MORE NAILS FOR THE COFFIN OF TRANSFERRED AGENCY

MORE NAILS FOR THE COFFIN OF "TRANSFERRED AGENCY J.E. Adams. Copyright (c) 1999 Sweet & Maxwell Limited and Contributors Subject: INSURANCE. Other related subjects: Agency Keywords: Agency; Insurance brokers; Intermediaries Abstract: Potential problems arising from lack of legislation or ABI Statements of Practice relating to liability of brokers and other intermediaries who conclude insurance agreements on behalf of insurance company. *215

The problems of ""the transferred agency", whereby the insured agentbecomes, or is treated as becoming, the proposer's agent in relation to thecompletion of the proposal are well known and well documented. [FN1] Thecriticisms have not prompted legislative intervention, [FN2] the ABI Statementsof Practice do not address the issue directly and, to date at least, theInsurance Ombudsman accepts the conventional view. The absence of recentlitigation is equivocal; the point may be treated as so firmly settled as notto justify proceedings or insurers, as a body, choose not to take the point.The purpose of this article is to suggest that, were it now to be litigated, acombination of legislation, delegated legislation and ""quasi-litigation" mighthelp to produce an answer different from that traditionally given.Brokers Apart from the possible impact of the Financial Services Act 1986 (discussedbelow), brokers are largely untouched by the new developments. Given theirposition as agents of the proposer, that is not a surprise (at least not to alawyer) and indeed almost none of the authorities affected brokers strictlydefined.

The major problem has been the identification of the status, theforemost example of which is Woolcott v. Excess Insurance Co. [FN3] where,although the intermediary was described as a broker, it was seemingly assumedthat the knowledge he was found to have should have been communicated to theinsurer.*216 The Financial Services Act The 1986 Act, and the concomitant delegated legislation and rules,introduced the concepts of ""authorised persons" (i.e. those allowed to offerfinancial services) and ""appointed representatives". The latter is ""employed"by the former under a contract of services requiring or permitting him to carryon investment business in the form of procuring contracts with third partiesand giving advice to third parties and for whose conduct the authorised personhad accepted responsibility in writing. The statute renders the principalresponsible for ""anything said, done or omitted by the representative as ifthere had been express authorization." [FN4] It imposes vicarious liability onthe principal for the representative's action in breach of the rules in, ormade under, the Act. The existence of this imposed responsibility significantly strengthens thearguments against transferred agency for, under the statute, the intermediaryis plainly the agent of the insurer, as regards the whole of the conduct. Thecategorisation of implied authority varies between authors--implied actualauthority, apparent authority, ostensible authority, usual authority andcustomary authority--but for present purposes it is not necessary to pursue thefull debate. If the authorised person is obliged to answer for the (mis-) deedsof the appointed representative, it should not be difficult for the proposer'sadvisors to fit the circumstances into one or other category of impliedauthority. What could be wider than the formula for responsibility on theinsurer of ""anything said, done or omitted"? If the proposer vouchsafesmaterial information to the intermediary, which is either not transmitted onthe form to the insurer, or partially, misleadingly, wrongly or ambiguouslytransmitted, there is surely an act or omission. The first limb of theNewsholme [FN5] decision is thus effectively overcome. What, then of the secondtest, the negligence of the proposer approach? Stone v. Reliance MutualInsurance Society [FN6] departed from the 1929 case on this score, because of afinding, on the facts, that the status of the intermediary and the relativeunsophistication of the plaintiff's wife (with whom the inspector dealt)permitted a finding that he had authority to represent to her that the form hadbeen correctly completed. The structure of section 44, and its generality,gives any appointed representative a wide authority so that nice questions ofhis, or her, hierarchical ranking can be avoided and reliance on his, or her,standing established so enhancing the prospects of following Stone. The LAUTRO rules forbade the representative to complete the proposal form onbehalf of the proposer unless the proposer agrees he should do so. The rules have been adopted by the Personal Investment Authority, doubtlesson a temporary basis. The prohibition thus continues into the new scheme. One'smain worry lies in the ease with which, in practice, the agreement of theinvestor *217 (proposer) ""that he may do so" [FN7] could be procured.Furthermore, if the intermediary does complete the form, how effective inpractice is the consequential obligation to ask [sic not ""ensure"] theinvestor ""to check that what he has written is correct" and then ""to ensure[sic] that the investor reads the form through before signing it"? [FN8] If the rule is breached, that is an act for which the insurer must answerunder section 44 of the 1986 Act. If the rule is observed, that still does notdestroy the possibility that the mandatory statutory structure overcomes bothlimbs of the Newsholme principle. Of course, all these provisions affect only those insurances when negotiatedby a broker which constitute investments within the scope of the 1986 Act.There is no reason to suppose that the Financial Services Authority will wantto vary these rules, when it takes over in due course.Non-broker Intermediaries The ABI promulgated its Code of Practice for All Intermediaries (IncludingAll Employees of Insurance Companies) Other than Registered Brokers in November1988, it took effect in January 1989 and was re-issued (with minor amendments)in August 1994. It relates to general business as defined in the InsuranceCompanies Act 1982. The general sales principles include the following: ""A (ii) [The intermediary] shall make it known that (s) he is-- (a) An employee of an insurance company, for whose conduct the company accepts responsibility; or (b) An agent of one company, for whose conduct the company accepts responsibility; or (c) An agent of two or up to six companies, for whose conduct the companies accept responsibility; or (d) An independent intermediary seeking to act on behalf of the prospective policyholder, for whose conduct the company/companies do not accept responsibility." Thus, for categories (a) to (c), the holding out goes well beyond section 44of the Financial Services Act, in that the intermediary is obliged to tell thepotential proposer that the insurer stands behind him or her. As the preambleto the Code states ""As a condition of membership of the ABI, members undertaketo enforce this Code and to use their best endeavors to ensure that all thoseinvolved in selling their policies observe its provisions." Thus ABI insurersshould make their non-broker intermediaries, of whatever status, hold out, i.e.expressly state, that the relevant insurer accepts responsibility for theirconduct. Thus, it is urged, neither intermediary nor insurer can exclude theirconduct in misdealing with information supplied by a proposer. Under principleC (ii) the intermediary must ""ensure that the consequences of non-disclosureand inaccuracies [in completion *218 of the proposal form] are pointed out tothe prospective policy-holder by drawing attention to the relevant statementsin the proposal form and by explaining them himself to the prospectivepolicy-holder". Note A (ii) also appears in the Code of Practice for LifeInsurance (Non Investment) Business also issued in November 1988. Here, in the consumer cases, the over-ruling of ""transferred agency" is themore readily found. Scrutton L.J.'s scepticism ""I have great difficulty inunderstanding how a man who has signed without reading it, a document which heknows to be a proposal for insurance and which contains statements in factuntrue, and a promise that the are true", [FN9] can be rejected. Allintermediaries, save registered brokers, are to have the backing of the memberinsurer in relation to their conduct in no way restricted to any particularelements of that conduct. The cases already hold that attempts to make theinsurer's representative the agent of the proposer by wording in the proposalfail. [FN10] So far as consumers are concerned, the Unfair Terms in Consumer ContractsRegulation may also assist. The ""Indicative and Illustrative List of TermsWhich May Be Regarded as Unfair" in Schedule 3 includes: ""(n) limiting theseller's ... obligations to respect commitments undertaken by his agents ...".If that is not sufficient, the general wording of Regulation 4(1), defining asunfair a term ""which contrary to the requirement of good faith causes asignificant imbalance in the parties rights and obligation under the contractto the detriment of the consumer" also assists the present agreement. Thesaving for core terms (if clearly expressed) seems not to apply. If unfair, itdoes not bind the consumer. At the very least, the Regulations should outlawthe wording frequently found in proposals expressly making the insurer'srepresentative who completes the proposal the agent of the proposer. One can thus conclude that there are further weapons that can be put to gooduse in the assault on the citadel of ""transferred agency". Even if the role ofthe ABI in policing its own pronouncements is somewhat pusillanimous, perhapsthe Ombudsman may be firmer. One day, of course, a government may belatedlytake a part in ending it. FN1. e.g. Tedeschi, ""Assured's misrepresentation and the insurance agent's knowledge of the truth" (1972) 7 Israel L.R. 475; Timmins, ""Misrepresentation in insurance proposal forms completed by agents" [1974] Victoria University of Wellington Law Review 217 (""over-optimistic" according to Birds, Modern Insurance Law (4th ed.), p. 149); Tan Lee Meng, ""Insurance Agents and the Proposal From" (1975) 17 Malaya Law Review 104; Merkin, ""Transferred Agency in the Law of Insurance" (1984) 13(3) Anglo-American L.R. 33. FN2. The Law Reform Committee 5th Report Cmnd. 62 (1957) on Conditions and Exceptions in Insurance Policies proposed a provision that ""any person who solicits or negotiates a contract of insurance should be deemed, for the purpose of formation of the contract, to be an agent of the insurer and that the knowledge of such person should be deemed to be the knowledge of the insurer." FN3. [1979] 1 Lloyds Rep. 231. FN4. s.44, surprisingly not included in Butterworth's Insurance Law Handbook (4th ed., 1995). FN5. Newsholme Brothers v. Road Transport and General Insurance Co. Ltd [1929] 2 H.B. 356. FN6. [1972] 1 Lloyds Rep. 469. FN7. Para. 1.6(b) of Sched. 12 to the PIA (Lautro) Adopted Rules 1994. FN8. The 1986 Act may still apply in appropriate circumstances, of course. FN9. Newsholme, supra, n. 5 at 382. FN10. Stone, supra, n. 6.END OF DOCUMENT © 2007 Thomson/West. No Claim to Orig. US Gov. Works.