1. An Insurance Broker is a professional who represents consumers in their search for the best insurance policy for their needs. They work closely with their clients to research coverage, terms, conditions, and price and then recommend the insurance policy that best fits the bill. An Insurance Broker represents the insured by acting as amiddleman between the Insured and the Insurer.They solicit insurance from the public without employment from any particular company and upon securing an order, they place it with a Company selected by the Insures or if the Insured has no preference, a company selected by the Insurance Broker. An insurance broker uses his knowledge and experience to help you assess your unique insurance needs, find the best coverage and value, and can assist you when making a claim.

2. It is important to state at this point that there is no specific legal framework which expressly spells out the duties of an Insurance Broker in Nigeria. The law which primarily governs the relationship between the Insured, Broker and Insurer is the Law of Aagency. An agent is a person employed for the purpose of bringing his principal into a contractual relationship with a third party. He does not make contracts on his own behalf. The legal doctrine which applies is qui facit per aliumfacit per se (he who does something through another does it himself).An Insurance Broker is therefore an agent employed to buy or sell on behalf of another. He is not usually liable to his principal for the failure of the buyer to pay the price. However, in performing his role, he owes a duty of care to his principal.

3. The general principle is that Insurance Brokers are the agents of the Insuredeven though they receive Commission from the Insurer. Commissions are paid out of premiums charged to policy holders by Insurers. These may include base commissions as well as supplemental commissions or contingent commissions.
Base commission is the “normal” commission earned on insurance policies. It is expressed as a percentage of premium and varies by type of coverage. For instance, your Broker might earn a 15 percent commission on your insurance, your Broker will deduct his commission and send the remaining to your Insurer.

4. In addition to base commissions, many Insurers pay supplemental or contingent commissions. These are intended to reward Brokers who achieve volume, profitability, growth or retention goals established by the insurer. Supplemental commissions are usually a fixed percentage of the premium. The percentage is set at the beginning of the year and is communicated to the Broker. It reflects performance in the previous calendar year. Contingent commissions are calculated after the year has ended. For example, AIICO Insurance promises to pay Lilac Dew Brokerage a two percent contingent commission if Lilac Dew writes $10 million in new property policies in 2020. AIICO waits until early 2021 to determine whether Lilac Dew has met its goal. If it has, Lilac Dew receives the commission.Both supplemental and contingent commissions are controversial because Brokers represent insurance buyers (the insured) and profit-based commissions can create a conflict of interest. They can motivate Brokers to steer the insured to insurers that pay the highest fees but are not necessarily the best option for the insured.

5. While it may appear obvious that the Broker owes a duty of care to the Insured, situations may arise where the brokers act as agents of the insurer and owe them a duty of care; for example, where the insurers have agreed that notification to the brokers is also notification to the insurer.

6. The legal status of the Broker is confused during the course of an insurance transaction, since he may become the agent for both the Insured and the Insurer. When Brokers act as agents for both the Insured and the Insurers, they must obtain the fully informed consent of both parties. In the event of a dispute, the court will look at the function the Broker was performing in deciding whether he/she was acting as the Agent for the Insurer or the Insured at the time.

Dual Agency

7. In certain circumstances Brokers could be discharging duties owed to both the insured and the insurers, on the same risk, and thus have a liability to the insurers. Examples include:

a. Operating binding authorities: A binding authority is an agreement in which an Insurer gives full authority to a Broker to act on their behalf for the purpose of underwriting and this allows the Broker to sell policies on the Insurer’s behalf. Hence, operating a binding authority is one of the key ways in which brokers can be agents of insurers. In the English case of Pryke v Gibbs Hartley Cooper Ltd [1991] 1 Lloyd’s Rep 602, the Brokers placed an underwriting authority which enabled an agent in the USA to write business on behalf of London market insurers. A risk was written which was outside the terms of the authority and the insurers instructed the brokers to ask the agents to cancel the policy. This was not done and, although the brokers became aware of this, they did not advise the insurers. The insurers could not take steps to limit their exposure and were entitled to damages against the brokers in respect of the subsequent loss.

b. Completing proposal forms. Where insurance Brokers are operating a binding authority or other facility, they would be acting on behalf of the insurers if they assisted or completed a proposal form on behalf of an insured.

c. Claims-delegated authority. Brokers are acting as the agents of the insurers when they are authorised to settle claims under delegated authority arrangements. In fact this is a clear conflict of interest because the interests of the insurers and insured are diametrically opposed when claims are involved, and again the insured should consent to this arrangement.

8. Notwithstanding the above, the Broker can only act as an agent of the Insurer upon the full and informed consent of the Insured. In the absence of such express and fully informed consent, it would be a breach of duty on the part of the insurance broker so to act. This contradicts the vital principle that an agent may not at the same time serve two masters (two principals) unless he has the explicit and informed consent of both principals.
Essentially, an Insurance Broker is an agent of the Insured and in any situation where the Broker may have to act as an agent of the Insurer, the Brokerhas a duty to disclose any conflict of interest that may arise in discharging duties to the Insured to enable the Insured make an informed decision on whether the Broker can continue as his Agent.

Writer : Folake Adeniyi
Publisher: BA LAW LLP