Hobbins v Royal Skandia Life Assurance Ltd (Skandia) & Anor HCCL 15/2010 (6 January 2012), is the first case in Hong Kong regarding the legality of insurance brokers receiving commissions. In this landmark ruling, the court ruled that commissions paid by an insurer to an insurance broker are not illegal secret profits, unless they are in excess of what is normally paid in the insurance market. Robert Clark of Deacons acted for the successful insurer, Skandia.
Clearwater (an insurance broker) acted as Mr Hobbins’ agent to purchase Investment Linked Assurance Scheme (ILAS) products from Skandia. Clearwater (with Mr Hobbins’ knowledge) made money from commissions and fees paid by insurers (such as Skandia) whose ILAS products were purchased by Mr Hobbins. Mr Hobbins sought to set aside the investment schemes (as they were not doing well) and to be restored to the position he was in immediately before entering into them. Mr Hobbins sought restitution on the basis that, although Clearwater had disclosed to him that it would be earning commission from insurers, it did not inform him precisely how much commission it would be earning and had therefore breached its fiduciary duty owed to him as his agent.
Further, it was alleged that the contracts whereby Mr Hobbins purchased ILAS products from Skandia were illegal under Section 9(2) of the Prevention of Bribery Ordinance (PBO) or tainted by an underlying fraudulent misrepresentation. Section 9(2) of the PBO prohibits a person, without lawful authority or reasonable excuse, offering any advantage to an agent as an inducement to or reward for doing any act in relation to his principal’s affairs or business.
Issues considered and the Court’s decision
1. Was Clearwater Skandia’s agent?
No. There was an express term in the contract that Clearwater was not Skandia’s agent. Clearwater had no express or implied authority to act as Skandia’s agent and there was no suggestion that Clearwater had apparent authority to act as such. It is long established at common law that insurance brokers (such as Clearwater) are acting solely as agents for an insured. The mere fact that an insurer pays brokerage fees to a broker does not mean the broker is undertaking to perform any obligation on behalf of the underwriter.
2. Were Skandia’s contracts with Hobbins illegal under the PBO?
No. There was no breach of the PBO. There was “lawful authority” (consisting of a long line of judicial pronouncements dating back to the 19th century to the present) for the commercial practice that an insurance broker acts as an agent of the insured and not the insurance company. As a result of those judicial pronouncements, it has long been settled at common law that commission paid to an insurance broker by an insurer does not constitute an illegal secret profit, unless it is in excess of what is normally paid within the insurance market. There was no evidence whatsoever that the commission or fees which Clearwater received from Skandia were otherwise than that normally paid in the insurance market.
3. Was Clearwater in breach of its fiduciary, common law or statutory duty to Hobbins?
No. There was no breach of Clearwater’s obligation as Mr Hobbins’ agent to make adequate disclosure of the fact that it would receive commission from Skandia. An agent is a fiduciary and obliged (by equity) to disclose commission/fees earned from third parties in connection with the agent’s handling of the principal’s business. It is accepted practice at common law for an insurance broker to receive commission from an insurer, provided those commissions do not exceed the usual market rate. Clearwater had disclosed the fact that it would be remunerated by way of commissions and fees from insurers (such as Skandia). That should be regarded as minimum good practice for insurance brokers. To go beyond that and say that Clearwater should have disclosed the quantum of commission it expected to receive would be to impose a standard which would be at odds with case law on prevailing commercial practice among insurance brokers.
4. Was Skandia liable as principal for Clearwater’s breaches?
No. Skandia was not Clearwater’s principal and Clearwater was not Skandia’s agent. Further, Clearwater had not committed any breaches.
5. Were the ILAS contracts between Skandia and Hobbins void/unenforceable?
No. There was no misrepresentation by Clearwater and no illegality under the PBO.
6. Was there an obligation on Clearwater to make restitution?
This ruling will ease insurance brokers’ concerns about whether they can legally receive commissions. However, the judgment also demonstrates that brokers should obtain their clients’ consent before receiving commissions and that the amount of commissions should not exceed the usual market rate. It is advisable for brokers to include clear terms in contracts with their clients stating that they will receive commission/fees from insurers and recording that the client consents to this.