A lapsed broker licence, an unpaid premium and a fire that arrived too soon
Ceylon Risk Advisors (Pvt) Ltd has placed Hotel Sandalwood's fire and business interruption cover with Lanka Meridian Insurance PLC for nine years. Its IRCSL broker licence expired on 31 January and its renewal application is pending because of an outstanding audit query. On 12 February Ceylon Risk issued a cover note on Lanka Meridian letterhead, collected LKR 3.2 million premium into its general bank account and did not remit it. On 20 February the hotel's kitchen wing burned down; the loss is LKR 48 million. Lanka Meridian declines, saying (a) no premium was received, so no cover exists, and (b) the hotel failed to disclose that its previous insurer had declined renewal after a 2019 kitchen fire. The proposal form asked: 'Has any insurer declined, cancelled or refused to renew your policy?' and the hotel's director answered 'no'. He says the broker filled in the form and he signed without reading it. The premium was still sitting in the broker's account on 20 February.
1. Can Lanka Meridian avoid the policy for non-disclosure? Address the broker's role in completing the proposal form and what the insurer must additionally prove.
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The duty. A proposer must disclose every material fact and answer proposal questions honestly and completely. A prior refusal or cancellation following a kitchen fire is plainly material to a fire risk; it bears directly on whether the insurer writes the risk at all and on the terms it sets.
Does it matter that the broker completed the form? Generally no. The insured signs the proposal, and the signature represents that the answers are his. The broker acted as the insured's agent in placing the business, so the broker's knowledge is the insured's knowledge, not the insurer's. The insurer's remedy for breach of the duty of utmost good faith is avoidance of the policy, subject to the policy's own terms and any statutory limitation.
But inducement must be proved. The insurer has to show it would not have written the risk on any terms, or would have written it differently. If it would have written it with a survey, a sprinkler warranty and a higher excess, a court may still hold it was induced into a contract it would not otherwise have made, because common-law avoidance is all-or-nothing and gives no proportionate remedy. Expect the insured to argue the insurer already knew the loss history through market knowledge; that is weak unless it can be evidenced in writing.
Practical line. Repudiation is defensible on disclosure, but the insurer should not stake everything on it. The premium point may be the cleaner defence, and a repudiation that fails leaves the insurer exposed to the claim plus interest and costs. Take a signed statement from the broker on who completed the form and when.
2. Did cover attach despite the premium never reaching the insurer? Advise, distinguishing a condition precedent to liability from an ordinary premium condition.
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When is the contract formed? On acceptance of the proposal, not on payment of the premium. If the cover note was issued under the insurer's authority, temporary cover exists from its stated inception.
Who bears the risk of the unpaid premium? This turns on wording, not on general law:
- If the policy contains an express clause such as 'no premium, no cover', or makes payment a condition precedent to liability, the risk never attached and the insurer's position is strong.
- If the clause is merely an ordinary condition of payment, cover has attached; the insurer's remedy is to sue for the premium or to cancel prospectively after notice.
Payment to the broker. A broker receives premium as agent of the insured for transmission, but the regulatory regime requires premiums to be held in a designated client/trust account and remitted within the prescribed period. Paying LKR 3.2m into the general account is a breach of those rules. Practically, the insured has done what it reasonably could, and should not bear the consequence of the broker's misapplication - but the insurer may still argue the insured chose that broker. The defensible outcome is: the insurer honours the claim if there is no condition precedent, pursues the broker and its own credit control, and takes an assignment of the insured's claim against the broker.
Before deciding, read the cover note, the premium clause and any cancellation notice issued after 31 January. If the insurer never authorised the cover note, that raises a different problem, dealt with below.
3. What are the regulatory and professional consequences of Ceylon Risk having placed business after 31 January, and what should the compliance function do?
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Regulatory exposure. Placing, renewing or holding out as an insurance broker without a licence is an offence under the Regulation of Insurance Industry Act framework administered by the IRCSL. A renewal being 'pending' does not extend the licence; it lapsed on 31 January.
The letterhead cover note. If Ceylon Risk issued a document on Lanka Meridian's letterhead without authority, that is a serious misrepresentation, potentially an offence, and it exposes the insurer to claims from third parties who relied on the document. The insurer should confirm or deny cover publicly and in writing at once.
What to do, in order:
- Report to the board and to the IRCSL without delay; there is no 'quiet' handling of an unlicensed intermediary holding client money.
- Notify the broker's professional indemnity insurers and the insurer's own fidelity or crime cover.
- Freeze and reconcile the client account; identify every other policy placed after 31 January.
- Write to every affected client explaining the position and their right to complain to the IRCSL.
- Cooperate with any investigation and preserve documents; do not destroy files.
Professional ethics. The compliance officer's duty is to the institution and to policyholders, not to the branch's reputation. Pressure to delay notification until a regional visit is over must be resisted and minuted. The insurer's own controls also failed: it should never have allowed an unlicensed intermediary to hold its stationery or collect its premium.