Premiums increased after payment. Do I have to pay?

Insurance Helpline with Cedric Stephens

Question:

My vehicle is insured in a group scheme through a broker. I paid a part of the premium on November 30, 2010, for the coverage, which started the next day. The balance was paid one month later. On February 1, 2011, I received a letter dated January 21, 2010, which said that the premium had been increased because of claims, and also due to the fact that the insurer had disallowed a discount that it had previously granted. The broker is now refusing to issue a cover note or an insurance certificate. Is it legal to increase the premium after the policy has been sold to a customer and the premium has been paid?

- S.E.C., Kingston 10

HELPLINE:

Here are a few facts that you need to get straight. You are the boss. The insurance broker is mainly your agent - not the insurer's. In law, the broker owes a series of duties to you - lawyers use the term principal - the person for whom they are acting as agent.

Christopher Henley writes in an article, 'The professional liability of insurance brokers', that "brokers owe fiduciary duties to their client because they occupy a position of special trust and confidence. 'The distinguishing obligation of a fiduciary is the obligation of loyalty. The principal is entitled to the single-minded loyalty of his fiduciary".

Mr Henley continues: "The general law of agency requires insurance brokers to:

Perform all their principal's lawful instructions personally and in a timely fashion;

Exercise reasonable skill and care in the performance of their principal's instructions;

Act at all times in the best interests of their principals to avoid conflicts of interest, and to disclose to their principal fully any circumstances which may give rise to the appearance of a conflict;

Make full disclosure to their principal of their personal interest in any transaction."

Did these legal guidelines influence the actions of your broker? Or were the brokers simply trying to cover up their mistakes at your expense because they believed that they - not you - called the shots?

The premiums that brokers quote to their clients are obtained from insurers. Quotations in cases like yours are derived from written rates or underwriting guides that insurers prepare. The guides set out in great detail the profiles of the vehicles and drivers that the insurer likes and dislikes, and the methods that are to be used to calculate the premium.

Rate-making for affinity or group schemes is handled differently from other cases. Because the expenses that are associated with a single group policy are spread over many separate units, special discounts are often allowed to members of the group that a single buyer would not get.

These types of arrangements are no different from groups who pool their resources to buy basic foods or other commodities directly from wholesale distributors at lower prices instead of buying separately in smaller lots from retailers.

Room for making mistakes

There is lots of room for making mistakes in the two rate-making methods.

Brokers who take their duties seriously pay for mistakes by cutting their commissions. They view this is as one of the costs of business.

Other intermediaries take the short-term approach. They try to find all kinds of excuses and use strong-arm tactics to get their bosses - customers like you - to pay for their errors. The notion of "single-minded loyalty" applies solely to their income.

The market for motor insurance is as unstable as is the market for energy. Prices are always moving. The insurer of your group scheme reported losses of over J$300 million during the period 2007 to 2009. Could this be part of the reason why it decided to stop the discount that it previously allowed the members of your group?

Is it legal to increase the premium after the policy has been sold to a customer and the premium has been paid? The answer to your question is no.

I suggest that you remind the broker who is the master and who is the servant. Explain that they have not met your expectations as your professional agent and that you are giving them an opportunity to correct their mistakes. If that approach fails, I suggest that you contact the CEO of their very public parent company to seek redress. The latter method is guaranteed to work.

Cedric E. Stephens provides independent information and free advice about the management of risks and insurance. aegis@cwjamaica.com SMS/text message to 812-7233.