Modern Law of Marine Insurance Volume Five, The

Professor D; Rhidian Thomas

Document

CHAPTER 4 Page 77

Neither fish nor flesh nor good red herring: A comparative study of the law relating to marine insurance brokers

Martin Davies

Introduction

4.1 We still use the expression “Neither fish nor fowl” to describe something (or someone) with ambiguous or hybrid characteristics. The present-day version is a remnant of the much older expression, “Neither fish nor flesh nor good red herring”.1 Fish was for the clergy, flesh for the rich, “good red herring” for the poor. The older, three-part version of the expression is more apt to describe the role of marine insurance brokers than the current two-part version, because it captures the three-way ambiguity of the role of the broker. A marine insurance broker acts as the agent for the assured, but not always in all respects; it is not the agent for the insurer, except that sometimes it can be, depending on the circumstances, and it usually has close connections with multiple insurers; it does not act as principal, except that sometimes it does, and that is how it often looks. A broker is not solely any of these three things but it is something of all three at various times. 4.2 As Professor Robert Merkin pointed out in the first volume of this series, “The modern marine broker is a market-maker, who has interests independent of those of the assured, and whose relationship with insurers and reinsurers is in many cases incompatible with the generally accepted agency relationship between it and the assured”.2 If anything, the role of the broker as “market-maker” has increased since those words were written in 1996. Now, the broker is almost invariably larger and has greater bargaining power than the assured, however large the assured's business, and in a 2001 review, the Australian Law Reform Commission reported that insurance brokers often exercise superior bargaining power over insurers, as well.3 4.3 The size and influence of brokers continue to increase not only because of the mega-firms such as Marsh but also as a result of the growth of broker networks of what the

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UK calls “Appointed Representatives”4 and Australia calls “Authorised Representatives”.5 The network firm, such as BGP (Bennett Gould & Partners Ltd) in the UK6 or Steadfast in Australasia,7 coordinates and harmonises the operations of a network of smaller brokers, giving them superior market access in the form of established relationships with insurers, agreed policy wordings, and other services. The individual broker continues to trade under its own name (but usually identifying itself as a member of the network), and the network firm takes care of compliance and accounting requirements for the entire network. Rather confusingly, given the ambiguous role of brokers in general, the UK describes the network firm as the “principal” under its contract with the Appointed Representatives.8 (The Australian legislation refers to the network firm as “a financial services licensee” or simply “the licensee” and the individual brokers in the network as “Authorised Representatives”.)9 The network firm must obtain authorisation from the regulatory authority [the Financial Conduct Authority (FCA) in the UK;10 the Australian Securities and Investment Commission (ASIC) in Australia11], but the individual brokers in the network need not if they act within the scope of their authorisation from the network firm.12 The network firm remains responsible for compliance with the terms of its own regulatory authorisation, even if the broking tasks are undertaken by Appointed (or Authorised) Representatives.13 The effect is that insurers no longer have so much bargaining power over smaller brokers, but must deal with them as representatives of the larger network broker.14 4.4 Brokers have played an important role in the marine insurance business since the very beginnings of its development at Lloyd's,15 and so the common law relating to the role of brokers is centuries old,16 but it was substantially reformed by legislation in the UK as of 200517 (with significant amendments in 2018)18 and in Australia as of 2012.19 In both of those countries, the law relating to insurance intermediaries has been brought largely into

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conformity with the law relating to other financial services advisers, such as investment advisers, securities brokers, derivatives dealers, and so on, mainly in relation to “retail” insurance business, but not only so. Although the potential far-reaching consequences for the law relating to insurance brokers in both retail and commercial business have been recognized since the beginning,20 the legislation has yet – rather surprisingly – had much of an impact in the cases. 4.5 This chapter will give a sketch of the law relating to marine insurance brokers in England and Wales, Australia, and the USA. The aim is to give some indication of the far-reaching impact on the common law of the legislative changes in England and Wales and Australia, and also to show how similar issues relating to brokers are dealt with in a common law country (the USA) that does not base its law of marine insurance on the Marine Insurance Act 1906 (UK). The ambiguous, shifting, yet predominant role of the broker is a central factor in shaping the law in all three places, although predictably there are differences between the legal responses to that role. The questions are common, even though the answers are different. Space does not permit a complete examination of all legal questions about brokers, so this chapter deals with only two, which highlight some of the anomalies created by the role of the broker. The next section considers the duty owed by the broker to the assured (including a section on conflict of interests). Then the following section considers the payment of the premium. The final section draws some tentative conclusions.

The broker's duty to the assured

England and Wales

General

4.6 The content of the broker's duty to the assured under English law is so well settled that expert evidence from brokers about what they would or would not have done in the fact situation being considered by the court may prove to be superfluous or unhelpful, as it may end up being no more than the expert brokers' opinion about how the law should be applied,21 which is, of course, the province of the court, not an expert witness. The cases on the common law duty have been comprehensively supplemented by the Financial Conduct Authority (FCA)'s sourcebook Insurance: Conduct of Business (ICOBS),22 which contains detailed provisions about the manner in which the broker's business should be conducted, how the assured's needs and demands should be identified, and what disclosures should be made by the broker to the assured. ICOBS was first published in January 2005, but significant amendments to the provisions relating to insurance intermediaries were made with effect from 1 October 2018,23 to comply with European Directive (EU)

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2016/97 (the IDD Directive),24 which provisions continue to have effect after the UK's exit from the European Union.25 4.7 Significantly, a “private person” is given a cause of action for breach of statutory duty if he or she suffers loss as a result of the contravention of any of the ICOBS rules.26 (A “private person” is either an individual, or a corporation if it does not suffer the loss in question in the course of carrying on business of any kind.)27 4.8 ICOBS has a somewhat symbiotic relationship with the common law about the broker's duty, as it is both a distillation of much of what the common law says should be done in discharge of the broker's duty, and also a source for courts to draw on when describing what the content of that duty is, not only to consumers but to commercial customers, too. In some respects, it goes beyond what the common law had established. For example, in Jones v Environcom Ltd,28 David Steel J quoted what the then edition of ICOBS said about the duty owed by the broker to its client in relation to pre-contractual disclosure to the insurer before describing the duty as follows:29

In short, a broker:

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Modern Law of Marine Insurance Volume Five, The

CHAPTER 4

Page 77 Neither fish nor flesh nor good red herring: A comparative study of the law relating to marine insurance brokers

Page 77