Robert Vivian is Professor of Finance & Insurance, School of Business Sciences, Wits University, and a member of the Free Market Foundation’s Rule of Law Board of Advisors.
The views expressed in the article are the author's and not necessarily shared by the members of the Foundation.
This article may be republished without prior consent but with acknowledgement to the author.
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This article was first published by Medsuite on
1 October 2022 (see hard copy below)
Common-law position of member, broker and medical scheme
In a previous article I discussed the substantial role insurance brokers played in the creation of the South African insurance market and touched on the role of brokers in the medical schemes market. There is of course a vast difference between insurers and medical schemes. The differences are both historical and factual; I pointed out the reason for that. This article focuses on the announcement by the Council or Medical Schemes that it intends to revise Circular 20 of 2010, which largely governs the operation of brokers in the medical schemes market. To this end the Council for Medical Schemes published Circular 35 of 2022 setting out its proposals and calling for public comment.
The reason for the proposed revision of the broker’s role was the 2020 ruling by the Appeals Committee of the Council for Medical Schemes in the matter of Bonitas Medical Fund and another v Ramaph Healthcare Consultants and another November 2020 (Ramaph 2020). In this matter Bonitas appealed a decision made by the Registrar of Medical Schemes. Bonitas’ appeal was dismissed. Essentially, it seems the Appeals Committee was trying to protect the “individual member’s right to choose a broker” (paragraph 57). Bonitas’ position, according to the Committee, would undermine that right. The Appeals Committee appears to be the upholding of the parties common law rights.
It goes without saying if no regulation at all existed the matter would be resolved in terms of the common law and there would be no litigation. The court would simply enforce the well-established voluntary contracts the parties entered into. The point of departure of the analysis is thus to understand the common law position of the member, the broker and the medical scheme.
The various positions of the parties can be gleaned from relevant court cases. One of the earliest cases, 1928, involved a Paris jeweler, Mr Rozanes who engaged the services of a broker Mr Alfred Hacco to secure insurance covering his stock. He had endured a number of losses and his existing insurer indicated it was going to increase the premiums and so Mr Rozanes decided to change his insurance to Lloyd’s.
In arranging this insurance he failed to inform Lloyd’s of the previous losses. When asked in the proposal form about previous losses he only detailed one loss. After the policy came into force Mr Rozanes experienced a substantial loss which Lloyd’s declined to pay because of the failure to disclose the losses. Mr Rozanes disagreed. His version was that he gave all the information to the broker Mr Hacco who also read out each question in the proposal form which he Mr Rozanes said he truthfully answered but left it to the broker to complete the form. He also indicated he has signed the proposal form in blank.
Sadly, by the time of the case Mr Hacco had died, so only one side of the story could be told. In law Mr Rozanes argued the broker was the agent of Lloyd’s, and thus when he provided the information to Mr Hacco, in law, so his argument went, he had advised Lloyd’s. He argued Mr Hacco was the agent of Lloyd’s since after all Lloyd’s paid Mr Hacco. Mr Rozanes did not pay the broker a fee for services rendered. Further the proposal form he signed indicated the name of Lloyd’s and that of the broker. This case gave the court to opportunity to clarify the legal relationships between the insured, broker and insurer.
Clearly the insured does not pay the broker. The broker is paid a commission by the insurer. So, the relationship between the insured and the broker is not the normal contractual relationship where there is a fee for service. It is generally accepted the contract which exists in that of mandate. The insured gives the broker a mandate to place his insurance. Mr Rozanes’ view that the broker was the agent of Lloyd’s did not succeed. The Lloyd’s market consists of a number of independent syndicates. The broker can approach any of a number of individual underwriters who may accept or decline the proposal. No individual underwriter had appointed the broker as its agent.
The underwriter decides whether or not to accept the risk presented. When the broker is paid a commission, it is for bringing business which is accepted by the insurer. The commission is part of the business acquisition costs. It is not a fee for a contractually agreed service.
To summarise the common law position is:
In my previous article I pointed to an unnoticed problem which has arisen. When legislation intervenes, it may completely change the situation. The common law position may not be applicable or even achievable. It may no longer even be clear what is the nature of the contract. It is not what parties agree to, but something created by legislation. So, in the Ramaph case, where the Appeals Committee indicated it is trying to uphold the member’s right to enter into a broking agreement, the question becomes is that even possible? Once that is answered the question becomes: What does the proposed circular defining the operation of brokers in fact achieve? The answers to these two questions and others are left for future articles.
- The insured gives the broker a mandate to place his or her insurance. For this purpose, the broker is the agent of the insured. The broker places the application for insurance before an insurer;
- The Insurer decides whether or not to accept the application and specifies the premium;
- If the insurer accepts the application the broker is paid a commission, from the premium. In this case the broker is not the agent of the insurer.