Coverholder outside delegated authority
NorthBridge Coverholder Ltd holds a Lloyd's binding authority for marine cargo risks up to £5m per vessel, but the agreement requires referral to the syndicate for any shipment containing lithium-ion batteries. A freight forwarder, OceanLink, asks NorthBridge to cover a £3.2m consignment of lithium batteries from Shanghai to Felixstowe. NorthBridge's underwriter issues a policy on the syndicate's paper without referring it. OceanLink has dealt with NorthBridge for years and has never seen the binding authority. The cargo is damaged by fire during discharge; the syndicate denies cover, saying NorthBridge acted outside its authority. NorthBridge says it made an honest mistake and that the policy is binding. OceanLink's broker says the syndicate must pay because NorthBridge appeared to have authority. The syndicate's underwriting manual shows it would have declined lithium batteries altogether. The policy contains a 'full terms and conditions as per binding authority' clause.
1. Is the syndicate bound by NorthBridge's policy? Analyse actual and apparent authority.
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Actual authority. NorthBridge's actual authority is limited by the binding agreement. It may write marine cargo risks up to £5m, but lithium-ion batteries require referral. NorthBridge did not refer the risk, so it acted outside its actual authority. The fact that it made an 'honest mistake' does not create authority. The 'full terms and conditions as per binding authority' clause may incorporate the limits, but that clause is more likely to govern policy terms than to give OceanLink notice of every internal referral rule. Whether it does depends on incorporation and OceanLink's knowledge.
Apparent authority. A principal is bound where it represents that an agent has authority, the third party relies on that representation, and the agent acts within the apparent scope. The syndicate appointed NorthBridge as its coverholder and allowed it to issue policies on syndicate paper. That is a holding out that NorthBridge has authority to write marine cargo business. OceanLink had dealt with NorthBridge for years and had no notice of the lithium restriction. The restriction is unusual and internal; it is not obvious from the class of business. On balance, OceanLink can argue that NorthBridge had apparent authority to issue the policy, even though it exceeded actual authority.
Conclusion. The syndicate is likely bound unless it can show OceanLink knew or ought to have known of the restriction. The 'as per binding authority' clause is not a clear statement to the market that lithium batteries are excluded.
2. If the syndicate is not bound, what remedies does OceanLink have against NorthBridge, and what regulatory issues arise?
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Breach of warranty of authority. NorthBridge purported to contract on behalf of the syndicate without authority. OceanLink can claim damages for breach of warranty of authority. The measure is the loss suffered because the policy is unenforceable, subject to the amount the syndicate would have paid if the policy had been valid. The syndicate's manual says it would have declined lithium batteries, so OceanLink cannot recover the full £3.2m on the basis that cover would have existed. It can recover reliance losses and any difference between the invalid policy and the position it would have been in, but the counterfactual is no cover at all.
Negligence. NorthBridge also owed a professional duty to act with reasonable skill and care. Issuing a policy without checking the referral requirement is likely negligent. OceanLink may claim for the uninsured loss, but again the fact that the syndicate would have declined is relevant to causation. The claim may be reduced for any failure by OceanLink's own broker to check the policy.
Regulatory issues. NorthBridge is an FCA-regulated coverholder. Breaching delegated authority and issuing a policy outside scope raises conduct and systems-and-controls concerns. It should notify the syndicate, its compliance officer and its professional indemnity insurer. The syndicate should review its coverholder monitoring. There may also be a duty to treat OceanLink fairly and to explain the position promptly.
3. How would the answer change if OceanLink knew of the referral requirement before the policy was issued?
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If OceanLink knew that lithium batteries required referral, it could not rely on apparent authority. Apparent authority depends on the third party's reasonable reliance on the principal's representation. Knowledge of the restriction defeats that reliance. The policy would then be outside NorthBridge's authority, and the syndicate would not be bound unless it later ratified the policy.
Ratification is possible if the syndicate, with full knowledge of the facts, accepts the policy or acts in a way that shows it is treating the policy as binding. A mere denial is not ratification. If the syndicate ratifies, the policy is treated as authorised from the start. If it does not, OceanLink's remedy is against NorthBridge for breach of warranty of authority and negligence. OceanLink's own knowledge may also amount to contributory negligence and may reduce its recovery.
The 'full terms and conditions as per binding authority' clause becomes more significant because OceanLink knew what the binding authority contained. The syndicate would have a stronger argument that the policy incorporated the referral requirement and that OceanLink took the risk of the agent exceeding authority. The regulatory position for NorthBridge is worse if it issued the policy knowing that OceanLink knew of the restriction.