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Taking Back the Pen—‘Pre-Nups’ for Coverholders
London & Bermuda Newsletter
When an insurer and coverholder walk down the aisle to enter into a binding authority, all is rosy. But what happens on divorce? The parties’ rights and obligations on termination of the agreement are too often overlooked, which can lead to trouble and expense.
The recent case of Temple Legal Protection Limited v QBE Insurance (Europe) Limited serves as a warning to insurers and underwriting agents alike to give serious thought to what should happen in the event of a breakdown in business relations. In particular, it shows why termination clauses in binding authority agreements need to be drafted with special care. Without clear wording relating to the right to run the business off after the pen has passed back to the insurer, the courts will look to the common law to determine the parties’ rights.
Facts
QBE and Temple entered into a binding authority (binder) whereby Temple had authority to underwrite on behalf of QBE. The binder also conferred authority on Temple to delegate that function, in turn, to coverholders.
Following a deterioration in relations between the parties, Temple served notice to terminate the binder in August 2006. QBE wrote back stating that from that point on QBE itself would assume all claims-handling functions, including run-off, relating to policies issued on its behalf. A dispute then arose as to whether QBE was entitled to take over the management of the run-off.
The matter was arbitrated, and Temple lost. It appealed that decision to the Court, lost again, and subsequently brought its case to the Court of Appeal.
Court of Appeal decision
The Court of Appeal upheld both earlier decisions and held that Temple’s authority to manage the run-off was extinguished when the binder terminated. In reaching this conclusion, their Lordships examined the wording of the binder, paying particular attention to the termination clause. The Court held that the clause conferred a liability on Temple to perform certain run-off obligations, but not a right. In other words, the clause provided that Temple’s obligations in relation to the run-off remained in force even after termination, save to the extent that QBE chose not to require Temple to perform them.
The Court then looked to the common law, in particular aspects of the law of agency. As Temple had the authority to set up contracts on behalf of QBE, QBE was, as a matter of law, Temple’s principal, and Temple QBE’s agent. Agency law dictates that a principal can revoke the agent’s authority at will, save in exceptional circumstances (which did not arise here). Accordingly, since the terms of the contract did not give Temple an express right to insist on conducting the run-off, QBE was entitled to terminate Temple’s authority and to prevent Temple from managing the run-off business.
While it has long been clear to both insurers and coverholders that such arrangements need clear, unambiguous wordings, this case highlights the importance of getting termination provisions absolutely right at the outset, particularly where both parties may claim some right of “ownership” over the underlying book of business.
Temple Legal Protection Limited v QBE Insurance (Europe) Limited ([2008] EWHC 843 (Comm))
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