Insurance practice and the role of intermediaries
Agency and the broker's role
Insurance distribution depends on agency. An agent acts for a principal with authority: actual (express or implied) or ostensible (holding out by the principal). A broker normally acts as the insured's agent when placing business, so owes duties of care, skill, loyalty, confidentiality and to follow instructions. The broker must disclose material information to the insurer, place cover on the instructed terms and account for premiums. An agent can act for the insurer for limited acts, such as binding cover or issuing documents.
Regulation of intermediaries
Intermediaries must be authorised or appointed representatives under FSMA and comply with the Insurance Distribution Directive as implemented in the UK. They must disclose their status and, where required, remuneration, and ensure staff are fit and proper and meet minimum knowledge and competence requirements. ICOBS applies to the sale; the broker must assess demands and needs, not just present a product.
Market practice
In the London market, placing often uses a slip and may involve delegated authority: coverholders, managing general agents and binding authorities. A terms of business agreement (TOBA) sets out agency, premium payment, risk transfer and claims handling. If the TOBA includes premium risk transfer, the insurer bears the credit risk of the broker; without it, the broker may remain liable to the insurer for premium. Commission disclosure is governed by the regulatory regime and the terms agreed; it is not simply a matter of market custom.
Worked example
A broker is instructed to insure a warehouse for fire. Through an oversight, the broker never places the risk. A fire destroys the building. The insurer is not liable because no contract exists. The broker is liable for breach of duty/negligence, and damages aim to put the insured in the position it would have occupied if cover had been placed: the amount the insurer would have paid, subject to policy terms. The broker cannot rely on the absence of a policy to defeat the claim.
Traps
Do not assume the broker is always the insurer's agent; the agency depends on the act and authority. Do not assume commission must always be disclosed in every commercial case; check the regime and agreement. Do not ignore TOBA risk transfer: it changes who bears premium credit risk. Do not treat delegated authority as unregulated: the coverholder and MGA remain subject to FCA rules and insurer oversight.