REGULATION 21


This case study concerns a cover-holder’s binding authority and the relationship between the issuing insurance company and a provincial broker.


The broker entered into a contract with ‘Acme’ Insurance Company in 2004 to supply its commercial combined insurance products. Authority was given in the contract to quote and bind risks that fell within the pre-determined criteria and categories mutually agreed, in writing, between the company and the broker.


The criteria included post code, occupations, and information determining restricted and excluded classes of industry and commerce. They also included agreed commission, rates and discounts as well as the obligations of the broker to the company.


In 2004, the broker sold insurance both direct from their office and remotely via a call centre that dealt with internet-generated enquiries. Business was successful and the two parties enjoyed a good relationship.


In early 2008 the broker negotiated with the company to update its sales generation by creating an automated pre-selecting internet programme. This was intended to replace the call centre process and was designed to reach a wider target market.


The broker worked directly with a company representative to re-define the underwriting, quoting and binding criteria and the new programme was launched in early 2009. The new programme attracted significantly more enquiries but the pricing was less competitive than had been anticipated.


Consequently, the broker discussed the options with the company and it was agreed that an ‘adjustment’ of permitted discounts and commission allowances would result in more competitive prices.


At almost the same time the company withdrew its current commercial combined policy and replaced it with a new policy that the broker was obliged to sell from that time onwards. The new policy was similar in most respects to the previous policy and the differences in cover are not relevant in this case study.


Several months were to pass before the company reviewed the management information (MI) that the broker had supplied them with on a monthly basis. It was noticed by the company that the premiums received on some of the policies bound by the broker was less than the company expected to receive.


With immediate effect, the company withdrew the broker’s authority and set about claiming the difference in premium from the broker; some hundreds of thousands of pounds - there


was no suggestion of dishonesty.


Following some careful investigation into the facts, the broker discovered that the premiums charged in the identified cases was correct having regard to the adjustment of permitted discounts and commission allowances that the broker and the company had agreed some months earlier.


However, the company disagreed, saying that permitted discounts and commission allowances applied only to the former product and not to the latter product, which the broker had become obliged to sell.


The broker counter-argued that they had assumed that the same criteria applied to the new policy as to the old and justified this by saying:


a) there was nothing said by the company, at the time of introducing the new policy, about not transferring the pricing model to the new product


b) by not transferring the pricing model the product would be too uncompetitive (which was borne out by the broker by showing the apparent results).


Assumption and fact Was the broker right to assume that the pricing model was transferred to the new product? Maybe and maybe not. What is important in this case study is the assumptions made by each party and the evidence to support the agreement between the parties.


The company’s case against the broker was that they had breached the contract with the company, made in 2004. The broker argued that the contract was, by the time of 2009, almost irrelevant because the substance of the business arrangement between the parties had progressed and changed so significantly that it bore virtually no relation to the situation at the time of its inception.


Nevertheless, the contract was there and it was signed - it gave the company a basis upon which to argue its position in seeking to recover the difference in premium (their alleged loss).


The lessons 1. Much of what happens in the insurance industry, even today, is agreed by word of mouth, by email and (loosely speaking) custom and practice. As everyone knows when times get tough so too do the people suffering. This is a case in point. Targets are everything to insurance companies relying upon shareholder and City support and when they are missed, they have to react.


2. There was no substantial evidence on the files of the parties to exactly what had, and had not, been agreed. The parties’ file notes were inconclusive and no more than ‘jottings’ of the things apparently


remembered after the meeting. They did not match in all respects. What was left out of the notes turned out to be crucial. Email correspondence was highly ‘colloquial and chatty’ and did not usually get to the point of the real and substantive agreements made between the parties.


3. The company at no time intimated that there was a need for a new contract as the dealings between the parties developed and substantially changed over the five years; and neither did the broker enquire as to whether there was a need for an new Terms of Business Agreement (TOBA).


What to take away As the industry moves more and more towards remote selling to its clients there is an exponentially increasing risk of misunderstand- ings and the opportunity to claim ‘black was in fact, white’.


The reason for this is that the industry is becoming less people and relationship focussed, despite what some may wish to the contrary, because the technology needed to reduce the cost of distribution of insurance products and services eliminates the human factor as far as practicable; and sometimes it goes too far.


Pricing is generally regarded as the golden key to selling insurance and certainly to selling commodity type insurances such as home, motor, commercial combined and even my own speciality, professional indemnity and directors’ and officers’. Pricing is a sensitive and constantly moving target and it cannot be assumed that it will remain competitive if it remains static for very long.


Ergo, it is entirely foreseeable by both brokers and insurers that pricing models and rating criteria will have to be regularly adjusted if the remote distribution model of modern insurance practice is to succeed.


That means that there ought to be a specific written agreement put in place every time there is a change in direction of the authority given by a company to a broker. People may well continue to ignore this but the consequences of lack of clarity of agreement will be, at the very least circa £100,000 of costs incurred in resolving the dispute and these may not be covered by PI insurance.


Breach of contract is not the same as negligence and many policies exclude liability arising from underwriting arrangements. Compliance with regulation is an essential pre-requisite of modern insurance practice but this case study reinforces the fact that the regulations also create a basis for civil law claims and this is, regrettably, so often overlooked in our industry because it is not controlled by a tick box solution. Brokers should check their contracts and if necessary, seek specialist advice.


July/August 2010 Insurance Brokers’ Monthly


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