Insurance Intermediaries

Witness S.O’Shea Date 29/1/68.”



There is a mark near Mrs Stone’s signature as if she was told where to sign.


It is apparent that the answers to questions 5 and 7 were wrong. Mr O’Shea must have made a mistake in filling them in. The society had information, no doubt in their own records about the lapsed policies and about the fire claim. Mr O’Shea cannot have known about them or remembered them – else he could not have inserted “None” as the answers.


The proposal form went up to the head office of the society. They do not seem to have checked their records either. At any rate they issued a policy against burglary and housebreaking and it was delivered to 86 Hebden Court, E.2. It gave the insured as Leonard Stone. The commencement date was 29 January 1968. The sum insured was £1,100. The premium was 10d. a week. Thereafter the premiums were duly paid.


On 16 October 1969, thieves broke into Mr Stone’s flat at 86 Hebden Court. He at once called the police. He obtained a claim form from the local office. Within two days, on 18 October 1969, he put in his claim to the Reliance Insurance Society. On the form was a question to which he gave answers disclosing fully the previous fire claim; thus showing good faith.



“11. Have you ever before sustained loss by fire, burglary, YES
housebreaking or larceny?……………FIRE DAMAGE FEB-1966
Was a claim made upon any Company or underwriters? If PAID £280
so, give name, date, nature of loss and amount paid…”


That answer was quite correct except that “1966” was a mistake for “1967”. He added a list of the items stolen amounting to £211.


Mr Stone sent that form in to the local office of the Reliance Insurance Society in Leyton. They received it on 23 October, 1969. An assessor went to the flat and agreed the amount at £211. The collectors went on collecting the premiums which were duly paid.


On 9 January 1970, he signed another claim form containing the same particulars, and sent it to the local office at Leyton. They sent it on to the head office at Tunbridge Wells. Head office received it on 19 January 1970, and rejected the claim. They alleged that he had not disclosed the previous fire claim…


The case was tried in the Mayor’s and City of London Court. The Judge reserved his judgment and, with some regret, dismissed the claim. He thought that the case could not be excepted from the established principle as set out in Newsholme Bros v Road Transport and General Insurance Co Ltd [above, [313]]. His findings are not quite as full as one could have wished. But, as I read them, this much is quite clear. Neither party was guilty of any fraud. Fraud was not alleged. It was not proved. It was not found. The only inference is that the answers in the proposal form were inserted by mistake. Whose mistake? Clearly Mr O’Shea’s mistake: because he did not ask Mrs Stone the questions; and he inserted the answers out of his own head, without checking up from her — or from the Society’s records — whether they were true or not. No doubt it was Mrs Stone’s mistake too. She ought to have read through the questions and answers before she signed the form: but she did not do so. Her mistake was, however, excusable, because she was of little education, and assumed that the agent would know all about the previous policies and that there had been claims made under them. She said: “He didn’t ask about any previous claims. He already knew about it.”


On those facts, it seems to me that the agent by his conduct impliedly represented that he had filled in the form correctly and that he needed no further information from her. Relying on this implied representation, she signed the form which he put before her. Later the policy was sent and she paid the premiums.


What then is the legal position? It is quite clear that, in filling in the form, the agent here was acting within the scope of his authority. He said: “It is company policy that I should put the questions, writing down answers.” This distinguishes the present case from Newsholme’s case, where the agent had no authority to fill in the proposal forms: and it was held that he was merely the amanuensis of the proposer. The present case is more like Bawden v London, Edinburgh and Glasgow Assurance Co [above, [311]]…That case was adversely commented on in Newsholme’s case, but I think it was correctly decided. It would have been most unjust if the company had been allowed to repudiate liability.


The case presents itself to my mind like this: The society seek to repudiate liability by reason of the untruth of two answers in the proposal form. They seek to fasten those untruths onto the insured. They do so by virtue of a printed clause in the proposal form. They make out that it was the insured who misled them. Whereas the boot is on the other leg. The untrue answers were written down by their own agent. It was their own agent who made the mistake. It was he who ought to have known better. It was he who put the printed form before the wife for signature. It was he who thereby represented to her that the form was correctly filled in and that she could safely sign it. She signed it trusting to him. This means that she, too, was under a mistake, because she thought it was correctly filled in. But it was a mistake induced by the misrepresentation of the agent, and not by any fault of hers. Neither she nor her husband should suffer for it. No doubt it was an innocent misrepresentation for which in former times the only remedy would be to cancel the contract and get back the premiums. But nowadays an innocent misrepresentation may give rise to further or other relief. It may debar a person from relying on an exception. Likewise in this case it disentitles the insurance company from relying on the printed clause to exclude their liability. Their agent represented that he had filled in the form correctly: and having done so, they cannot rely on the printed clause to say that it was not correctly filled in. So they are liable on the policy.’



[315]    Blanchette v CIS Ltd (1973) 36 DLR (3d) 561 (Supreme Court of Canada)


[The insured had signed a composite proposal form for insurance covering his granary and public liability. He subsequently telephoned the insurers representative, Raiche, to obtain cover on his tractor. Raiche, who completed the relevant part of the previously signed proposal form, entered incorrect answers to the questions contained therein. The proposal form contained a basis of the contract clause. The issue for the Court was whether the insured was Raiche’s principal and therefore bound by his misrepresentations thus entitling the insurers to repudiate liability].



Pigeon J:


‘Raiche was not a mere soliciting agent, that is a man having no authority to make a contract binding the company. In order to hold that no contract results from the receipt of the premium with an application under such circumstances, one would have to say that this is an offer open to acceptance for an indefinite length of time that is, as long as the company does not decide whether to accept or to refuse the offer. This would mean that if a loss occurs in the meantime, which may be a matter of weeks if not months, it could simply refuse the offer, but otherwise it could issue a policy dated from the day specified in the application, thus taking the benefit of the premium for the elapsed time without having been at risk. This cannot be so. If the company is to earn the premium from the date of the application by issuing a policy bearing that date, this means that a contract has been made when the premium was received by the agent.


On the basis that initially the application covered only the granary and the liability, appellant testified that there had been. no questions put with respect to the Farm Equipment Floater and no answers given or written. He asked the agent to come back in order to cover the tractors but Raiche said this was unnecessary and it could be done by telephone conversation. Appellant admits that Raiche did not at that time repeat the statement that he would be covered immediately. In my view, this makes, no difference. The previous statement was clearly the enunciation of an established policy, as a matter of fact, the agent’s interpretation of the company’s established policy. It should therefore be understood to apply to the tractors as well as to the other risks.


This is borne out by the letter written by the company to appellant’s solicitors in which there is this statement:



“Your letter deals with Mr Blanchette’s application for insurance through Mr Raiche and the fact that Mr Raiche advised Mr Blanchette that his equipment was covered by fire insurance, until our Company rejected the. application. While this commitment on the part of our Agent may be correct, we have refused to accept the application, on the basis of misrepresentation and non-disclosure on the part of Mr Blanchette.”


In view of the evidence as to Raiche’s duties, I fail to see how it can be said that he did not have at least apparent authority to make this commitment. He was not a mere soliciting agent, he had some authority to bind the company and the latter should be held to whatever authority he professed to exercise and was reasonably believed to have…


Under these circumstances, can the company rely on the inaccurate answer written by the agent? We are not here dealing with an application signed in blank which the insured has authorised the agent to fill subsequently. We are faced with what is really a second contract made by telephone between the agent and the insured. I cannot agree that an applicant for insurance who signs an application form leaving a part concerning “farm equipment” completely blank and who later applies for this type of coverage and authorizes by ‘telephone the company’s agent to complete the form for that coverage, must be in the same position at law as if he had signed the form without reading answers previously entered by the agent. I can see no authority for that proposition and there is undoubtedly an important difference between the two situations. When the insured signs after the answers have been entered by the agent, he has the opportunity of reading them. On the assumption that he is under a duty to verify before signing that the agent has properly filled in the form, I can understand how he can be said to be negligent if he does not do so.


However, in the present case, the signed form was already in the hands of the agent when he told the appellant that the additional coverage could be obtained by his making the necessary additions on the basis of the information given him by telephone. When Blanchette agreed not to insist on Raiche returning to his home for the purpose of adding the tractor coverage on the insurance application, he had no means of verifying the correctness of the form as completed. In my view, it is unfair to hold that he should suffer the consequences of Raiche’s failure to complete the form properly.’


Notes:


1.    The courts in most USA jurisdictions have also taken the view that an agent who procures insurance and completes the proposal form does so as the agent of the insurer: ‘the insurer cannot rely on incorrectly recorded answers known to the insured where the incorrect answers are entered pursuant to the agents advice, suggestion or interpretation’, Stewart v Mutual of Omaha Insurance Co 817 P2d 44, 53 (Ariz Ct App 1991).


2.    Adams has argued that notwithstanding the lack of direct legislative intervention the Newsholme principle might nevertheless be circumvented by a future court.



[316]    JE Adams, “More Nails in the Coffin of ‘Transferred Agency’” [1999] JBL 215



‘The problems of “the transferred agency”, whereby the insured agent becomes, or is treated as becoming, the proposer’s agent in relation to the completion of the proposal are well known and well documented. The criticisms have not prompted legislative intervention, the ABI Statements of Practice do not address the issue directly [see now the GISC Codes, above, [303] and [304]] and, to date at least, the Insurance Ombudsman accepts the conventional view. The absence of recent litigation is equivocal; the point may be treated as so firmly settled as not to justify proceedings or insurers, as a body, choose not to take the point. The purpose of this article is to suggest that, were it now to be litigated, a combination of legislation, delegated legislation and “quasi-litigation” might help to produce an answer different from that traditionally given’.


Brokers


Apart from the possible impact of the Financial Services Act 1986 (discussed below), brokers are largely untouched by the new developments. Given their position as agents of the proposer, that is not a surprise (at least not to a lawyer) and indeed almost none of the authorities affected brokers strictly defined. The major problem has been the identification of the status, the foremost example of which is Woolcott v Excess Insurance Co [1979] 1 Lloyds Rep 231 where, although the intermediary was described as a broker, it was seemingly assumed that the knowledge he was found to have should have been communicated to the insurer.


The Financial Services Act


The 1986 Act, and the concomitant delegated legislation and rules, introduced the concepts of “authorised persons” (ie those allowed to offer financial services) and “appointed representatives”. The latter is “employed” by the former under a contract of services requiring or permitting him to carry on investment business in the form of procuring contracts with third parties and giving advice to third parties and for whose conduct the authorised person had accepted responsibility in writing. The statute renders the principal responsible for “anything said, done or omitted by the representative as if there had been express authorization” [see section 44]. It imposes vicarious liability on the principal for the representative’s action in breach of the rules in, or made under, the Act.


The existence of this imposed responsibility significantly strengthens the arguments against transferred agency for, under the statute, the intermediary is plainly the agent of the insurer, as regards the whole of the conduct. The categorisation of implied authority varies between authors — implied actual authority, apparent authority, ostensible authority, usual authority and customary authority — but for present purposes it is not necessary to pursue the full debate. If the authorised person is obliged to answer for the (mis-)deeds of the appointed representative, it should not be difficult for the proposer’s advisors to fit the circumstances into one or other category of implied authority. What could be wider than the formula for responsibility on the insurer of “anything said, done or omitted”? If the proposer vouchsafes material information to the intermediary, which is either not transmitted on the form to the insurer, or partially, misleadingly, wrongly or ambiguously transmitted, there is surely an act or omission. The first limb of the Newsholme [above, [313]] decision is thus effectively overcome. What, then of the second test, the negligence of the proposer approach? Stone v Reliance Mutual Insurance Society [above, [314]] departed from the 1929 case on this score, because of a finding, on the facts, that the status of the intermediary and the relative unsophistication of the plaintiff’s wife (with whom the inspector dealt) permitted a finding that he had authority to represent to her that the form had been correctly completed. The structure of section 44, and its generality, gives any appointed representative a wide authority so that nice questions of his, or her, hierarchical ranking can be avoided and reliance on his, or her, standing established so enhancing the prospects of following Stone.


The LAUTRO rules forbade the representative to complete the proposal form on behalf of the proposer unless the proposer agrees he should do so.


The rules have been adopted by the Personal Investment Authority, doubtless on a temporary basis. The prohibition thus continues into the new scheme. One’s main worry lies in the ease with which, in practice, the agreement of the investor (proposer) “that he may do so” could be procured. Furthermore, if the intermediary does complete the form, how effective in practice is the consequential obligation to ask [sic not “ensure”] the investor “to check that what he has written is correct” and then “to ensure [sic] that the investor reads the form through before signing it”?


If the rule is breached, that is an act for which the insurer must answer under section 44 of the 1986 Act. If the rule is observed, that still does not destroy the possibility that the mandatory statutory structure overcomes both limbs of the Newsholme principle.


Of course, all these provisions affect only those insurances when negotiated by a broker which constitute investments within the scope of the 1986 Act. There is no reason to suppose that the Financial Services Authority will want to vary these rules, when it takes over in due course.


Non-broker Intermediaries


The ABI promulgated its Code of Practice for All Intermediaries (Including All Employees of Insurance Companies) Other than Registered Brokers in November 1988, it took effect in January 1989 and was re-issued (with minor amendments) in August 1994. It relates to general business as defined in the Insurance Companies Act 1982. The general sales principles include the following:



“A (ii) [The intermediary] shall make it known that (s)he is —


(a)   An employee of an insurance company, for whose conduct the company accepts responsibility; or


(b)   An agent of one company, for whose conduct the company accepts responsibility; or


(c)   An agent of two or up to six companies, for whose conduct the companies accept responsibility; or


(d)   An independent intermediary seeking to act on behalf of the prospective policy-holder, for whose conduct the company/companies do not accept responsibility.”


Thus, for categories (a) to (c), the holding out goes well beyond section 44 of the Financial Services Act, in that the intermediary is obliged to tell the potential proposer that the insurer stands behind him or her. As the preamble to the Code states “As a condition of membership of the ABI, members undertake to enforce this Code and to use their best endeavors to ensure that all those involved in selling their policies observe its provisions.” Thus ABI insurers should make their non-broker intermediaries, of whatever status, hold out, ie expressly state, that the relevant insurer accepts responsibility for their conduct. Thus, it is urged, neither intermediary nor insurer can exclude their conduct in misdealing with information supplied by a proposer. Under principle C (ii) the intermediary must “”ensure that the consequences of non-disclosure and inaccuracies [in completion of the proposal form] are pointed out to the prospective policy-holder by drawing attention to the relevant statements in the proposal form and by explaining them himself to the prospective policyholder”. Note A (ii) also appears in the Code of Practice for Life Insurance (Non Investment) Business also issued in November 1988.


Here, in the consumer cases, the over-ruling of “transferred agency” is the more readily found. Scrutton LJ’s scepticism “I have great difficulty in understanding how a man who has signed without reading it, a document which he knows to be a proposal for insurance and which contains statements in fact untrue, and a promise that the are true”, [Newsholme, at 382] can be rejected. All intermediaries, save registered brokers, are to have the backing of the member insurer in relation to their conduct in no way restricted to any particular elements of that conduct. The cases already hold that attempts to make the insurer’s representative the agent of the proposer by wording in the proposal fail.


So far as consumers are concerned, the Unfair Terms in Consumer Contracts Regulation may also assist. The “Indicative and Illustrative List of Terms Which May Be Regarded as Unfair” in Schedule 3 includes: “(n) limiting the seller’s…obligations to respect commitments undertaken by his agents…”. If that is not sufficient, the general wording of Regulation 4(1), defining as unfair a term “which contrary to the requirement of good faith causes a significant imbalance in the parties rights and obligation under the contract to the detriment of the consumer” also assists the present agreement. The saving for core terms (if clearly expressed) seems not to apply. If unfair, it does not bind the consumer. At the very least, the Regulations should outlaw the wording frequently found in proposals expressly making the insurer’s representative who completes the proposal the agent of the proposer.


One can thus conclude that there are further weapons that can be put to good use in the assault on the citadel of “transferred agency”. Even if the role of the ABI in policing its own pronouncements is somewhat pusillanimous, perhaps the Ombudsman may be firmer. One day, of course, a government may belatedly take a part in ending it.’


Notes:


1.    It is lamentable that the GISC Codes do not address the harshness of Newsholme and align the law with the expectations of insureds (neither para 19 of the GISC’s Commercial Code nor, more importantly, the General Insurance Code for Private Customers (above, [303]) pick up on the calls for reform made by both Hodgson J and Purchas LJ in Roberts v Plaisted (above, 3.3). Until legislation changes the law, it falls to the Ombudsman to champion the consumer in this regard.


2.    As Adams points out (above, [316]), the LAUTRO rules made under the 1986 Act prohibited an agent from completing the proposal form on behalf of the proposer unless the proposer agreed that he should do so. If there was such an agreement the agent was under a duty to ask the proposer to check the form and ensure that he or she read it before signing it. Notwithstanding the FSMA 2000 it seems likely that insureds will remain responsible for any inaccuracies unless non est factum can be pleaded.


3.4   The Duties of an Intermediary


In addition to the duties imposed by the FSMA 2000 and the GISC an insurance intermediary is also subject to the duties imposed by the general law: principally deriving from tort and contract (although it should be noted that agents, as fiduciaries, are also subject to fiduciary duties (see J Lowry and P Rawlings Insurance Law: Doctrines and Principles (Oxford, Hart Publishing, 1999) pp 334–35).


3.4.1   The Agent’s Duty of Care


An agent owes a duty of care to the principal and will be liable for any reasonably foreseeable losses consequent upon a breach. Such liability runs concurrently in tort and contract and so the agent may be sued in either: Henderson v Merrett Syndicates Ltd (below, [318]). The relevant limitation period will need to be taken into account when determining which cause of action should be pursued (see J Lowry and P Rawlings, Insurance Law: Doctrines and Principles (Oxford, Hart Publishing, 1999) pp 326–27).


As explained by Cantley J in Cherry Ltd v Allied Insurance Brokers Ltd (below, [317]) and by Lord Goff in Henderson v Merrett (below, [318]) the basis of an agent’s liability for breach of the duty of care is the decision of the House of Lords in Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 464. The court’s determination of the scope of the duty of care will, in turn, determine the measure of damages for its breach (see Aneco Reinsurance Underwriting Ltd v Johnson and Higgins Ltd (below, [319]) where, on the particular facts, the defendants were held liable for the full losses suffered by their clients).


[317]    Cherry Ltd v Allied Insurance Brokers Ltd [1978] 1 Lloyd’s Rep 274


[The defendant brokers had acted for the claimants for over 50 years. Dissatisfied with the size of the premiums they were charged given their low claims record, the claimants decided to place their business elsewhere and they instructed the defendants to terminate their policies. At a meeting with the defendants on 13 August 1974 they learnt that the existing insurers refused to cancel cover mid-term. In order to avoid double insurance the claimants cancelled the new policies but failed to inform the defendants. Subsequently, the original insurers agreed to cancel, but the defendants did not pass this information on to the claimants. The claimants suffered a loss and discovered that they were uninsured. They therefore sued the defendants in negligence.]



Cantley J:


‘It is contended that they had no duty to be careful. I think in the circumstances of this case they had. The meeting of 13 August was a mutual business meeting from the point of view of both parties; there was nothing casual about it. They were giving information within their specialised knowledge and they knew or ought to have known that it would be taken seriously and acted upon in a transaction of importance. Whatever may have been the position in contract, the situation seems to me to have been covered by the principles as stated by Lord Morris of Borth-y-Gest in the well-known case of Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 464 at pp 501 and 502, where he said



“I consider that it follows and that it should now be regarded as settled that if someone possessed of a special skill undertakes, quite irrespective of contract, to apply that skill for the assistance of another person who relies upon such skill, a duty of care will arise. The fact that the service is to be given by means of or by the instrumentality of words can make no difference. Furthermore, if in a sphere in which a person is so placed that others could reasonably rely upon his judgment or his skill or upon his ability to make careful inquiry, a person takes it upon himself to give information or advice to, or allows his information or advice to be passed on to, another person who, as he knows or should know, will place reliance upon it, then a duty of care will arise.”


Accordingly I hold that the plaintiffs are entitled to succeed in this action.


I am not asked to make an award of damages, because the calculation of the appropriate damages is a matter of some intricacy and substance. I am asked to make a declaration, and I do make a declaration, that the plaintiffs are entitled to recover from the defendants as damages such sum as they would have recovered under policy 02CL1532/12 of the General Accident Fire & Life Assurance Corporation Ltd. if that policy had been in force on 29 August, 1974.’


[318] Henderson v Merrett Syndicates Ltd [1995] 2 AC 145 (HL)


[The facts are immaterial].