UK: Insurance: Personal Responsibility For Breach Of Binding Authorities: Who Pays What?

Last Updated: 27 January 2009
Article by Ed Foss, Henrietta Burke and Jonathan Thorpe

Last year the Commercial Court held that individuals employed by an agent under a binding authority and named on the binding authority agreement may owe fiduciary duties personally to the insurers who granted the authority, as their sub-agents. For more information on the liability decision, click here. The court has now handed down its decision on the quantum of the insurers' claims against those individuals.

Insurers agreed binding authorities under which an agent, through three named individuals (two directors and one employee), was granted authority within defined financial limits to issue bonds. They issued bonds outside the terms of delegated authority. It was held that two of the individuals were involved in a conspiracy to defraud insurers by issuing the bonds outside the authorised limits and diverting premium from insurers to themselves. As such they were in clear breach of their fiduciary duties owed as sub-agents to the insurer. The third individual was not found to be involved in the conspiracy to defraud and did not directly benefit from the fraud. He was, however, found to have deliberately closed his eyes to the fraud by continuing to sign certain bonds in excess of the specified authority. The court found he had been dishonest and that he too acted in breach of fiduciary duty by signing the bonds. A fourth individual was found to be party to the fraud although he did not owe any fiduciary duties to insurers.

In its judgment on the quantum of insurers' claim the court held:

  • Insurers were bound to pay claims to third parties under the bonds since the agents were apparently (although not actually) authorised to issue them. Insurers were entitled to an indemnity from the individuals in respect of those claims settlements insurers had already made (all of which had been reasonable). They were also entitled to a declaration for an indemnity for all reasonable settlements of any future claims. On these facts, the court was not prepared to go further and make a declaration that it would be reasonable for insurers to settle future claims at anything up to 100% of the claim.
  • Insurers could recover all net premium that had been diverted away from them, as damages. It is noteworthy that this element of the insurers' claim had nothing to do with whether or not claims had been presented on the unauthorised bonds; the relevant loss was the loss of the net premium.
  • The individual who was not party to the conspiracy to defraud but who had knowingly turned a blind eye to the fraud and continued to sign unauthorised bonds was only liable to pay compensation (in the form of the net premium not paid to insurers) in respect of those bonds which he himself had signed. In contrast, those individuals involved in the conspiracy would pay damages in respect of all of the unauthorised bonds. Insurers' attempts to widen this finding failed for estoppel reasons.

Further reading: Markel International Ins Co v Surety Guarentee Consultants Ltd and Others [2008] EWHC 1135 (Comm)

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 21/01/2009.

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