UK: Binding Authorities: Insurers’ Injunctions Against Coverholders

A recent Commercial Court decision highlights the difficulties insurers face when applying for an injunction against coverholders. Insurers should not assume that such relief will be granted as of right.

In this recent case, the insurer sought to restrain its coverholder from handling the run off of ATE legal expenses insurance under a binding authority the insurer had purported to terminate.

The Judge refused to grant the injunction sought. In particular, he held that the coverholder’s business interests in running off the covers precluded the insurer from obtaining this injunction. In contrast, the insurer’s interests could be protected by an award of damages at the main trial.

In addition, he also concluded that ordering the injunction would place the coverholder in breach of authorised sub-delegated authority agreements (and the other party to those agreements also in breach), and would place policyholders in a difficult position. These were further reasons which weighed against against granting the injunction.

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In addition, he also concluded that ordering the injunction would place the coverholder in breach of authorised sub-delegated authority agreements (and the other party to those agreements also in breach), and would place policyholders in a difficult position. These were further reasons which weighed against against granting the injunction.

It is often thought by insurers who delegate authority to agents that it is easy to obtain injunctive relief restraining those agents from continuing to act for them if the agent is in breach of the delegated authority agreement. This cannot be assumed to be the case. If an insurer seeks an injunction, there are difficult hurdles it must overcome. This has been highlighted recently by the court in Europ Assistance Insurance Ltd v Temple Legal Protection Ltd.

The claimant insurer (Europ) delegated binding authority to the defendant (Temple). The authority delegated was broad: Temple was authorised to underwrite ATE legal expenses insurance, to process and settle claims and to calculate and collect premiums. It was also permitted to sub-delegate its authority to others. This it did by way of sub-delegation agreements, largely to firms of solicitors who were acting for claimants in personal injury litigation. Under these sub-delegation agreements the sub-delegatees were authorised to bind insurance. Europ was not a party to these sub-delegation agreements. Rather, Temple entered them as principal.

The sub-delegation agreements required, amongst other things, the submission of monthly bordereaux and claims information to Temple, and required Temple to administer all claims and make payments due to the insureds. Temple received commission on the net premium. The premiums payable by policyholders were adjusted according to the stage at which a claim was disposed of and were generally payable only upon disposal of the claim.

Europ alleged various breaches of duty on the part of Temple. These included unauthorised retention of commission, failure to account for premium and failure to collect premium from coverholders. Europ purported to terminate Temple’s authority to act for it in any way, including the run off of covers already issued. Europ also wrote to the sub-delegatees, requiring them to provide to Europ the monthly bordereaux and claims information, and to account to it for premium. Both of these requirements were contrary to the sub-delegation agreements.

Temple disputed Europ’s entitlement to terminate but accepted Europ’s unlawful repudiation as bringing the binding authorities to an end. It alleged, however, that it was entitled (indeed required) to administer the run off of those unexpired covers issued under the binding authority. Temple also wrote to sub-delegatees asking them to honour the sub-delegation agreements, rather than follow Europ’s requirements. In response, Europ sought to restrict by way of an interim injunction Temple’s ongoing operation of the sub-delegation agreements, and its collection of premiums and payment of claims. Europ alleged that it had lost all trust and confidence in Temple to administer and monitor the policies.

The Judge refused to exercise his discretion to grant Europ the injunction sought. The reasoning behind this decision is interesting.

The first point to note is that any insurer seeking an injunction must show that the conduct it is seeking to restrict would entitle the insurer to claim against the coverholder. The fact that the insurer has an existing claim against the coverholder for a previous breach of duty will not of itself allow the insurer to obtain an injunction restricting future conduct. The insurer must show that there is a serious case to be tried: unsurprisingly, at the interim stage, the court is not always prepared to conduct a trial within a trial to assess the relative merits of the insurer’s case on the one hand, and the coverholder’s case on the other. In this particular case, the Judge was clearly not impressed with the claims which formed the basis of Europ’s application.

The Judge then proceeded to consider the relevant factors to be weighed up in deciding whether or not to grant the injunction. This involves the court assessing firstly whether or not damages would be an adequate remedy in the event that it succeeded at trial with its claims on which the application is based. Secondly, and only if the answer to the first question is no, the court must then consider whether or not damages would be an adequate remedy to the respondent in the event the applicant did not succeed at trial on the claims on which the application is based.

In this case, the Judge concluded that:

1. if Temple was to cause loss to Europ through breach of duty in its claims handling or accounting for monies, this could be compensated by damages;
2. on the other hand, Temple could not adequately be compensated by damages if the injunction was granted but then Europ did not succeed on the relevant claims at trial. The Judge concluded that the "business" was Temple’s business. Temple had built up the relationships with the solicitors who were sub-delegatees. Europ had no relationship with these sub-delegatees. If the interim injunction was granted, the Judge concluded that there was a real risk of damage to Temple’s business. This damage would be difficult to prove and to quantify. So would the impact of the loss of cash flow to Temple’s business.

This contrasts with the often held view in the market when an insurer’s relationship with its coverholder breaks down. In those circumstances, insurers will focus on the need to protect their reputation. It is often assumed that this will trump any concerns of coverholders. But frequently, the coverholder also has a reputation to protect. In this case there does not appear to have been any suggestion that policyholders would not be protected and the Judge has clearly considered as paramount the risk of damage to the business of the coverholder which could not be compensated by damages. One would expect the position to be different where there was shown to be a real risk of damage to insurer - in particular where its name appears on the policies as underwriter and there was a real risk of claims brought by policyholders being unpaid.

In addition, the Judge pointed to a number of further factors which militated against granting Europ’s injunction. Of particular interest was the fact that if the injunction was granted, then:

1. both Temple and the sub-delegatees would be placed in breach of the sub-delegation agreements; and
2. policyholders would have a claim against Temple and would be placed in an invidious position since the policies stated that claims notification should be made to Temple, who were also identified as the insurer "on behalf of [Europ]", rather than Europ.

In contrast, the Judge considered that Europ’s concerns were capable of being addressed by requiring Temple to continue to provide bordereaux, to maintain a separate bank account for premiums and claims and through Europ’s rights to audit and inspect Temple’s records.

This raises the possibility that the insurer’s right to an injunction may be restricted where granting it would put the coverholder in breach of (at least an authorised) sub-delegation agreement or where it would cause other problems further down the insurance chain. The Judge treated these as additional factors, and they are not, in our view, factors which overrides other concerns. In particular, the key question will always be: can the parties be adequately compensated by damages?

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

The original publication date for this article was 04/09/2007.