Agency law and the role of intermediaries
Agency law and the role of intermediaries tests who can bind an insurer or insured and what duties an intermediary owes. The exam focuses on authority, disclosure and the broker's position in the distribution chain.
Creation and authority
- Agency may be created expressly, impliedly, by ratification, by estoppel or by necessity.
- Actual authority is what the principal expressly or impliedly grants. Apparent or ostensible authority arises where the principal represents that the agent has authority and a third party relies on that representation.
- Usual authority is the authority a person in that role normally has; a broker usually acts for the insured, while an agent may act for the insurer.
Duties of an intermediary
- Follow instructions, act with reasonable skill and care, disclose material information to the principal and avoid conflicts of interest.
- Account for money and do not make a secret profit.
- Explain the scope of cover and any material limitations; do not assume the client understands exclusions.
Worked example
A broker is told by a client that the premises are used only for storage. The broker places cover with an insurer on that basis. The client later begins light manufacturing and does not tell the broker. A fire occurs. The insurer may rely on the misdescription because the broker's knowledge of the storage only was the basis of the presentation. The broker is not liable to the client for failing to disclose a change the broker did not know about, unless the retainer required ongoing review.
Traps that cost marks
- Confusing actual authority with apparent authority.
- Assuming a broker always acts for the insurer.
- Ignoring ratification, which can bind a principal after the event.
- Treating the intermediary as a guarantor of cover rather than a professional adviser.