(First published in edition 34 of mEMo, Elborne Mitchell's the commercial and regulatory newsletter).
An insurer's decision to write new lines of business can be restricted by a number of factors. These include start-up costs, lack of expertise or reputation, or a desire to commit to a market for short-term profit.
As a result, underwriters may consider giving their pen to an underwriting agent that has a reputation in the particular area of business and has good business leads. This is done usually by way of a binding authority. It gives the insurer clear advantages and also the underwriting agent benefits from such an arrangement as well, since it is able to promote a product that it has likely "created" and which is backed by good security. This is all well and good, but there are various matters that need to be addressed by the parties at the outset of the business relationship to ensure that the parties understand their obligations including not only promotion and administration of the product (including who pays for those) but also what happens when the relationship ends. In particular, the parties need to know what is required of the other as far as the run-off of the business is concerned, and the exercise of any proprietary rights in the book of business.
The recent case of Temple Legal Protection Ltd v QBE Insurance (Europe) Ltd addressed some of the issues arising on the termination of a binding authority. This was an appeal from an arbitrator's award that addressed the question whether an underwriting agent had an entitlement to conduct the run-off of the business it had bound under the binding authority.
Temple underwrote legal expenses insurance on behalf of QBE under a binding authority that had specific terms dealing with the administration of the claims following termination of the binder (the run-off). It stated that, unless otherwise agreed in writing by QBE, Temple would remain liable to conduct the run-off of the insurances bound until their expiry or termination. This is a common provision in binding authority agreements. In this instance however the binding authority was terminated by Temple part way through its term. The arbitrator decided that QBE could in turn terminate Temple's authority to conduct the run-off. Temple appealed asserting that QBE was not entitled to take over the run-off because that would place Temple in breach of its obligations to various third parties who had sought legal expenses cover in conditional fee litigation cases. QBE asserted that it had lost trust and confidence in Temple, its agent, and therefore was able to bring the agency relationship to an end.
On appeal, the Court considered the issue in the context of the various clauses dealing with the day-to-day operation of the binding authority. The Court recognised that there was a relationship with the various third parties, but it decided that it existed only for as long as Temple had authority to manage the run-off. The binding authority agreement imposed an obligation on Temple, but not a duty or a right, to administer the run-off. In this instance, QBE was entitled to decide that Temple should not conduct the run-off. The Court paid particular attention to the fact that on Temple's reasoning even a withdrawal of regulatory authority would still entitle Temple to conduct the run-off; the Court decided that could not be the intention of the parties and therefore Temple was not entitled to conduct the run-off in contract, agency law or in the context of the commercial arrangement.
Clearly, this gives rise to a number of concerns where underwriting agencies are seeking to preserve some control and right over the business that they have created. It is also at odds with an interlocutory decision in another case involving Temple which was brought against it by Europ Assistance Insurance Limited. In that case, the Court declined to grant an injunction preventing Temple from conducting a run-off.
In view of the underwriting agent's commercial imperative that it preserves the business it has created and therefore preserves the interface with those with whom it deals, greater attention needs to be given when binders are drafted to the rights of the parties, including those arising out of post termination administration, and the protection of their respective business interests.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.