Confusion over the legal position of independent insurance brokers and ambiguity over contract terms and formation are weaknesses in New Zealand’s insurance industry, insurance law expert Crossley Gates
told delegates at a conference last week.
Gates said these practices are letting the industry down and implored both underwriters and brokers to lift their game to avoid costly court cases in the future.
Delegates at the Insurance Council of New Zealand’s Auckland conference heard that two particular areas requiring closer scrutiny were firstly regarding the legal position of independent insurance brokers and secondly how a contract is arrived at and when.
Gates said in New Zealand independent insurance brokers are the legal agent of the insured apart from one exception, which is poorly understood.
“There is a window when the negotiations go on when if the broker starts acting for the underwriter to any extent then they are deemed at law to suddenly become the agent of the underwriter,” Gates said. “This has quite a dramatic effect. When I do seminars people are always quite aghast about this.
“The window closes once the contract is formed.”
He said if there was ambiguity in the wording in that time the ruling would go against the broker as the agent of the insured because of the contra preferendum rule.
He referred to the way underwriters sometimes refer to brokers as ‘our brokers’ who they partner with to distribute their products which also added to the blurring of lines.
“I think that language is awkward and unfortunate,” Gates said. “In terms of the legal relationship they are not ‘your’ anything, they are actually the insured’s agent and I think it can lead to a lot of confusion when some of this terminology is used.”
He said more serious was the behaviour around contracts and schedules, the schedule being particularly important as it has all the individual aspects that are unique to that particular insured.
“Some brokers don’t send [the schedule] on to the client which I find staggering as that’s part of the contract.
“And even worse they send something that they create themselves which is a really risky thing to do because you’re not sending the contract on to your client, you’re sending another document.”
He said sometimes the underwriter actually gets the broker to prepare the schedule.
“This confuses the roles because the broker is acting as agent to the insured but you’re asking the broker to do something for you, creating part of your contract, and I think that’s an undesirable state of affairs as well.”
Gates said he saw some of the worst examples of contracts arising out of the Christchurch situation.
“That showed me that some brokers and underwriters don’t understand which communications actually create the contract and they don’t understand when it is formed.
“Some of the communications I saw and the emails going backwards and forwards between underwriter and broker were lax in the extreme in this. It was actually very difficult to work out where there was an offer that was then accepted.
“And boy, we’re talking binding potentially millions of dollars of exposure here and we’ve got this incredibly loose process going. As a lawyer it’s quite breathtaking,” he said.
Problems can arise when a broker makes a change to a contract but then does not highlight it to the underwriter.
“It’s in no one’s interests for there to be uncertainty about this. The underwriter needs to know what the maximum exposure is and what the terms are.
“And for the broker, it doesn’t do your client any favours for this to be ambiguous, does it? Creating an insurance contract is a very formal process and current processes are generally pretty lax. The attention to detail over the terms and the drafting can avoid unnecessary disputes and a lot of money you spend on lawyers.”
Gates added that he had read ‘horrific’ emails from insureds. “They were scathing of the industry and I thought we’ve got to do better.
“What I’m saying is let’s not play games here, it’s not in the interest of the industry, it denigrates the product.”