Carter Perry Bailey
WHEN BROKERS GO UNDER…
An insurance broker going out of business can mean many complications for its clients and insurance partners. William Sturge, partner at London solicitors Carter Perry Bailey, tries to navigate and make sense of the complex situations that can arise when this occurs.
W
hen an insurance broker experiences financial difficulties, are premium and claims monies in the broker’s possession protected? How can the status of the business that the broker
has been handling be established?
The first solid information a client receives about his broker’s financial difficulty may be a notice that some part of the broker’s operations have been transferred to a third party.
Operating the business of insurance broking involves a great deal of
time and expense, and receivers, administrators, provisional liquidators or other insolvency practitioners (IPs) often sell the company’s goodwill, make employees redundant and arrange for another firm to handle the run-off.
The parties to the insurance and reinsurance contracts formerly handled
by the broker may find themselves left to deal with matters between themselves, as best as they can. Following the onset of insolvency, the IP’s duty is only to creditors, to collect and distribute the assets.
60 | INTELLIGENT INSURER | September 2011 PROTECTION FOR PREMIUM
AND CLAIMS At the time of the broker’s failure, it may be holding premium due to be
paid to the market. Similarly, it may be holding claims proceeds, which it has not yet passed on to the client.
Brokers are regulated by their local financial authority and rules will
exist to protect client money. The basic position under English law is that the broker is an agent of its client. Accordingly, when the client pays premium to its broker, this will not be considered to have been paid to the insurer. Similarly, when the market pays a claim to a broker authorised to collect it, this discharges the market’s liability for the claim. This is the case even where the broker fails before passing the monies onto the client.
The Financial Services Authority (FSA), which has supervised UK insurance brokers since 2005, regards this as unsatisfactory. The FSA regulates brokers by a series of high-level principles set out in its CASS sourcebook. It regards as essential the proper accounting and handling of
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