The Premium

261,632.81. Subsequently, Scort (Venezuelan broker) ceased to be represented, Banesco (Venezuelan reinsured) continued to defend the action, and counterclaimed for US325,000 collected by HL from the underwriters in respect of a particular average claim. HL asserted the right to set off against this sum the amount that it was owed in respect of premiums, leaving (after interest and charges) a balance to be handed over to Banesco of US11,911.34. The counsel for Banesco argued that as HL was authorised to collect and to account directly to Banesco, not to Scort, it would be wrong and inconsistent with its collection authority for HL to treat the loss proceeds as otherwise due to Scort, and attracting a lien, when HL is obliged to account to Banesco. HL collected the loss proceeds as agent for Banesco and as a result it had no lien in respect of the claim for premium against Scort. HHJ MacKie QC referred to the origins of the common law lien as explained by Diplock J in Tappenden v Artus⁹⁶ that a common law lien which arose independently of the law of contract, although not enforceable by action, affords a defence to an action for recovery of the goods by a person who, but for the lien, would be entitled to immediate possession. HHJ MacKie QC found the position the same with a statutory lien and with the proceeds of the policy as much as with the physical policy document.⁹⁷ The judge noted that in Eide – as noted above – it was expressed that the precise basis of this lien may be unclear but HHJ MacKie QC stated that the right is not. Accordingly, there was no doubt that HL had a lien over the proceeds of the policy both as against Banesco and any other intermediary, whether or not Banesco were under a direct obligation to pay the premium. That lien may be maintained until the premium is paid or the claim is in some other way satisfied. HHJ MacKie QC added that the lien asserted by HL should be upheld for these reasons as well as being consistent with that set out in Eide and with justice. It would be obviously unfair for HL to be required to hand over the proceeds of the claim under a policy without being reimbursed for unpaid premiums.

It is, of course, always possible for a broker to agree that he will not assert any claim over proceeds collected for an assured.

General lien

Section 53(2) provides ‘… where he has dealt with the person who employs him as a principal, he has also a lien on the policy in respect of any balance on any insurance account which may be due to him from such person, unless when the debt was incurred he had reason to believe that such person was only an agent.’

If the broker has been immediately instructed by the assured he has a lien on the policy not only for the premium and commission due on the particular transaction, but also for the amount of the general balance of his insurance account.⁹⁸ As described in Chapter 14, a broker may be employed by another agent and in such a case, if he knows that his employer is an agent, he has no lien on the policy in respect of his general balance against his immediate employer. The only question is whether he knew or had reason to believe that the person by whom he was employed was only an agent; and the party who seeks to deprive him of his lien must make out the affirmative.⁹⁹

Mann v Forrester¹⁰⁰ illustrates the abovementioned rules. The claimant merchant ordered some cargo from White and Lubbern (WL) who sent the cargo and employed the defendant broker to effect a policy on the cargo. The defendants effected the policy accordingly, and debited WL with the premiums. The policy was allowed to remain in the defendants’ hands, and before they had notice of the claimant’s interest, they had received £650 from the underwriters, and they received £200 afterwards. When they had the notice, they were creditors of WL for the amount of £167. This sum they deducted from the £200 subsequently received, and the balance of £33 they paid over to WL’s assignees.

The claimant merchant could not recover any part of the money received by the defendants before the notice; but it was insisted that he was entitled to the full sum of £200 received afterwards. Lord Ellenborough held that the broker, having had no notice that this policy was not for WL, had a lien upon it for their general balance. They must be supposed to have made advances on the credit of the policy, which was allowed to remain in their hands. Therefore, they had a right to satisfy their general balance from the money received under the policy, whether before or after the notice communicated to them of the claimant’s interest. But after that notice, the excess beyond the satisfaction of their balance was considered to be money had and received by them for the claimant’s use. Therefore, the claimant was entitled to a verdict for £33. This principle was approved in Cahill v Dawson¹⁰¹ where a merchant in Spain instructed his agent D in Liverpool to insure a cargo of fruit. The agent in Liverpool instructed a London broker, L, to procure the insurance in question. L then employed N to place the risk with an insurer. N effected the policy, and, a loss having occurred, received the money from the underwriters, but refused to hand it over to the broker in Liverpool, insisting on a lien as against L in respect of premiums due to him under other policies. The first issue to be resolved was whether the agent in Liverpool was in breach of his duty by appointing an agent in London instead of placing the risk in Liverpool. The court nevertheless stated his view that if N had known that the agent in Liverpool was in fact an agent he could have acquired no right to retain the proceeds of the policy for a claim against L, because he would have known that L was acting merely as agent for D. Thus, the 1906 Act now provides that a lien against a person who employed the agent depends on the status of the employer and the knowledge of the sub-agent regarding such status. The importance of the lien on the policy is, thus, that it enables the broker to maintain a set-off in respect of a receipt of claims proceeds notwithstanding that he has acquired knowledge of the existence of a previously undisclosed assured prior to the receipt, provided that he had no such knowledge when the lien on the policy arose. If the broker retains possession of the policy, discovery of the existence of a previously undisclosed principal will not defeat the accrued security of the lien on the policy, or the commensurate right to set off where a collection is made under the policy. If, however, the broker parts with possession of the policy and then discovers the existence of the undisclosed principal, he will have no continuing security, even if he recovers possession of the policy.¹⁰²

In Eide UK Ltd v Lowndes Lambert Group Ltd, Phillips LJ held that section 53(2) does not apply to composite insurance. In Eide the vessel Sun Tender was mortgaged to the Bank Colne Standby Ltd. The Sun Tender was demise chartered and the charterparty required the charterer to insure the vessel to protect the interests of the owner, charterer and mortgagees of the vessel. Colne instructed the brokers to procure two hull and machinery policies. The policies described the insured as: ‘Colne Standby Ltd and/or subsidiary and/or associated companies and/or where required by contract all other companies and/or persons concerned in contracts attaching to this insurance, shall be deemed to be jointly and/or additionally insured for their respective rights and interests.’

The owners assigned their interests in the policies to the bank. The Sun Tender sustained damage to her starboard main engine and was redelivered by Colne Standby to the owners in her damaged condition on or about 12 June 1993. Before redelivery of the Sun Tender and termination of the charterparty, Colne Standby incurred disbursements of £19,871.07 in respect of ‘part permanent repairs’. Following the vessel’s redelivery, the owners arranged and paid for the further repairs which cost £303,560.07.

The brokers collected from the underwriters the sum of £300,931 by way of claims proceeds, acting pursuant to letters of authorisation signed on behalf of Colne Standby and the bank. The sum paid by the underwriters represented the owners’ repair costs of £303,560 and Colne Standby’s repair costs of £19,871, totalling £323,431, less a deductible of £22,000. The brokers were entitled to deduct a 1 per cent collecting commission, leaving a balance of £297,921. The bank’s share of this sum was £279,629.42. The brokers paid the entirety of the claims proceeds into a mixed bank account.

At the time that these proceeds were received Colne Standby owed to the brokers a balance of £728,109.82 on an insurance account. This sum was wholly made up of debts in relation to insurances other than the policies.

The issue was thus whether section 53(2) gave the brokers a right to retain the claims proceeds in part satisfaction of Colne Standby’s liabilities under their insurance account.

Phillips LJ held that Section 53(2) does not apply to composite insurance.¹⁰³ The judge held that the latter part of the subsection suggests that the draftsmen were addressing only the simple position of one employer and one assured. ‘Where he has dealt with the person who employs him as a principal’ is not appropriate language to describe dealings between a broker and an employer who places insurance both on his own behalf and on behalf of other interests.

The Law Commissions discussed broker’s lien in their Issues Paper 8 in 2010 and expressed the view that section 53(2) is satisfactory and does not need to be reformed. In Issues Paper 9 the Law Commissions stated that section 53(2) should be amended or replaced, so as to clarify the law in this area. Due to the link between the two sections, sections 22 and 53(2) must be considered together, so that any reform of the former does not adversely affect the operation of the latter.¹⁰⁴ In Consultation Paper 201 the Law Commissions proposed that where the broker has paid the premium on behalf of the assured, it should be entitled to exercise any right the insurer has to recover the debt from the policyholder. Since it has been proposed that section 22 should be repealed, with the end of formal policies, the broker’s lien over the policy becomes practically defunct. Therefore, the Law Commissions proposed that section 53(2) ought to be repealed and replaced with a form of security for the broker which does not depend on the existence of a policy document. This cannot be a lien in the technical sense, as lien requires a tangible object.¹⁰⁵ The broker would have a specific statutory right to set off any premium or commission against the proceeds on that policy.¹⁰⁶

Return of premium

Section 53(1) of MIA 1906 provides that ‘… the insurer is directly responsible to the assured for the amount which may be payable in respect of losses, or in respect of returnable premium.’ Thus, the insurer is directly responsible to the assured for the return of the premium.¹⁰⁷

Total failure of consideration

Section 84 of MIA 1906 provides detailed provisions regarding return of premium. The contract of insurance is a contract of indemnity under which the insurer receives a premium for running the risk of indemnifying the assured. If the risk has never begun after the contract is concluded, the premium shall be returned for total failure of consideration for the insurer to keep the premium.¹⁰⁸ Section 84(1) provides ‘Where the consideration for the payment of the premium totally fails, and there has been no fraud or illegality on the part of the assured or his agents, the premium is thereupon returnable to the assured.’

Where the policy is void or is avoided by the insurer, the premium is returnable in the absence of fraud or illegality on the part of the assured (section 84(3)(a)). Where the assured has no insurable interest throughout the currency of the risk, the premium is returnable, provided that this rule does not apply to a policy effected by way of gaming or wagering (s.84(3)(c)).

The Consumer Insurance (Disclosure and Representations) Act 2012 reformed the duty of good faith in consumer insurance and the Act brought proportionate remedies for breach of the duty of good faith. Additionally, it is provided by the 2012 Act that section 84 of the Marine Insurance Act 1906 is to be read subject to the provisions of the schedule in relation to contracts of marine insurance which are consumer insurance contracts.¹⁰⁹ The insurer may avoid the contract if a qualifying misrepresentation was deliberate or reckless. In such a case the insurer need not return any of the premiums paid, except to the extent (if any) that it would be unfair to the consumer to retain them.¹¹⁰ If a qualifying misrepresentation is careless, the insurer may avoid the contract on the condition that the insurer would not have entered into the consumer insurance contract on any terms. The insurer must return the premiums paid in this case.¹¹¹ The Draft Insurance Contracts Bill, which aims to reform the duty of good faith in business insurance, provides identical provisions for business insurance.¹¹²

The premium is indivisible

As soon as the risk has commenced, the obligation to pay the entire premium at once arises. There shall be no apportionment or return of premium afterwards irrespective of the period of time between the commencement of the risk and the event which occurred under which the assured claims the return of premium. It was held that when the risk has begun, there never shall be a return, although the ship may be captured within 24 hours from the inception of the risk.¹¹³ In Tyrie v Fletcher¹¹⁴ the ship Isabella was insured at and from London to any port or place, where or whatsoever, for twelve months, from 19 August 1776, to 19 August 1777, both days inclusive. The ship sailed from the port of London, and was taken by an American privateer, about two months afterwards. The premium was held to be indivisible, it was calculated for the coverage for the twelve months and as soon as the risk had begun it was due to be paid at once. Lord Mansfield held that the contract entered into was one entire contract from 19 August 1776 to 19 August 1777. The parties ‘might have insured from two months to two months’ and made a division but by insuring the vessel for twelve months under the policy they made no division of time at all. The assured, according to Lord Mansfield, declared that ‘if you the underwriter will insure me for twelve months, I will give you an entire sum; but I will not have any apportionment’.

The question of whether or not the premium is divisible is a matter of construction of the contract. In Loraine v Thomlinson¹¹⁵ the policy insuring the ship Chollerford was to provide cover from 13 March, 1779 until 13 March 1780. Although the policy stated that ‘Premium received 16th March, 1779’, the premium was not paid as it was the custom in Newcastle not to pay the premium at the time of making the insurance, but at various times after the policies have been effected, and, sometimes, not till twelve months after. The ship was lost in a storm, within the first two of the 12 months for which the insurance was made, and the defendant tendered to the plaintiff £3 as the premium for the two months. Lord Mansfield held that the entire premium, £18, should have been paid. It was an insurance for 12 months, for one gross sum of £18 which was to be paid down at once.¹¹⁶

The modern authorities confirmed that the premium, unless otherwise agreed by the parties, is indivisible. The parties may agree that the premium will be payable in instalments but in such a case, in principle, the premium is still indivisible and if the insurer is discharged from liability for breach of warranty the obligation to pay the premium does not come to an end automatically. To have that effect the contract should expressly provide that the assured will not pay the premium after the insurer is discharged from liability or if the entire premium has been paid, the premium will be returned pro-rata. In JA Chapman & Co Ltd (In Liquidation) v Kadirga Denizcilik ve Ticaret AS,¹¹⁷ it was discussed whether the assured was still obliged to pay the premium after the insurer was discharged from liability as a result of a breach of warranty. The trial judge held that the premium was apportionable to successive periods of insurance, so that, a breach having occurred in respect of one period, instalments in respect of subsequent periods did not become payable. The policy provided that

If the premium is to be paid by instalments the instalments have to be paid as follows:
One fourth to be paid as a first instalment due and payable when insurance attaches.
One fourth due and payable at three months from inception.
One fourth due and payable at six months from inception.
One fourth due and payable at nine months from inception.

Chadwick LJ¹¹⁸ held that the trial judge failed to appreciate that, although the payment of premiums clause provided for there to be four instalment payments, there remained only one single premium. The wording ‘if the premium is to be paid by instalments’ made it clear that there was one single premium, namely the entire risk accepted by insurers under the policy – and the manner in which the premium was to be paid – by instalments at three monthly intervals. The fact that the successive instalments were due and payable on dates which occurred at three monthly intervals during the term of the policy did not lead to the conclusion that the premium, which comprised the aggregate of those instalments, was itself divisible between successive three-month periods.¹¹⁹ Notwithstanding that the insurers were released from liability by the breach, there remained a liability on the assured to pay the instalments that had not become due at the date of the breach.

The risk may be divisible

The risk in some policies may be distinct and divisible in its nature. The contract may not be entire, rather there may be two or more parts in the contract. For instance, in Stevenson v Snow¹²⁰ there were two distinct voyages: from London to Portsmouth and from Portsmouth to Halifax. The insurance depended on the contingency of the ship sailing with convoy from Portsmouth. In Bond v Nutt¹²¹