In March 2009, the Law Commission published a policy statement regarding the status of intermediaries and dealing with the question for whom does an intermediary act when it passes pre-contract information from consumer/insured to insurer. This is part of the Law Commission's joint review of a consumer's obligations to give information to insurers before entering an insurance contract and this policy statement follows the recent summary of published responses which identified the need for further clarity in this area.

Review of the Test

The single bright line test, which was proposed in the July 2007 Consultation Paper, stated that the intermediary was taken to act for the insurer unless it is clearly independent and only those intermediaries which conducted a fair analysis of the insurance market were taken to act for the consumer. This would have brought some clarity to the law but would also have resulted in a significant shift towards treating the intermediary as the agent of the insurer since single and multi-tied agents would become an agent of the insurer. Independent financial advisers, however, would have remained the consumer's agent under this test. This proposed test by the Commission was not well received on the basis that it was uncertain. Therefore, the Commission have now proposed not one single test but instead a new statutory code setting out a range of relevant factors to govern for whom an intermediary acts.

Decisive factors governing for whom an intermediary acts

The Commission identified three situations where the intermediary is always considered to act for the insurer as follows:

  1. The intermediary has authority to bind the insurer to cover;
  2. The intermediary is the insurer's appointed representative;
  3. The intermediary has actual express authority to collect precontractual information for the insurer.

In all other circumstances, the intermediary will generally be acting for the insured. However, the Commission acknowledged there may still be circumstances which fall outside the three categories listed above but where there is a close relationship between the intermediary and insurer so as to indicate that the intermediary is acting for the insurer.

Persuasive factors to consider when deciding for whom an intermediary acts

The Commission therefore has set out an indicative and nonexhaustive list of factors to indicate a close relationship such that the intermediary acts for the insurer:

  1. The intermediary only ever contracts with one insurer or a limited number of insurers;
  2. The insurer sells that particular policy through a limited number of intermediaries;
  3. The insurer permits the intermediary to brand its services with the insurer's name, thus giving the intermediary apparent authority to act on its behalf;
  4. The insurer permits its policies to be branded with the intermediary's name, thus representing that the insured is dealing directly with the insurer;
  5. The insurer requests the intermediary to approach the insured to market the insurer's particular product;
  6. The insurer exerts substantial control over the way that the intermediary conducts its business.

Conversely, factors which indicate that the intermediary acts for the insured are as follows:

  1. The intermediary undertakes to act in the insured's interest by giving impartial advice or providing a fair analysis of the insurance market, for example;
  2. The insured pays the intermediary a fee;
  3. The intermediary provides full disclosure to the insured of the commission that it has received the insurer.

By providing a non-exhaustive list of indicative factors, the Commission is proposing to allow for flexibility in a rapidly changing market.

Implementation

The intention of the Commission is to bring the law and practice relating to insurance intermediaries in line with each other since at present there are differences between the law of agency as strictly applied by the courts and what happens in practice following FSA and FOS guidance. The Commission has therefore suggested that the above principles be included in the draft Consumer Bill as a free standing code which would provide the courts with a framework of principles to apply to individual cases.

The code would apply to pre-contractual information in consumer insurance and whilst not directly applicable to business insurance or in relation to other areas of agency, the courts may also find the same principles useful in these contexts.

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