How to: The duties owed by insurance brokers

Introduction

When you are entering into an insurance contract, you may well use the services of an insurance broker (see How to enter into an insurance contract). As well as assisting you in entering into the contract, the broker will handle and pass on all payments made between you and the insurance company. Brokers are subject to the requirements of the INSURANCE INTERMEDIARIES ACT 1994.

What is an insurance broker?

Insurance brokers are different from insurance agents in that brokers are not contracted with any insurance company and are in fact your agent. Nevertheless they do make their money by getting a commission from the insurance company.

As the insurance broker is your agent, he or she has both express and implied authority to enter into an insurance contract that meets the requirements you have stipulated.

Broker must pass on premiums and claim payments within set time limits

Under the INSURANCE INTERMEDIARIES ACT 1994, an insurance broker who receives premiums from you under a policy that has been accepted by an insurance company must pay the premium to the company:

• within 50 days after the end of the month in which your insurance cover begins, or
• if the amount that you have paid is an instalment of a premium, within 50 days after the end of the first month to which the instalment relates

When an insurance broker receives money from an insurer to be paid to you under a claim, the broker must pay you the money within seven days, unless the money is in the form of a cheque, in which case the broker must send you the cheque immediately. The broker may, however, deduct any money that you owe under the policy.

A broker who doesn’t comply with this requirement commits an offence punishable by a fine of up to $5,000 (if an individual) or $10,000 (if a company).

Protection for the client if the broker goes bankrupt

Under the Act you are protected if your insurance broker goes bankrupt:

• If you pay your premium to the broker, this discharges your liability to the insurance company and therefore the company must bear the loss if the broker becomes bankrupt.
• However, if the insurance company has given the broker money to pay out a claim that you have filed under the policy, this does not discharge the company’s liability to pay you, and so again the company bears the loss if the broker becomes bankrupt.

Brokers must keep "insurance broking client account"

Brokers must also keep a separate account – called an "insurance broking client account" – into which they must pay:

• all premiums that they receive, and
• all payments made to them by insurance companies for claims (except cheques that are payable to a particular policy-holder and that are immediately sent to, or on behalf of, the policy-holder)

The broker holds the money in the account on trust, and brokers cannot pay money out of the account nor invest it, except as allowed by the Act.

If the broker becomes bankrupt or goes into liquidation, policy-holders who have filed claims are paid out of this account ahead of insurance companies that are due premium payments.

Other duties owed to their clients by brokers

As well as the specific duties and restrictions to which insurance brokers are subject under the INSURANCE INTERMEDIARIES ACT 1994, a broker is also subject to the following general duties when advising and acting for you:

• a duty of care and skill
• a duty of confidentiality
• a duty to act in your interest
• a duty to account for all payments made to the broker by you (the policy-holder) and the insurance company
• a duty to act in accordance with the authority that you have given

Cautionary notes

• If you believe that your insurance broker has not acted in your best interests, especially if you have lodged a claim and discovered that you are not in fact covered, you should consult a lawyer. If your policy did not cover the incident in question, you have no course of action against the insurance company; however, if your broker misled you, you may have a claim against your broker for breach of the duties owed to you.