by Helmut Heiss
1. Commercial relevance
In the insurance industry, exceptional importance is accorded to the position of the insurance intermediary. As a matter of empirical fact, insurance cover products are often not purchased directly by consumers, but rather sold indirectly through salesmen specifically trained for this purpose. As a consequence, sales through contracts concluded in insurance company sales offices play a less prominent role. While telephone sales as well as sales over the internet have undoubtedly made a greater impact in the recent past, contracts concluded through insurance intermediaries still remain the most important mode of sale.
This outcome is due not least to the particular interest that customers have in advisory services. Insurance policies are legal products. As such, they are essentially shaped by the standard terms and conditions of insurance adopted individually by each insurance company as well as by the law of insurance contracts (insurance contracts) regulating the operation of the former. As a matter of law, insurance cover is defined using primary, secondary and tertiary classifications of risk in the standard terms and conditions of insurance. However, in reality, it is very difficult for insurance cover to be perceived in this way. As insurance companies develop these products, they are in a superior position as regards information. By contrast, concluding contracts of insurance is frequently an atypical transaction for their customers who consequently possess very little specialized knowledge about the technicalities of insurance and insurance law, on the basis of which they would otherwise be able to gain an extensive understanding about the insurance product in question (asymmetrical distribution of information). The information obligations increasingly imposed on insurers by both EU directives and national insurance contract laws (information obligations (insurance contracts)) are only partially suitable for overcoming this asymmetry. Even the fact that policyholders may have actually had experience with certain policies is not sufficient to effectively counter the risk of adverse selection as, comparatively, they would still have less information available to them. In the case of several important types of insurance (fire insurance, life assurance, etc), experience with the insured event is missing altogether (most policyholders never sustain fire damage; in the case of term life assurance, the insured event only occurs once). Due to customers’ insufficient capacity to make the relevant judgments, insurance policies are considered to be credence goods. Consequently, the customer is largely dependent on proper advice from the intermediary, upon whose recommendation he will normally rely.
The more insurance markets are internationalized and deregulated, the greater the need for advice on the part of the customer. Both internationalization and deregulation are currently taking place in the European single market. The freedom to provide services (Art 56 TFEU/49 ff EC) enables cross-border provision and purchase of insurance cover. The deregulation of insurance law, and in this instance especially the prohibition of ex ante checks on general conditions of insurance, allows for a variety of products to be offered, even on national markets. At the same time, customers can only partly take advantage of the variety of products available as a result of both internationalization and deregulation, as there are no means of product evaluation open to them. There is thus a very real risk of adverse selection. As a consequence, the insurance intermediary plays a crucial role in the efficient functioning of deregulated and internationalized insurance markets in Europe.
2. Types of intermediaries, mixed types and structural shortcomings
The different types of intermediaries active on the relevant markets are commonly divided into insurance agents and insurance brokers. An insurance agent is any person who negotiates insurance contracts on behalf of the insurer. It is irrelevant whether the agent acts as an employee of the insurer or whether he is self-employed. In both cases, the agent has a contractual obligation to the insurer and therefore owes loyalty to him. Some legal systems also recognize additional professional duties (in particular the duty to advise) which the insurance agent has to carry out for the benefit of the customer. In contrast, an insurance broker is someone who is assigned by the policyholder to negotiate an insurance contract. Insurance brokers are, in general, self-employed. Their contract with the policyholder obliges them to act as an agent and in the best interests of the customer. In short, it is often said that brokers owe their customers ‘best advice’. As a consequence, an insurance broker—as opposed to a general broker—undertakes, in particular, the following duties: a) a duty to act; b) a duty to acquire the ‘best possible’ insurance cover for the ‘best possible’ premium; c) a duty to negotiate with a solvent insurer. A broker, thus, regularly analyses the risk involved for the customer, searches the relevant insurance market and provides the customer with a recommendation. A broker is therefore often viewed as the ‘arbiter of the market’.
In practice, different types of intermediaries for whom elements of agency have been mixed with elements of brokerage have developed in insurance law. This holds true, first, for so-called multiple agents. If an agent represents several insurers at the same time and is consequently in a position to offer customers different and competing insurance products, the insurance agent takes on a role which resembles that of an insurance broker. This is risky for the customer insofar as he does not have a contractual relationship with the insurance agent, who, as a multiple agent, is not obliged to provide ‘best advice’ when recommending specific products from this range.
Conversely, there are brokers who have such close ties with an insurer that the customer can no longer presume to be receiving independent advice. Such structural interdependencies may result from the insurer acquiring shares in the broker’s company (which may make the broker a ‘captive’ broker), from agreements on exclusive agency (‘exclusive broker’), from personal interdependence or even from financial benefits. On the one hand, the intermediary thus acts as a broker for the purpose of his dealings with the customer and is also under an obligation to provide ‘best advice’; on the other hand, however, his economic situation suggests that he will merely act as an insurance agent (‘pseudo-broker’). Finally, there are insurance intermediaries who, in accordance with special professional provisions, hold licences qualifying them as agents as well as brokers (broker-agents). All three mixed forms are problematic from the perspective of protecting the customer. With multiple agents, the customer feels as though he has been advised by a broker; at the same time, however, the agent is not obliged to provide independent advice. In relation to brokers, although the customer has a right to ‘best advice’, this right is systematically undermined by a broker’s ties with the insurer (‘pseudo-broker’). In the case of ‘broker-agents’, the customer often does not know whether the intermediary is acting as an agent of the insurer or as a completely independent broker. Therefore, on receiving erroneous advice, he is oblivious to the following points: whether the intermediary is liable to him as a broker or only as an agent; whether a claim can, if necessary, be made against the insurer in the background; and finally, against which of the several insurers a claim can be made in lieu of the intermediary (lack of status transparency).
Regarding the problem of mixed type intermediaries, further structural deficiencies are to be noted. This makes the possibility of obtaining impartial and expert advice seem rather doubtful for the customer. The insurance intermediary’s professional qualifications are of particular concern in this context. In various EU Member States, becoming an insurance intermediary was, until recently, not subject to professional regulation; furthermore, the activity could be pursued without proof of the relevant expertise. Even more significantly, according to the prevailing system of commission, intermediaries are not remunerated based on the advice provided to customers, but rather based on the number of contracts concluded. By using this type of commission agreement, an insurer can thus transfer his interest in making sales to the intermediary. The intermediary again finds himself placed between the financial incentive of concluding as many contracts as possible for the highest possible insurance sum and the requirement of providing the customer with comprehensive advice. Aligning intermediation services with the insurer’s interest in making sales is, in principle, a legitimate activity for agents. In contrast, the currently prevalent structure of the commission system for insurance brokers constitutes a failure from the outset. Although they are employed based upon mandates from policyholders and, therefore, owe them ‘best advice’, their commission (‘broker’s fee’) is paid by the insurer. The conflict of interest this produces is self-evident.
3. Insurance Mediation Directive
The Insurance Mediation Directive (Dir 2002/92) tackles at least some of the structural problems mentioned above. First, in Art 3(5), it guarantees the insurance intermediary the freedom of establishment and freedom to provide services (free movement of services). Intermediaries are thereby able to make the contribution expected of them to the process of creating an internal insurance market.
In order to pursue activities on the market, insurance intermediaries must be registered (Art 3(1) in conjunction with Art 8(1) of the Insurance Mediation Directive). Registration itself is conditional upon compliance with certain professional requirements. These include personal integrity, adequate professional qualifications and financial security (Art 4 of the Insurance Mediation Directive). In Art 12(2) and (3), the Insurance Mediation Directive also recognizes the intermediary’s duty to advise. Pursuant to Art 12(3), every intermediary is under an obligation to enquire into the demands and needs of his customers for the purpose of providing adequate consultation services. The duty to advise is not tied to the professional title of the intermediary as either an insurance agent or an insurance broker, but rather to the individual behaviour of the intermediary towards the customer. Pursuant to Art 12(1)(ii), the intermediary has to inform the customer about the conditions under which he is providing his advice. In doing so, there are three possibilities. First, the intermediary can give advice on the basis of a ‘fair analysis’. Second, he can be obliged to conduct the intermediation exclusively with one or more insurance undertakings. Finally, unless there is a contractual obligation to the contrary, he can also provide advice which is not based on a fair analysis. These three options essentially correspond to the roles of the insurance broker, the simple agent and the multiple agent. A duty to advise is only explicitly mentioned in Art 12(2). It is applicable in situations where the intermediary has informed the customer that his advice is based on a fair analysis, ie in the way that is typical for insurance brokers. The intermediary’s advice must therefore be based on an analysis of a ‘sufficiently large’ number of insurance contracts available on the market, and he must have the relevant professional qualifications. The intermediary must recommend a contract to the customer on the basis of these two aspects.
The statutory duty to advise and the liability arising as a consequence of any breach of that duty certainly do not undo the incentives ensuing from the commercial ties the intermediary may have with a particular insurance undertaking. The Insurance Mediation Directive also does not prohibit such ties. It provides for duties of disclosure on the part of intermediaries, albeit only to a very limited extent. In accordance with Art 12(1)(c) and (d), this especially applies to the reciprocal acquisition of shares as between the insurer and the insurance intermediary. The intermediary does not have to inform the customer of any other commercial ties. Notably, the directive does not tackle the key issue of the current commission system. It does not establish a fee system for insurance brokers, according to which the customer would have to remunerate the broker in line with the time and effort invested by him, nor does it demand disclosure of the amount of commission paid to the broker by the insurer. The false incentives for insurance brokers in the current commission system are thereby preserved in the European single market.
4. The law on intermediation in the Principles of European Insurance Contract Law (PEICL)
The Principles of European Insurance Contract Law (PEICL) do not contain autonomous provisions on intermediation. For one, this has to do with the PEICL’s limited material scope, which deals only with matters of insurance contract law. Thus, only questions of imputation are dealt with (questions of representation), ie primarily those relating to the liability of the insurer for his agents and for ‘pseudo-brokers’. These issues are governed by the PEICL in Arts 3:101 and 3:102. Furthermore, the law on intermediation deals with matters relating to professional standards and the personal (professional or contractual) duties of the intermediary vis-à-vis customers. These issues are therefore not the subject matter of a European insurance contract law. Moreover, they cannot be governed by the PEICL because, pursuant to Art 1:102, the latter have been drafted as an optional instrument, which is only employed if the insurer and the policyholder contractually agree to its application. An agreement reached by the insurer and policyholder inter se cannot, however, govern the intermediary’s behaviour towards the customer without his prior consent.
Attila Fenyves, Klaus G Koban and Martin Schauer (eds), Die Versicherungsvermittlungs-Richtlinie (2003); CMS Cameron McKenna, Insurance Broking Practice and the Law (2007); Peter Reiff, ‘Das Gesetz zur Neuregelung des Versicherungsvermittlerrechts’  Versicherungsrecht 717; Malcolm Clarke and Julian Burling in Malcolm Clarke (ed), The Law of Insurance Contracts (6th edn, 2009) chs 7-9; Jürgen Basedow, John Birds, Malcolm Clarke, Herman Cousy and Helmut Heiss (eds), Principles of European Insurance Contract Law (PEICL) (2009).