Insurers vs brokers: whose client is iy anyway?

Client retention in the insurance industry has always been a hot topic.

Who owns the client? What happens when a tied broker leaves an insurer to go independent or to work for another insurer?

These were issues that were discussed at a regulatory workshop hosted by Moonstone where a legal perspective on restraint of trade was provided by Dhevarsha Ramjettan, a Partner at Webber Wentzel.

The golden questions

Naturally, this is a sensitive issue and one that cannot be taken lightly. When assessing cases such as this – which will lead to a possible restraint of trade being imposed on the broker – four questions need to be looked at:

1. Does one party have an interest that deserves protection after the termination of employment?
2. If so, is that interest threatened by another party?
3. In the case of the second question, does such interest weigh qualitatively (quality or character of something) and quantitatively (based on the amount or number of something) against the interest of the other party enough to be economically inactive or unproductive? Simply put, if the one party takes the clients away from another party, will the second party be affected to the point where they can no longer function from an economic perspective? And;
4. Is there an aspect of public policy having nothing to do with the relationship between the parties that requires that the restraint be maintained or rejected? Simply…if the clients don’t have anything to do with the relationship between the two parties from an economic standpoint, does it matter who the clients belong to?

Points of order

Parties will argue that their clients need to be protected against two principles.

The first is confidential information. When looking at this, there is a simple test one can apply. The information must be useful (ie capable of application in trade or industry), the information must not be public knowledge, the information must have economic value to the person seeking to protect it and the information must be something unique and particular to the employer.

The second principle is that of the customer connection. Insurers will argue that brokers have a massive influence on clients and have the ability to move clients from one insurer to another because of this influence. Brokers will argue that the relationship with their clients are their bread and butter and have built up over many years without the help of the employer that they brought customers to.

Understand law of agency

We looked into this further and sought the opinion of Christine Rodrigues, Director at Norton Rose Fulbright, who pointed out that it is not easy to resolve this issue.

If the insured appoints a broker, it does so in the capacity of principal and the broker is the agent of the insured. As an agent of the insured, the broker will be required to perform the services in the best interests of the client. The insured can at any time revoke this mandate. This relationship is also governed under the Financial Advisory and Intermediary Services Act, 2002. It should also be governed by a written mandate.

However, in other instances the insurer appoints a broker to solicit business. In many instances, the broker has a large book of business as it has a large number of loyal customers. A broker such as this can be attractive to the insurer as this is an opportunity to take on a large number of policyholders.

In this instance, the insurer is clients of both the broker and the insured. It will depend on what the mandate is between the insured and broker as well as the agency arrangement between the broker and the insurer. The agency agreement could have restraint provisions that stipulate that if the broker leaves the employment or is no longer the agent of the insurer; such a broker will not be able to provide intermediary services for any of the clients for a reasonable period of time.

Issues of clarity

Restraint provisions are more likely to be upheld where the mandate and the intention of the parties are made clear from the outset.

However, even in these circumstances, neither the broker nor the insurer can force the insured to remain with the broker or with the insurer.

The client/broker relationship is a principal/agent relationship and the insurer cannot force the insured to use another broker if the insured wants to continue to use the broker, or has specifically mandated the broker to choose the appropriate insurer at all times.

The unenforceable agreement

Restraints and intellectual property rights can always be governed between the insurer and the broker by way of agreement, but it’s never certain whether such agreement will be enforceable against the client.

The insured will always have the ultimate decision on whether to go with the broker or stay with the insurer. However, the insurer can always impose a financial penalty in its agency agreement on the broker for soliciting clients away from the insurer.

The long and the short of it is that in order to avoid any debate as to when the broker’s or insurer’s relationship with the insured can be protected, there should always be agreements in place that govern the relationships between the parties.

Readers weigh in

We have always been, and will always be for the broker. It is no surprise then that this issue touched a fine nerve with our readers when we published it on our website.

Anton Schutte asked possibly the most important question surrounding the issue; who has the relationship with the client? He rightly validated his question by pointing out that people don't do business with businesses, they do business with people that they know, like and trust. “Most FSP's argue that the client belongs to them. But who has the relationship with the client? The broker does,” said Schutte.

Edsaid was very blunt by pointing out that last time he checked, no one owns the client; The client owns themselves. For the bank, the dealership, the insurer or their agent to assume that they own me as a client is ludicrous.

Kenny believes there is more to this issue than what was discussed above. “The client has a relationship with the broker not the insurer or the broker house. How many brokers have moved elsewhere and have had to leave their clients at the broker house they were at? Most times a broker house will also insist that those are their clients and refuse to transfer with broker. This means that the client is further inconvenienced as the broker will now have to go and sign individual notes to transfer each client. Broker houses are often guilty of wanting to build big numbers of brokers as they know they will retain clients (or some as there is attrition when leaving), simply to retain commissions for those clients,” he said.