Can a man serve two masters?

If it is permissible to start a legal article with a quote from St Matthew's Gospel, Chapter 6, Verse 24 is pertinent to the current problems of commission disclosure and of the status of insurance brokers.

Its full text reads: "No man can serve two masters: for either he will hate the one, and love the other; or else he will hold to the one, and despise the other. Ye cannot serve God and Mammon."

Ignoring the theological issues of the second sentence in the interests of brevity and relevance, let us concentrate on the practical issues of the first sentence and the position adopted by law and by regulation.

Commission disclosure as a current issue has arisen from the practice of acting for both sides in an insurance or reinsurance transaction.

Acting for more than one party is not in itself something immoral. It may be, in certain professions and in certain circumstances, unethical.

In many situations, however, it is perfectly proper for one intermediary to act for both or all the parties to a transaction.

In a television interview, the late Sir Peter Green, chairman of Lloyd's at the time, brushed off a question about conflicts of interest between his personal interests as an underwriter or agent and those of his Names by responding that at Lloyd's one dealt with conflicts of interest everyday and was quite accustomed to doing so.

Leaving aside individual cases, what Sir Peter's response failed to communicate was an understanding that judging how acute a conflict is may not be easy, even in a situation involving only an agent and a single principal.

Where there is a dual agency, the considerations are inherently more complex.

For the protection of those for whom a dual agent acts, the law takes a strict line on dual agency not far removed from that of St Matthew's Gospel, hence the pertinence of the opening quotation.

Current position
Most relevant law is to be found in a large number of court decisions, each of which probably rivals St Matthew in length and is not so easily read. However, the following may serve as a summary of the current position.

Under English law a broker is regarded as the agent of the insured or prospective insured, to whom he owes a number of duties by virtue of that agency relationship.

See Winter v Irish Life (1995). In particular, he owes what is called a fiduciary duty, in other words a duty of loyalty.

That means that the insured or the prospective insured is entitled to expect that the broker will act in his interests to the exclusion of the broker's own interest.

This entails avoiding conflicting interests and not making secret commission from the relationship.

Interestingly, the courts use the words "secret commission" and "bribe" interchangeably in the leading cases on the subject.

If an agent acts for more than one party, he must disclose that fact, together with the details of his remuneration from that other agency, in advance: transparency is required.

If there is a dual agency, transparency can resolve legal issues over remuneration, but many other problems can arise.

When acting for two parties, an agent may well find that the interests of one of them conflict with the interests of the other. For whom should he act? Or whose interests should he serve?

The pragmatic answer may be to say that he should make a value judgment or discuss it with both parties.

The law, for reasons which are clearer in this situation, takes a rather stricter view, as it does with commissions.

Fresh intermediary
Unless the situation has been foreseen and provided for, the broker may not be able to act for either party. Each party may have to find a fresh intermediary, or resolve the conflict directly with the other party.

Neither outcome is particularly satisfactory, which is probably why the law requires full disclosure to, and informed consent by, a principal where an agent is going to act for another party.

Much modern regulation, even the widely dreaded ICOB, does little more than apply the fundamental principles of agency law to particular circumstances.

The only reason why regulation appears tougher is that it is presented more starkly than a series of lengthy court judgments and needs less legal advice in its interpretation.

Its enforcement is also much stricter, something which commands attention if not respect.

It does not help the broker that his commission for acting for the insured is determined (provided it is within the band of normal market rates) and paid by the insurer.

Furthermore, the precise degree of relationship between the entitlement to a second commission and the act of placing an individual risk is unlikely to be irrelevant altogether.

As already noted, the law takes a strict view. It does so not because, in the normal run of business, insurance brokers are considered likely to be engaging in malpractice, but because it has tended to develop from adverse experiences, whether from court decisions which are the result of disputes, or from statutes which are often the result of cumulative dissatisfaction with existing law.

Potential for improprieties
The main problem with acting for more than one party, as the law sees it, is the potential that it brings for a graduating scale of improprieties, occurring with diminishing frequency.

Therefore it seeks to prevent the choice of insurer being influenced not by the insured's best interests, but by the amount of additional commission, or by an invitation to place related reinsurance, or, at the most serious end of the spectrum, by bid rigging.

It does so by requiring the disclosure of any relationship that may lead to such a situation.

Recent FSA guidance on improper inducements follows similar principles. Of course, avoiding the likelihood of being a dual agent would have removed any incentive for such conduct, and would reduce greatly the need for compliance measures.

Other difficulties of a dual agency arise where the broker is also an underwriting agent and becomes fixed with knowledge on the part of one party. The law immediately imputes that knowledge to the other party.

Thus a broker who is also an underwriting agent may have a difficult, if not impossible, decision to make in relation to a client who discloses a particular negative risk profile, between offering that client cover on the one hand and doing his duty by the insurer on the other.

It may be that some 'fudge' is possible practically, but the law will probably take a stricter view and say that in such circumstances, the broker's primary duty is to the insured.

Yet how many brokers have considered how to deal with such situations, and how many disclose to clients when offering, for example, motor cover, whether or not they have an agency agreement with the insurer?

In the absence of that disclosure, the courts will expect the broker to pay absolutely no attention whatever to the interests of the insurer: see North and South Trust Co v Berkeley (1971).

At present, many brokers will be reviewing their commission arrangements. In many cases they will be analysing very deeply the role they intend to play in future.

They will then position themselves in the spectrum of agency relationships, with acting for the insured alone at one end and acting for the underwriter alone at the other.

Radical reappraisa
For historical reasons, the broker's position has been somewhere nearer the middle of the spectrum than is conducive to a simple analysis of for whom he is acting and to whom he owes his duties.

With the advent of FSA regulation along lines very similar to the common law, there is unlikely to be a better opportunity for a very long time for such a radical reappraisal.

To avoid a repeat of the unfortunate encounters with regulators and prosecutors in the last few months, brokers are likely to seek to balance commercial pressures with the FSA's regulations and the basic principles of agency law.

Since each of the latter is too long to retain in the mind, St Matthew's Gospel may still have a practical as well as a moral purpose. IT

' Christian Wells is partner of the insurance and reinsurance group at Lovells