Understanding Agency In Insurance Law: Whether The Insurance Broker Is An Agent Of The Insured Or The Insurer

Introduction

It is frequently assumed that insurance brokers and insurance agents occupy the same role, and the two terms are often used interchangeably in common parlance. However, each role is legally and functionally distinct and serves different stakeholders in the insurance sector. This article examines the extent to which these roles denote separate functions, explores the differing liabilities, including questions of insurance broker liability in India, attached to each role, and considers whether and to what extent an insurance broker is the agent of the insured rather than the insurer.

An insurance agent is typically an employee or representative of an insurance company, appointed for the purpose of soliciting and procuring insurance business as stipulated in Section 42 of the Insurance Act, 1938. The grant of a license to act as an insurance agent is governed by Insurance Regulatory and Development Authority (Licensing of Insurance Agents) Regulations, 2000. An insurance broker, on the other hand, is someone who arranges insurance contracts with insurance companies and/or reinsurance companies on behalf of its clients. The regulations governing the functioning of an insurance broker are titled Insurance Regulatory and Development Authority (Insurance Brokers) Regulations, which were first introduced in 2002, and subsequently amended in 2013 and 2018.

Principal and Agent as defined in the Indian Contract Act, 1872

At the outset, the relationship of an insurance broker vis-à-vis an insured or insurer can be examined within the statutory framework governing principal–agent relationships under the Indian Contract Act, 1872 (ICA). The definition of agent is set out in S. 182 of the ICA, which defines an agent as “a person employed to do any act for another, or to represent another in dealings with third persons…" and the same provision correspondingly defines the principal as the person for whom such act is done or who is so represented. It is a settled position of law that an agency may be constituted either expressly or by necessary implication. This is clear from a conjoint reading of S. 186 and S. 187 of the ICA.

In the insurance context, an element of agency can be established between the insured and the insurance broker by virtue of S. 182 of the ICA as the insurance broker may reasonably be regarded as representing the insured in its dealings with third parties, ordinarily the insurer. This insurance broker agency relationship in India is further reinforced by the fiduciary mandate under which the broker operates, directed towards protecting and advancing the interests of the insured, as would also be evident from the Insurance Brokers Regulations discussed below. This position contrasts with that of an insurance agent, who acts for and represents the insurer.

IRDAI (Insurance Brokers) Regulations, 2018

Reference may be had to the functions of an insurance broker specified in the Insurance Brokers Regulations (Schedule I – Form A), which ranges from obtaining information of the insured’s business, rendering advice on appropriate insurance covers and terms, submitting quotations received from insurance companies to the insured to providing requisite underwriting information to the insurance companies, assisting insured in payment of premium and negotiation of claims. The said regulations also make it clear that every insurance broker shall follow the recognised standards of professional conduct and discharge its functions in the interests of the insured (referred to as ‘client’) or policyholders (Schedule I – Form H). The IRDAI broker regulations thus cast a clear duty on brokers to act in the interest of the insured.

In addition to the above, insurance brokers are also statutorily bound by the code of conduct set out in Schedule I with respect to their dealings with the insured and matters relating to sales practices, furnishing of information by the insured to the insurance companies, explaining the insurance contracts to the insured, renewal of policies on behalf of the insured, claims raised by the insured, receipt of complaints and maintaining policy documentation, amongst others. 

The IRDAI Insurance Brokers Regulations 2018 do not expressly designate an insurance broker as the agent of an insured, but it can reasonably be inferred from the nature of the functions performed by an insurance broker (illustratively highlighted above) that, for all practical purposes, the broker acts on behalf of the insured. It is this functional role, combined with the insurance broker’s fiduciary duty to the insured, which gives rise to a principal–agent relationship between an insured and an insurance broker. This inference is further reinforced by the broker’s statutory obligation to maintain an arm’s length relationship with insurance companies under Regulation 37, as well as the explicit prohibition on an insurance broker acting as an insurance agent for any insurer under Schedule I (Form H).

Although an insurance broker is entitled to receive remuneration from the insurance/re-insurance companies and not the insured, such remuneration is an inevitable result of the entire process of securing an insurance product for the insured, and hence, such a factor alone cannot be considered as an impediment to the principal – agent relationship which the Insurance Brokers Regulations seek to establish between an insurance broker and an insured.

Judicial precedents on the duties of an insurance broker

The existence of a principal–agent relationship between an insurance broker and the insured can also be substantiated from the duties of an insurance broker enumerated by the England and Wales High Court in Standard Life Assurance Ltd v. Oak Dedicated Limited and Others¹, wherein, the court emphasised that it is the duty of the broker to identify and advise the insured about the type and scope of cover which the insured needs, match the risk exposures with the available coverage, arrange the coverage which meets the insured’s requirements, clarify to the insured the precise nature of what is and is not covered, ensure that the policy language clearly encompasses the needs of the insured, and maintain the same standard of care during renewals as during initial placement, ensuring coverage that consistently meets the insured’s needs appropriately.

The England and Wales High Court also relied upon the decisions of the Court of Appeal in FNCB v. Bannet Devanney² and Talbot Underwriting v. Nausch Hogan & Murray³, which hold that it is the duty of a broker to obtain, so far as is possible, insurance coverage which clearly meets his client's requirements. The coverage will be unclear, and the broker in breach of duty, if the form thereof exposes the client insured to an unnecessary risk of litigation.

Along similar lines, the Calcutta High Court in Heritage Insurance Brokers Pvt. Ltd. v. Insurance Regulatory and Development Authority⁴, held: “…Under the Code of Conduct, all insurance broker is required to follow recognized standards of professional conduct and discharge its functions in the interest of the policyholders. The said broker is required to conduct its dealings with clients with utmost good faith and integrity at all times…”.

Connected to the above, the Insurance Brokers Association of India (IBAI)⁵ describes an insurance broker as a specialist in insurance and risk management who will⁶:

1. act on behalf of the insured and provide advice in the interest of the insured;
2. identify individual and/or business risks to help the insured decide what to insure, and how to manage those risks in other ways;
3. provide technical advice, which can be very useful if the insured needs to make a claim;
4. be aware of the terms and conditions, coverages and exclusions and costs of a wide range of competing insurance policies, so they can help the insured find the most appropriate cover for their circumstances; and
5. Help arrange and place the cover with the chosen insurer.

Therefore, the above discussion demonstrates that an insurance broker not only owes a duty to the insured but is also legally required to act in the insured's best interests. The insurance broker’s fiduciary duty to the insured is a cornerstone of this obligation. This obligation effectively confers upon the broker the authority to act on behalf of the insured, thereby giving rise to an agency relationship between the two.

American Jurisprudence on an insurance broker being considered as the agent of the insured

Indian courts are yet to examine the position on whether an insurance broker acts as an agent of the insured. However, American courts have consistently acknowledged the principal–agent relationship between an insured and an insurance broker, thereby providing persuasive comparative jurisprudence on the issue.

In Burlington Ins. Co. v. Clearview Maintenance & Services, Inc.⁷ the Supreme Court, Appellate Division, Second Department, New York held that in general, an insurance broker is considered the agent of the insured and not that of the insurance company; however, a broker will be held to have acted as the insurer's agent where there is some evidence of action on the insurer's part, or facts from which a general authority to represent the insurer may be inferred. A similar view was earlier taken by the Supreme Court, Appellate Division, Third Department, New York, in Indian Country Inc. v. Pennsylvania Lumbermens Mut. Ins. Co.⁸

The above principle has been further reinforced by the California Court of Appeals in Erin Hughes v. Farmers Insurance Exchange, which highlighted the statutory distinctions between insurance agents and brokers. It was held that an insurance agent acts on behalf of an insurer, while an insurance broker acts on behalf of an insured. The court emphasised that a broker "does not act for the insurer, and the insurer is not liable for the broker's acts or omissions". The judgment also noted that the definitive characteristic distinguishing agents from brokers is that agents have the authority to bind the insurer, whereas brokers lack such authority vis-à-vis the insurer.

Conclusion

The American decisions establish a clear legal framework recognising the insurance broker as the agent of the insured, rather than that of the insurer. This distinction has significant implications for the allocation of insurance broker liability in India and globally, as insurers generally cannot be held vicariously liable for brokers' acts or omissions unless there is specific evidence that the broker was authorised to act on the insurer's behalf.

A similar clarification by the regulator i.e., the IRDAI or Indian courts would help crystallise the legal position in India. Such clarity may aid in resolving and/or substantially reducing disputes arising from broker conduct and would contribute to the development of a more transparent, predictable, and efficient insurance ecosystem.

Footnotes

^{1. (2008) EWHC 222 (Comm)}

^{2. (1999) Lloyds Rep IR 459}

^{3. (2006) 2 Lloyds Rep 195}

^{4. (2013) SCC OnLine Cal 23129}

^{5. A body incorporated to promote interaction amongst the insurance/re-insurance broker members and to encourage, promote, facilitate and protect the interests of the members as well as to provide an avenue to the members for further education, training and research in all fields of insurance and re-insurance.}

^{6. IBAI - Insurance Brokers Association}

^{7. 150 A.D.3d 954 (2017)}

^{8. 284 A.D.2d 712 (2001)}

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