A couple of important cases dealing with agency issues relevant to the insurance industry have recently passed through the Hong Kong courts. Both cases are worthy of comment. The first case considered in this article appears to have passed with relatively little comment (apart from, for example, the lawyers involved); it examines the relationship between an insurance company and its agent.
In contrast, the second case considered in this article has received much interest in the insurance industry; it considers (among other things) the nature of the relationship between an insurer, insurance broker and insured. In challenging market conditions, the outcome in both cases will be welcomed by insurers. In this article, we briefly examine both cases and highlight some practical issues.
Insurance companies and their agents
Leung Suk Fong Peggy v The Prudential Assurance Co Ltd  5 HKC 592 and  1 HKLRD 168 (the Peggy case)
In the Peggy case the plaintiff claimed to be entitled to certain employee benefits on the termination of her contract with the defendant insurance company. The claim turned on whether the plaintiff was the company's agent or employee. The claim was rejected by the Minor Employment Claims Adjudication Board (the Board) on the basis that the plaintiff was the company's agent (and not employee). The plaintiff appealed the Board's decision to a judge who dismissed her appeal.
The judge, applying a "nuanced approach" to whether an employment relationship existed, looked at the characteristics of the plaintiff's relationship with the company and concluded that she was an agent. Those characteristics included (for example): the contract between the company and the plaintiff (that expressly stated the relationship was one of agency and not employment), the extent of control, the fact that the plaintiff was paid by commission (not salary), the plaintiff's role in the company's organisation and her principal place of work.
The plaintiff applied to the Court of Appeal for permission to appeal the judge's decision. The Court of Appeal refused to grant such permission based on two grounds. First, as an appellate court it was reluctant to interfere with findings of primary fact made by the Board. Second, the plaintiff's appeal did not raise "a question of law of general public importance", being the threshold for permission to appeal in such cases pursuant to section 33(2) of the Board's Ordinance (Cap.453). Effectively, the plaintiff was seeking to re-argue her case.
The Court of Appeal considered that the determination the plaintiff was not an employee was not a precedent to be applied in other cases involving different facts.
Some practical issues:
- While a finding of employment or agency depends on the individual facts of a case, the fact remains that insurance agents are widely perceived in the industry to be agents. That this issue is rarely tested in the Hong Kong courts is a testament to that perception and trade practice.
- That said, insurance companies would do well to review their contractual arrangements and working practices with their agents regularly in order to ensure that the indicia of an employment relationship are not allowed to creep in. In these sorts of relationships the courts in Hong Kong normally place emphasis on contractual provisions.
- An insurer's staff and their training must appreciate the difference between employment and agency agreements.
Insurance brokers and their commission
Hobbins v Royal Skandia Life Assurance Ltd & Anor, HCCL No.15 of 2010, 6 January 2012 (the Hobbins case) In the Hobbins case the plaintiff appointed the defendant insurance broker to act as his broker to purchase certain investment products from the defendant insurer. The client agreements between the plaintiff and the broker acknowledged (as was the case) that the broker had explained the investments to the plaintiff and the fact that the broker would be paid commission by the insurer; the plaintiff was not paying for the broker's services.
On becoming dissatisfied with the investments, the plaintiff commenced court proceedings against the insurer and the broker in order to set aside the investments and to recover (among other things) the commissions paid to the broker by the insurer. Two of the grounds relied on by the plaintiff were that the investments had allegedly been negotiated by the broker as the insurer's agent in breach of the Insurance Companies Ordinance (Cap.41 – the ICO) or that those investments allegedly fell foul of section 9(2) of the Prevention of Bribery Ordinance (Cap.201 – the PBO).
In essence, section 9(2) of the PBO makes it, among other things, unlawful for a person (without lawful authority or reasonable excuse) to offer any advantage to an agent as an inducement or reward with respect to the agent's performance of his principal's affairs or business.
One of the main issues in the Hobbins case was whether the broker was the insurer's agent. The contractual agreement between the insurer and the broker contained an express term that the broker was not the insurer's agent. There was no dispute that the broker was the plaintiff's agent.
In a landmark judgment the High Court judge decided (among other things) that:
- the broker was not the insurer's agent (a finding that was hardly surprising in light of the contractual term to this effect);
- as a matter of law the mere payment of commission by the insurer to the broker did not make the broker the insurer's agent;
- case law had long established that an insurance broker was the agent of the insured;
- for the purposes of section 2 of the ICO the broker was not the insurer's agent. That section defines an insurance agent as "a person who holds himself out to advise on or arrange contracts of insurance in or from Hong Kong as an agent or subagent of one or more insurers". There was no evidence of the broker ever having held itself out as the insurer's agent or having any apparent authority to do so;
- as a result of judicial recognition (for more than a century) of the commercial practice of an insurance broker acting as agent of the insured and not the insurer, commission paid to an insurance broker by an insurer did not constitute an illegal secret profit, unless it is in excess of what is normally paid within the insurance market (which, on the facts in the Hobbins case, was not the case). Therefore, in a civil context, no offence had been committed under section 9(2) of the PBO;
- The plaintiff was not entitled to any compensation.
At the time of writing the Hobbins case was still within the period for an appeal.
Some practical issues:
- As with insurance companies and their sales agents, insurance companies and brokers would do well to review their contractual arrangements and working practices to ensure they reflect that there is no agency as between them. In these sorts of relationships the courts in Hong Kong normally place emphasis on contractual provisions.
- Just as importantly, insurance companies and brokers should ensure that they refrain from any activity that might purport to give the broker any apparent authority to be the insurer's agent. This is as much a concern for the insurance company as it is for the broker.
- Insurance brokers should observe a minimum good practice of disclosing to their clients (insureds), for whom they are agents and often financial advisers, that they will be remunerated (and only remunerated) by commissions and fees paid by insurers. Brokers should be prepared for more queries from their clients as to how they are remunerated (and, in particular, how much).
- The outcome of the Hobbins case may well invite certain organisations to review the guidance they give to their insurer or broker members with respect to the disclosure of broker commissions. This remains as much of interest to insurers as it does to brokers. If in doubt as to such guidance consider taking good independent legal advice.
Both the Peggy case and the Hobbins case raise interesting and different agency issues. The outcome in both cases is consistent with what is understood to be market practice in the insurance industry. That industry is one of the pillars of Hong Kong's economy.
As insurance companies face increasing risk exposure to "events" and a challenging environment for their investments, customers and income, in Hong Kong they will welcome the court's approach in both cases. As Charles Dickens wrote (with equally turbulent times in mind): "It was the best of times, it was the worst of times...".
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