Misrepresentation, Non-Disclosure and Breach ... - Law Commission

THE CURRENT LAW
Introduction
9.16 Relationships between policyholders, intermediaries and insurers are governed
by the general law of agency. This consultation paper does not attempt to review
general agency principles. Instead we begin this section by outlining some of the
features of the insurance marketplace which may appear surprising when viewed
against such principles. We then consider when an intermediary or other agent
will be treated as an agent of the insured and when they will be treated as the
agent of the insurer. We highlight some aspects of the FSA rules and conclude
by considering how the law and the FSA rules apply to some current market
practices.
Remuneration
9.17 Intermediaries who act as agents of applicants for insurance are commonly
remunerated by commission, which is typically expressed as a percentage of the
premium payable. This commission is paid not by an intermediary's principal, the
applicant, but by the third party, the insurer. The level of commission may be
agreed between the intermediary and the insurer without reference to the
applicant. In some cases the applicant will not be informed of the sum of
commission paid.
9.18 Nevertheless, intermediaries are regularly regarded as agents of the insured. On
general agency principles, it would be expected that an intermediary should
account to its principal for any benefit received from a third party. However in
insurance it is accepted that the intermediary will retain the commission - indeed
this will normally be its only remuneration, with no fee being paid by the
applicant. 7
9.19 We are not concerned directly with the question of how intermediaries are
remunerated. However, we will see that it is a relevant factor. The fact that the
proposer does not have to pay the intermediary may give the impression that the
intermediary in some sense “represents” the insurer. This may affect the
proposer’s understanding on questions of pre-contract information, encouraging
the proposer to rely on what the intermediary has said.
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Fee based advice is available for some types of insurance, but is uncommon in either
consumer or commercial markets.
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