Who Do Insurance Brokers Really Work For? Amendments to Taiwan's Insurance Act Relating to Brokers

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1 Who Do Insurance Brokers Really Work For? "Insurance Broker" Defined An insurance broker is a person or business that negotiates insurance contracts or provides related services in the interest of the person covered by the insurance (the "insured"), and earns a commission or compensation for doing so. Taiwan's legal system classifies insurance brokers as one kind of "insurance auxiliary," a category that also includes insurance surveyors and insurance agents. Insurance brokers are required to consider and act in the interest of the insured. In addition to helping the insured to choose and sign insurance contracts (policies), brokers may provide other insurance related services and receive fair consideration for doing so. Amendments to Taiwan's Insurance Act Relating to Brokers "Insurance broker" is defined in Article 9 of Taiwan's Insurance Act. Before it was amended on 18 July 2007, Article 9 read: The term "insurance broker" as used in this Act means a person who, based on the interests and on behalf of the insured, negotiates an insurance contract with an insurer, and collects a commission from the insurer that underwrites the insurance. Legislative comments to the 2007 amendment to the Insurance Act explained that: When an insurance broker brokers an insurance policy, it is entitled to charge a stipulated commission (from the insurance enterprise). In practice, in addition to brokering the signing of insurance policies, insurance brokers also play a role in consultation, risk assessment, and other follow-up services. Even if an insurance policy is not signed and so the broker does not earn a "commission," the broker still deserves to be compensated for the professional services that the broker provides. Article 9 is therefore amended to conform to actual insurance practice and to broaden the scope of business that may be handled by insurance brokers. The amended provision reads: The term "insurance broker" as used in this Act means a person who, based on the interests of the insured, negotiates an insurance contract or provides related services and collects a commission or remuneration. Thus, before the 2007 amendment to the Insurance Act, insurance brokers relied on commissions from insurance enterprises as compensation for their services. But since

2 the 2007 amendment, in addition to those commissions, they also may charge fees to insureds for providing consulting, risk assessment, and related services. Before the Legislature amended the Insurance Act in 2011, the Act required insurance brokers to provide their services "based on the interests of the insured." Why are brokers, acting on behalf of the insured, permitted to charge commissions to the counterparty to the insurance contract, i.e. the insurer? And under the current operative version of the Act, insurance brokers derive income not only from the insurer but also the insured. This increases the complexity of the broker s role. Legal Nature of the Insurance Broker's Role The broker as an intermediary under Taiwan s Civil Code It is generally held by scholars of insurance law that an insurance broker's mission is to negotiate insurance policies with insurers on behalf of insureds, rather than to act as an agent for contract signing. That is to say, an insurance broker should take stock of the interests of the insured and assist the insured to choose the most suitable insurance policy (and insurer). But the broker's primary function still remains that of an intermediary who matches up the two parties to an insurance contract with the objective of getting the contract signed. And the insurance broker does not sign the insurance policy on behalf of the insured. So the legal relationship of an insurance broker to the two parties of an insurance contract is indeed that of an intermediary, which is to say that of a "broker" in the specific sense that term is used in Taiwan's Civil Code. Taiwan's Civil Code defines "brokerage" as:...an arrangement whereby one of the parties agrees to inform the other party of the occasion to establish a contract, or to act as intermediary for the establishment of the contract, and such other party agrees to pay him remuneration. There is no question that an insurance broker serves as an intermediary, and thus as a broker in this sense, for the establishment of an insurance contract between the insured and the insurer. But Taiwan's Civil Code further provides as follows concerning the remuneration of brokers: Unless otherwise provided for by contract or by custom, each party to the contract shall bear an equal part of the remuneration to which the broker is entitled for having acted as intermediary.

3 The Insurance Act, in contrast, requires the insurance broker to turn solely to the insurer for the commission for the broker's intermediary services in the establishment of the insurance contract. It is a fundamental principle of Taiwan's legal system that specific provisions of law take precedence in application over general provisions. This raises the question of whether we can consider the provision of the Insurance Act concerning remuneration for brokers to be a specific provision that overrides the general provision made in the Civil Code. The broker as a mandatary Some other scholars of insurance law, meanwhile, hold that an insurance broker is by nature an agent of the insured, and acts on the mandate of the proposer (the person applying for the insurance), on behalf and in the interest of the insured, to negotiate the insurance policy with the insurer. Further, although the insurance broker collects its commission from the insurer, that commission ultimately comes out of the insurance premium paid by the proposer. So the commission actually should still be deemed remuneration received from the proposer, which puts the broker in the role of a remunerated "mandatary" (a person who acts under a mandate from another) under Taiwan's Civil Code. The broker as an agent or servant of the insurer In actual practice in the insurance field, in addition to negotiating insurance policies for insurers, insurance brokers routinely are authorized by insurers to collect premiums from proposers (or insureds) and to deliver the insurance policies to them or to handle matters in connection with insurance claims. Under such circumstances, the insurance broker's role is in the nature of an agent or servant of the insurer. The broker in the eyes of the courts It is not just scholars who hold differing views on the legal nature of the role of insurance brokers. In judicial practice, courts have also diverged on this issue. Some courts have held that the relationship between the insurance broker and the insured is a mandate relationship. But other courts have held that the insurance broker is an intermediary who brings together the proposer and the insurer to establish the insurance contract, and is thus a "broker" as defined in Taiwan's Civil Code. Regardless of whether an insurance broker, in its role as intermediary for the establishment of an insurance contract, is understood to be a mandatary or an

4 intermediary (broker) under Taiwan's Civil Code, the insurance broker still retains the legal duty to exercise the "due care of a good administrator" or to handle its business with fiduciary responsibility and good faith under Taiwan's Civil Code. So the insured still enjoys the same protection under the law, regardless of which legal role the broker is understood to play. Nevertheless, the roles of broker and mandatary do have certain different legal implications. For example, under the Civil Code, a broker is prohibited from seeking reimbursement for expenses unless specifically agreed upon. A mandatary, on the other hand, is entitled to request payment of necessary expenses in advance. Perhaps the most significant way in which the roles of broker and mandatary differ in legal nature is whether an insurance broker can be held criminally liable for breach of fiduciary duty. In current judicial practice, a mandatary can be held criminally liable, but a broker (in the sense of a simple intermediary for the establishment of a contract) cannot. Additionally, some courts have held that if an insurance broker is authorized by an insurer to collect insurance premiums from proposers, deliver insurance policies, or handle matters in connection with claims, the broker is also acting as an agent of the insurer. Such as: when Taiwan's insurance companies offer group insurance policies, they typically promote the policies through insurance brokers. Because such policies are standard contracts, the insurance brokers are not actually negotiating the policies in the interests of the insured, but rather are actively promoting the policies as-is in pursuit of commissions. A court in one case even held considering the nature of such contracts and transactions, in which an insurance broker signs a brokerage service contract with an insurer without even knowing the identity of the individual insureds, which it is then up to the broker to solicit that the insurance broker was acting in a capacity legally tantamount to a salesperson of the insurer. But in other cases courts have taken a diverging view and held that the fact an insurance broker collects a premium on behalf of an insurer does not necessarily mean that the insurance broker is acting as a servant of the insurer. Conflicting Interests Insurance brokers are required by law to act on behalf and in the interests of the insured and to use their professional expertise and experience to select the insurance that is best suited to the insured. In theory, then, they should act as an agent of the insured. But in general practice in the insurance industry, and as specified by the Insurance Act, insurance brokers obtain their commissions from insurers. This state of affairs raises the question: who do insurance brokers really work for? Can brokers on the payrolls of insurers truly be relied on to select the most suitable policies for insureds? Not to mention that in actual practice, insurance brokers are often under

5 contract with insurers, and receive certain commissions calculated as a percentage based on the amount of business done by the broker or on the profits of the insurer. This method of calculating compensation, which closely aligns the business of insurance brokers with that of insurers, invites further skepticism about whether insurance brokers can be expected to act impartially in the interests of the insured, and underscores the conflicting interests at play in their role. The duties of insurance brokers to exercise the care of good administrators and to avoid conflicts of interest are expressly stated in the Regulations Governing Insurance Brokers and in the Code of Professional Ethics and Self Regulatory Agreement of insurance brokers. And as mentioned before, regardless of whether the nature of an insurance broker under the law is understood to be that of broker, mandatary, or agent of the insurer, the insurance broker still has the legal duty to exercise the "due care of a good administrator" or to handle its business with fiduciary responsibility and good faith under the Civil Code. But these legal provisions and rules cannot immunize insurance brokers from concerns about conflicts of interest. Evolving Insurance Brokerage Services Heighten Conflicts of Interest New insurance marketing channels It was long the conventional practice of Taiwan's insurance enterprises to rely on their own networks of solicitors as their primary marketing vehicle. But in recent years new marketing channels have proliferated across the insurance industry worldwide for example telemarketing, Internet marketing, and marketing through banks and television shopping channels and insurers are relying on professional marketing consultants to grow their customer bases and survive in an increasingly competitive market. In the international insurance market, insurance brokers are heavily relied on as a source of insurance business, and the larger insurance brokerages in particular control a hefty share of large and important insurance business. The rise of institutional insurance consulting and risk management services Recent years have seen great change in the role of insurance brokers. In addition to their conventional role as intermediaries who bring together parties to insurance contracts, insurance brokers today also provide professional risk management services, such as loss prevention and management strategies for insureds, in particular for commercial policyholders, as well as reinsurance brokerage services for insurers. Enterprises can use insurance to shift their operational risk to the insurer, but excessive insurance premiums may also adversely affect corporate performance. And

6 insurance can never completely indemnify the insured against loss from insured perils. Whether an enterprise has its own risk management mechanisms and loss prevention measures is a factor that may influence the insurer's underwriting (insurability) review and calculation of the premium price. Insurance brokers, with their familiarity with various kinds of insurance policies and years of experience helping insureds pursue claims, are well positioned to provide companies with expert advice and assistance on how to identify and control their existing risks. This can accelerate the insurer's underwriting review process and, what is more, can fundamentally help the insured enterprise to lower and control its operational risk, improve its performance, and achieve its goals. Professional loss prevention services have therefore gradually emerged as a key service offered by insurance brokers. This is in line with the legislative comments to the 2007 amendment to Taiwan's Insurance Act, which stated that the amendment was adopted for purposes of conforming to actual insurance practice and broadening the scope of business that insurance brokers may handle, so that in addition to commissions for brokering insurance contracts, the brokers also may receive compensation for providing consulting, risk assessment, and other insurance related services. In the international market, it has long been common for insurance brokers to broker reinsurance contracts, but there is still unmet demand for this kind of brokerage service in Taiwan's insurance market. Taiwan's reinsurance market remains lacking in underwriting capability, expertise, and experience, so there is an urgent need for international reinsurance. The large institutional insurance brokerages that have emerged in today's global insurance market can use their global resources to provide timely and diversified service in brokering reinsurance policies, which can increase the underwriting capability and competitiveness of Taiwan's own insurance enterprises. In recent years, a trend has also been seen toward international insurance brokerages going a step further and establishing professional consulting companies to provide such value-added services. Who Do Insurance Brokers Really Work For? Although insurance brokers are expected by law to apply their professional expertise and price negotiation ability to negotiate insurance policies with insurers on behalf and in the interest of the insured, the fact remains that in this intermediary capacity

7 they are providing contract brokering services to both parties: the insured and the insurer. If the services an insurance broker provides to an insured extend beyond policy brokerage services to, for example, loss prevention and risk control services, the insurance broker can be understood as a mandatary acting on the mandate of the insured to provide such services specifically to the insured. And if an insurance broker receives the mandate of an insurer to collect premiums from insureds, or to seek suitable reinsurance to share some of the insurer's risk, then the broker might be understood as a mandatary acting on the mandate of the insurer, or as providing reinsurance policy brokerage services to both the insurer and the reinsurer. Insurance brokers thus play multiple roles. A broker may simultaneously provide different but related services to the insurer, the insured, and even the reinsurer. How the laws apply to these relationships must be examined on a case-by-case basis, looking at whom the insurance broker is providing services to and the factual substance of the services. Only then can the relevant laws and their application be specifically determined. The ongoing evolution of the services offered by insurance brokers has naturally exacerbated the potential conflicts of interest among the roles played by brokers. In addition to effective supervision by insurance regulators and appropriate legal strictures, the greatest key to avoiding problems of conflict of interest is selfregulation by the insurance brokers. After all, astute business managers know that expertise is not everything, and that practicing good faith is equally key to succeeding and staying competitive in a challenging market. Chen Hui-ling leads the Winkler Partners insurance practice. For more information, she can be contacted at +886 (0) ext. 555 or at hchen@winklerpartners.com.