Insurance brokers' commission: no secret profits
February 21 2012
Article from International Law Office
Summary
The judgment of the Court of First Instance on January 6 2012 in Hobbins v Royal Skandia Life Assurance Ltd(1) confirmed that the customary practice of insurance brokers receiving commission from insurers is not contrary to Section 9 of the Prevention of Bribery Ordinance, provided that the commission is not in excess of the normal level of commission paid in the insurance market and the broker had made disclosure to its client.
This decision provides reassurance to insurance brokers regarding the legitimacy of receiving commission from insurers, as well as useful guidance on the extent of the duty of disclosure to clients.
Facts
Hobbins was a successful businessman and an experienced investor. Clearwater, an insurance broker, acted as Hobbins's agent to purchase investment-linked assurance scheme products from Skandia and other insurers.
Clearwater made known to Hobbins, from the outset of their relationship, that it made money from commission and fees paid by insurers whose products were purchased by Hobbins. It was also clearly stated in the client agreements with Hobbins that Clearwater would be earning commission from such of his business as Clearwater placed with insurers. Hobbins later sought to set aside the investment schemes and to be restored to his position immediately before purchasing those products.
The court found no basis for holding any of the contracts void or unenforceable. Hobbins's claims against Skandia and Clearwater were dismissed.
Key findings
Agency
It has long been established at common law that insurance brokers act solely as agents for an insured. The mere fact that an insurer pays brokerage fees to a broker does not mean that the broker is undertaking to perform an obligation on behalf of the underwriter.
In order to establish agency, there must be express or implied authority for the agent to enter into any transaction or act in any way on the principal's behalf. It was clear in this case, from the contracts between the insurers and Clearwater, that Clearwater had not been appointed as an agent and had no express or implied authority to enter into a transaction or act on the insurer's behalf. Therefore, Clearwater was not an agent of the insurers.
Illegal contract
There is lawful authority for the commercial practice that an insurance broker acts as an agent of the insured, not the insurance company. It has long been settled at common law that commission paid to an insurance broker by an insurer does not constitute an illegal secret profit unless it is in excess of what is normally paid within the insurance market.
In this case, there was no evidence that the level of commission or fees received by Clearwater was excessive by industry standards.
Breach of fiduciary, common law or statutory duty
Equity imposes on an agent a duty to make disclosure of commission or fees earned from third parties in connection with the agent's handling of a principal's business. However, that duty does not extend to providing specific details of the quantum of commission.
There was no dispute that Clearwater disclosed that it would be remunerated by way of commission and other fees received from the insurers. It was for the principal to ask the insurance broker for further particulars of the commission to be received and then decide accordingly whether to proceed with a transaction.
To impose a duty on the broker specifically to disclose the amount of commission that it expected to receive would be a standard at odds with case law on prevailing commercial practice among insurance brokers in Hong Kong. The court noted that if there is to be a change, the initiative must come from the legislature.
Hong Kong Federation of Insurers initiatives
Before Hobbins, concerns over the question of whether Section 9 of the ordinance applied to commission received by insurance brokers had prompted the Hong Kong Federation of Insurers to issue a circular to all member companies on October 13 2011, drawing their attention to the risk of such a breach.
The circular advised insurers to require a broker to disclose to its clients that it will receive a commission from the insurer as a result of the insurer's policy being taken up, and proposed that a broker sign a declaration to the insurer that he or she has made such disclosure.
Since Hobbins, the federation has announced(2) that the Task Force on the Disclosure of Intermediaries Remuneration has been reactivated in order to:
- review the need to refine the legal advice provided to member companies in the circular; and
- explore the possibility of devising a simplified version of the broker's declaration in the context of the ordinance, protecting the legal position of insurers.
Comment
Pending further revision to the circular, Hobbins provides clear authority that:
- an insurance broker is solely an agent of the insured;
- commission received from the insurer does not constitute an illegal secret profit unless it is in excess of what is normally paid within the insurance market; and
- it is sufficient for insurance brokers to disclose to the insured the fact that they will be remunerated (and only remunerated) by way of commission and other fees received from insurers, without specifying to the insured the amount of commission received.
For further information on this topic please contact Kevin Bowers at Howse Williams Bowers by telephone (+852 2803 3688), fax (+852 2803 3608) or email (kevin.bowers@hwbhk.com).
Endnotes
(1) HCCL15/2010.
(2) In its monthly brief for January 2012.
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Article from International Law Office
