client money, which is to be segregated into separate accounts and held on a trust or quasi-trust basis.
Provided there is no shortfall in these client accounts, the client is protected in relation to premium and claims held by the broker.
DEDUCTING INVESTIGATION COSTS
FROM CLIENT ACCOUNTS Much work may be required to clarify entitlements to funds in the
client account. Here, a problem arises. IPs may have to review extensive amounts of possibly chaotic data in order to ascertain entitlements.
However, client funds do not belong to the insolvent broker. Instead,
the funds sit outside the insolvent estate. Is it the function of an IP to investigate those trust claims?
The English courts recognise that, even though IPs have no statutory
powers to deal with such assets, there is a residual equitable jurisdiction vested in the court to allow IPs to do so. Thus, the court can authorise IPs to act as quasi-trustees in order to realise the assets. As a consequence, an IP can become entitled to recover fair compensation for his efforts in determining issues relating to client monies, his compensation being drawn from the client funds being investigated: Berkeley Applegate (Investment Consultants) Nos 2 and 3 (2008).
Taking money out of a client account to fund an investigation of
entitlement can seriously reduce funds and, to this extent, the value of the regulatory protection is eroded.
ACCESS TO INFORMATION In the case of a substantial corporate insured, and in reinsurance, the
position may be complex in that numerous contracts and insurers or reinsurers may be involved.
Can the client ask the broker or its IP to produce the relevant books and
records to ascertain cash held by the broker on behalf of the client and also the state of collection of losses?
The Terms of Business Agreement (TOBA) that should have been
provided by the broker may contain relevant provisions as to the client’s right of access to information and also the position on terminating the agency relationship.
Meanwhile, under English law, it is clear that a broker, as agent, owes
his principal a duty to maintain books and records, and to be constantly ready to allow the client access. In Equitas v Horace Holman (2007), it was not disputed between the parties that brokers in Horace Holman’s position owe a duty to take reasonable care to maintain proper and adequate records that would allow the reinsured at any stage to ascertain the true state of the account with them and to ascertain what sums are owed by reinsurers.
ELECTRONICALLY STORED The client is entitled to the broker’s hard-copy files relating to his business.
However, where information concerning the client’s business is contained in the same record as that for other clients, or stored electronically, access may be resisted.
In the Horace Holman case referred to above, the broker argued that it
was not obliged to provide copies of documents created for the broker’s own purposes, such as ledgers and cashbooks. However, the court held that Holmans must produce the records insofar as these recorded transactions that Holmans had carried out as agent for its client.
In Yasuda v Orion (1995), the court held that, if a broker maintains records
in such a way as to be inextricable from records relating to other clients, this is not an excuse from production.
On any basis, the client does not have the legal right to live personal
access to the agent’s computer system. However, the data is the client’s property and he is always entitled to be provided with it, albeit he will have to accept it in the form in which the broker has maintained it.
Practical difficulties may arise in that the right to access computer data
may have been transferred with the sale of the goodwill, with the result that the broker itself can no longer grant the client access.
However, the client is entitled to have the information provided to him
by whoever has the right of access, as the broker held the data subject to his client’s order and cannot have transferred greater rights over the data that he possessed.
INFORMATION IN THE WRONG HANDS Issues of set-off might be raised if the entity appointed by a broker to run
off a client’s business on which the client expects to receive claims payments is also acting as run-off manager on unrelated accounts acquired from other brokers on which the client owes monies. Under English law, the run-off manager could not set off such claims and liabilities absent a clear agreement permitting such net accounting: AA Mutual v Bradstock Blunt (1996).
However, as possession puts a party into such a strong position, a client
that finds its business being transferred to a run-off manager that might attempt such net accounting should consider declining to allow the transfer of its account and make other arrangements.
PROFESSIONAL NEGLIGENCE CLAIMS It is important to be aware that an insurance broker’s claims-made coverage
may terminate upon the appointment of an IP, such that it might thereafter not be possible to trigger coverage for a claim in professional negligence.
William Sturge is a partner at London solicitors, Carter Perry Bailey LLP. He can be contacted at:
William.Sturge@
cpblaw.com
September 2011 | INTELLIGENT INSURER | 61
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