance:
- Where a broker is both the direct placing broker and the reinsurance broker, there may be a conflict.

Lloyd’s brokers:
- Consent of the insured is required if the broker is acting on behalf of the insurer.

Contingent commissions / overriders:
- This is a situation where the broker receives a payment from an insurer which is dependent on the actions of the broker.
- The implication of receiving such commissions/overriders is that it may influence decisions on where to place their client’s business due to the additional income it may generate.

Acting for two or more clients with similar interests. Two or more of the same broker’s clients could be:
- involved in the same claim.
- competing for limited market capacity.
- involved in the same financial transaction.
- competing for the same contract.

Question 18

Generally, how can a conflict of interest be remedied?

Answer 18

The FCA requires all brokers to remedy conflicts of interest by; full disclosure, transparency, and the agreement of all parties.

Question 19

What is a (TOBA)?

Answer 19

Term of Business Agreement.

This formal written agreement describes the relationship between the insurer or managing agent and the broker.

Broker’s also have TOBA’s with the client.

Question 20

What 4 key elements form a TOBA?

Answer 20

1. Regulatory information.
2. The broking firm’s TOBA.
3. Details of the services provided.
4. The broker’s remuneration.

Question 21

What items are found in a TOBA between an insurer and a broker?

Answer 21

1. Regulatory status.
2. Broker’s authority.
3. Ownership & access to data & records.
4. Law & jurisdiction.
5. Commission.
6. Conflict management.
7. Confidentiality.

Regulatory status:
- Broker & insurer warrant to each other that they are duly authorised to conduct insurance mediation and insurance business.

Broker’s authority:
- Declares a brokers authority to hold premium funds on behalf of the insurer.
- ‘Risk transfer TOBA’ = Allows the broker to hold premium funds on the insurers behalf. Any money once collected by the broker is deemed paid to the insurer (even if its not yet physically in their bank account).
- ‘Non-risk transfer TOBA’ = Does not allow the broker to hold premium funds on the insurers behalf.

Ownership & access to data & records:
- Clarification of this so there is less chance of a dispute later.

Law & jurisdiction:
- Establishing under what rules any dispute between the insured & insurers will be heard.

Commission:
- Details brokerage.

Conflict management:
- Each party adopts procedures to ensure conflicts are managed & identified.

Confidentiality:
- Each party agrees to maintain confidential information received from the other.

Question 22

What is a ‘Risk transfer TOBA’?

Answer 22

Allows the broker to hold premium funds on the insurers behalf.

Any money once collected by the broker is deemed paid to the insurer (even if its not yet physically in their bank account).

Question 23

What is a ‘Non-risk transfer TOBA’?

Answer 23

Does not allow the broker to hold premium funds on the insurers behalf.

Question 24

What regulatory information does the FCA require the broker to provide to the client?

Answer 24

• details of the firms ownership.
• confirmation the broking firm is a registered intermediary & the scope of its authorisation.
• the cooling-off period for consumers.
• details of the firms complaints procedures.
• the availability of compensation schemes.

Question 25

When does the FCA require a broker to provide regulatory information to the client?

Answer 25

Before the conclusion of the contract.

Question 26

What information should be included in a broker’s TOBA with a client?

Answer 26

1. Authority to act & signing.
   Clarifies the broker’s authority to act on the client’s behalf.
2. Broker information.
   Details of the broker - firm’s full name.
3. Duration of the contract & termination.
4. Client’s duty of disclosure.
   Reminds the client of their duty of disclosure & the potential consequences of non-disclosure.
5. Insurer security.
   Outlines the firms policy in selecting insurers from an insurer security perspective.
6. Remuneration.
   Broker’s policy on remuneration is laid out.
7. Payment terms.
   Firms payment terms; i.e. payment within 7 days.
8. Client money.
   Explains how the firm will handle client money.
9. Conflicts of interest.
   Steps the broker will take to deal with conflicts of interest.
10. Claims against the firm.
    Reminder that claims are against firms & not individual employees.
11. Limitation of liability.
    Sets out a firm’s liability.
12. Money laundering/data protection/confidentiality.
    States the client’s rights under the Data Protection Act 2018 (DPA 2018).
13. Law & jurisdiction.
    States under which country’s jurisdiction the agreement falls.