REFORMING INSURANCE LAW: - Law Commission

“prudent broker” test can be used, leaving the assured to recover from the broker in the event of
any failure to disclose by the broker; (b) repeal s 19 entirely so that the broker is no longer under
a duty to disclose facts known to him but not known to the assured; 135 (c) retain s 19 but in a
modified form, so that the broker remains in breach of duty to the insurers if he fails to disclose
relevant facts of which he knows, but that the insurers’ remedy is not to avoid the policy but to
sue the broker for any loss suffered; or (d) reverse the existing presumption that the broker is the
agent of the assured for placement purposes. Brokers in their everyday activities carry out
functions for both parties, and the law seems to accept that the commission received by brokers
is payment by underwriters for finding business. 136 The relationship between brokers and
underwriters in the London market is typically a close one, and the existing principle maintains
the notion that a broker should be treated as the agent of a person, the assured, where his day to
day relationship with the underwriters is likely to be much closer. These points were made by the
Court of Appeal in Roberts v Plaisted. 137
Misrepresentation by placing brokers
4.39 As the law stands at present in both England and also in Australia under the Insurance
Contracts Act 1984, any false statement by the broker to the insurers in respect of a fact which
induces them in some respect puts the assured in breach of duty. This is so whether the source of
the falsehood is the broker himself, or the assured in his responses to the broker. What is less
certain is whether the knowledge of the broker as to the relevance and truth of facts misstated is
to be imputed to the assured or whether the knowledge is to be regarded as held by the broker on
behalf of the assured.
Remedies
Outline
4.40 The ALRC discussed in detail the operation of the avoidance remedy for non-disclosure
and misrepresentation at common law. The ALRC’s view 138 was that avoidance was often a
disproportionate remedy in that the loss suffered by the insurers – possibly a small increase in
premium – would bear no relation to depriving the assured of the entire benefit of the policy.
The ALRC noted that avoidance outside insurance law worked more or less fairly in that the
parties would be restored to their pre-contractual position with all property retransferred,
whereas in insurance the avoidance would almost inevitably take place after a loss had occurred.
However, the right of avoidance should be retained where the assured had been fraudulent, given
that insurers were entitled to refuse to contract with fraudsters and also that any other approach
would not provide an appropriate disincentive to fraud, subject nonetheless to a discretion in the
court to make some award in appropriate circumstances. Outside fraud cases the ALRC felt that
135 Alternatively, such facts could be deemed immaterial.
136 See the discussion in Carvill America Inc v Camperdown UK Ltd [2005] Lloyd’s Rep IR 55.
137 [1989] 2 Lloyd’s Rep 341.
138 ALRC 20, paras 186-199.
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