Opinion

There are two pieces of legislation that directly govern the legal relationship between insurers and intermediaries: Insurance Intermediaries Act 1994 and section 10 of the Insurance Law Reform Act 1977.  

The Insurance Intermediaries Act 1994 addresses only a limited number of areas, viz. the legal effect of premium and claim payments made through intermediaries and the requirement for intermediaries to account for premiums separately through an insurance broking client account.  Section 10 (1) of the Insurance Law Reform Act 1977 initially created much confusion in the insurance industry.  

When I first started working in-house in the industry in the 1980s, it was thought that it deemed an intermediary to be the agent at law of the insurer at all times.  This, of course, was completely at odds with the business model of an independent insurance broker arranging cover for the insured.  

It was not until the Court of Appeal decision of Harewood Orchard Partnership v Mabey & Wallace Court of Appeal CA72/96 that the effect of the subsection was clarified.  Effectively it says that if an intermediary acts for an insurer to any extent during the negotiation of the insurance cover, then it is deemed at law to the legal agent of the insurer for all purposes until the cover is arranged (regardless of any other legal relationship).  

The balance of the law affecting the legal relationship between insurers, intermediaries, and policyholders is all common-law (decisions made by the courts, which set precedents); in particular, the common-law of agency.  (The one exception to this is the Secret Commissions Act 1910, although this legislation applies to all agents, not just insurance intermediaries.)  Because the law of agency is "hidden" in case law, it is not as well-known and as well-observed as it might otherwise be.  As a reminder, the law of agency says insurance brokers must:

• Carry out their principal’s instructions.
   
• Exercise the skill and care of a reasonably competent and careful insurance broker in the circumstances.
   
• Keep accurate accounts of all transactions.
   
• Not put the duties to his or her principal in conflict with his or own interests.
   
• Not profit from the agency without the knowledge of their principal.

As a generalisation, some of the business arrangements I see between insurers and insurance brokers seem to overlook some of these obligations – particularly the one relating to conflicts. 

In a backhanded way, compliance with the duty not to be in a position of conflict is likely to be enhanced greatly by the proposed financial adviser reforms.  This will occur through the proposed new Financial Advice Code of Conduct, which is being considered at the moment.  

I recently attended a presentation by Angus Dale-Jones, the Chair of the Financial Advice Code Working Group.  He made the following comments about the proposed reforms:

• The law will be more consistent across all types of financial advice.
   
• The present distinction between Category 1 and Category 2 products will be removed.
   
• The present distinction between personalised advice and class advice will be removed.
   
• All advice will be regulated in a consistent way.
   
• The proposed new financial advice code will be wider.  It will move away from occupational codes.  It is more likely to have universal application to all advisers.
   
• It will focus on the quality of the advice and on the availability (affordability) of the advice.
   
• He hinted that the code may be framed through the eyes of the client and take the form of minimum standards of client care in relation to the agent’s competence knowledge/skills.

The last point raises the possibility of the code setting out duties similar to those set out above by the law of agency.  All financial advisers are agents.  Therefore, by a backhanded way, those duties may now become much more visible and be enforced more readily than they have in the past.

The industry should take stock of this now and view its business relationships through the lens of the law of agency.  The new financial adviser code may effectively replicate much of this law.