The Coverholder Who Knew Better
A Lloyd's managing agent has granted a UK coverholder (an MGA) a binding authority to write SME commercial combined business. The agreement sets a maximum line of £25,000 any one risk, UK risks only, no construction risks above four storeys, an annual premium income cap of £7.5m, no US exposures, and screening of every risk against UK sanctions lists. During a routine audit the managing agent's delegated authority team finds three risks written at £60,000 each last quarter; a contractor's plant policy naming a US-domiciled parent company as additional insured; a bordereau showing declared premium income of £8.1m for the year; and one Polish-registered haulier bound without any sanctions check. The coverholder's underwriting manager says all of these were 'accommodation' for a long-standing broker and that 'the lead underwriter always signs these off anyway'.
1. Are the three £60,000 risks and the risk naming a US parent as additional insured binding on the syndicate? Explain your reasoning.
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Binding turns on authority.
The coverholder's actual authority is the binding authority itself: £25,000 maximum line, UK only, no construction above four storeys, no US exposures. A risk written outside those limits is not written under the authority, so as a matter of actual authority the syndicate has not agreed to it.
Ostensible authority is the real risk. If the coverholder held itself out as able to bind and the producing broker reasonably relied, the syndicate may still be bound. Market practice answers this: anything outside the authority must be referred to the lead underwriter for specific written approval before binding - a risk referral, a special acceptance, a written waiver.
'The lead always signs these off' is worth nothing without the document. Absent one, the syndicate can decline the three over-limit risks and the US-exposed risk, while the coverholder faces a claim from the insured for breach of authority and its own E&O exposure.
2. What are the consequences of the audit findings for the coverholder and the managing agent, and what should the managing agent do now?
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Treat this as a breach of the delegated authority, not an administrative slip.
Premium income of £8.1m exceeds the £7.5m cap, so the authority is exhausted - the coverholder must stop binding immediately, and anything bound after the cap was reached is outside authority.
The managing agent should:
- suspend or restrict binding pending a full review;
- require the coverholder to report every out-of-authority risk so the leader can decide individually to ratify or decline;
- assess whether the aggregate breach is notifiable to Lloyd's and to the FCA/PRA;
- review the DA terms, audit frequency and bordereau reporting;
- consider termination or a varied authority with tighter limits.
The coverholder's own FCA permissions and professional indemnity cover should be examined, and the brokers who placed the out-of-authority business must be told what is and is not covered - silence there is how complaints become claims.
3. The Polish haulier was bound without a sanctions check. What is the managing agent's position and what must happen?
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Sanctions obligations are strict, and the failure to screen is a problem in its own right regardless of what screening would have shown.
Immediate steps:
- Screen the insured, its beneficial owners, directors and the vessel/vehicle interests now, before anything else.
- If no party is designated, the cover can stand, but the control failure goes on the audit record with a remediation plan and possible notification to Lloyd's and the regulator.
- If any party is designated, the syndicate must not provide cover, pay a claim or make funds available to that person. The obligation sits on the insurer, not merely on the coverholder.
Note the interaction with the 'no US exposures' breach: a US additional insured can trigger US (OFAC) exposure as well as UK sanctions, so the contractor's plant risk needs the same treatment. Screening must be re-run at renewal and on any change of ownership.