Intermediaries

• Author: Denis Boivin
• Pages: 196-240

196

CHA PTER 6

INTER M EDI AR IES

A. INTRODUC TION

The insurance industr y would soon grind to a halt if it were not for inter-

mediaries. An insurance inter mediary is a person who comes between

insurers and in sureds in order to assist them w ith their relationship.

They are the faces seen by consumers of in surance; the voices heard

over the phone; the men and women who sell and service insurance

products. The main type s of insurance intermedi aries are agents, brok-

ers, and adjusters. In this ch apter, we will look at the role played by

intermediar ies in the formation of insurance contracts; hence, the dis-

cussion will be concerned mostly with insurance agents and brokers.

The impact of intermediarie s on the enforcement of insurance contracts

(that is, the role played by adjusters) will be considered in Chapters 9

and 11.

Intermediaries play a key role in contract formation: an insurance

contract is rarely negotiated without the as sistance of an insurance agent

or broker. Intermediaries carr y out many functions during this process,

depending on the terms of their specif‌ic mandates. They can help con-

sumers f‌ind the coverage that best corresponds to their needs. They can

provide information and advice about the avail able coverings, their

purpose, and their cost, a nd answer any questions regarding these mat-

ters. Intermediar ies can help prospective insured s complete insurance

applications. They can estimate t he premium that will be due and, in

some cases, offer interim coverage while the proposal is under review.

Intermedi aries 197

They can submit the application and communicate the insurer’s ac-

ceptance or refusal. In brief, insurance intermediaries are the conduit

through which many insurers and insureds conduct their negotiations.

The regulatory framework that applies to agents and brokers has

already been outlined in Ch apters 1 and 3.1 This chapter deals with an-

other dimension of this framework: the common law. In particular, we

will disc uss the legal impact of errors, omissions, and wrongful acts

that occur during contract formation and that may be traced to the in-

volvement of an intermediary. When the process run s smoothly, the

fact that intermedi aries are involved is of little legal signif‌icance. A con-

tract negotiated with the help of an in surance agent or broker has the

same validity as one purcha sed online, directly from the insurer. But

what happens when things go w rong? What is the legal signif‌icance

of an error, omission, or wrongful act attr ibutable to the intermediary?

Assume, for instance, that an applicant verbally discloses a material

fact concerning the risk for which insurance is being sought. Assume

further that t he intermediary who is f‌i lling out the proposal omits thi s

fact, either by accident or because she erroneously assume s that this

information is not relevant. Relying on the pr inciples discussed in

Chapter 5, can the insurer nullify the contract based on failure to dis-

close? If the insurer is able to avoid the contract, what remedies are

available to the applicant as again st the intermediar y?

Generally speaking, policyholders have two potential avenues of re-

dress when mistakes occur duri ng the negotiation process: (1) the “attri-

bution avenue” and (2) the “liability avenue.” With the f‌irst, the in sured

may claim under the in surance policy and argue that the contract re-

mains valid or applicable notwithstanding the er ror, omission, or wr ong-

ful act traceable to the intermed iary. With the second, the insured

may seek compensation direct ly from the intermediar y and argue that

the contract is void or inapplicable because of his er ror, omission, or

wrongful act. As a matter of logic and pr inciple, the insured’s princi-

pal recourse should be under the insura nce contract. If the attribution

avenue is successful, the insured will be indemnif‌ied by his insurer in

accordance with the term s of the policy, as though the mistake never

occurred. In thi s scenario, the insurer may want to seek some form of

contribution from the intermedia ry, but there would be no reason for

the policyholder to pursue the liability avenue. Indeed, from the per-

spective of insureds, it is nece ssary to hold intermedi aries personally

accountable for their errors, omissions, and wrongful acts only when

their mistake s have an actual impact on the validit y or applicability of

1 See Chapter 1, Sect ions D(1) & (2); Chapter 3, Section C(2).

INSURANCE LAW198

the contract that was formed as a re sult of their involvement. As a re-

sult, in this chapter, we will address both avenues of redress sepa rately,

in the order in which they should be pursued and pleaded.

B. THE ATTR IBUTION AVENUE —

UPHOLDING THE CONTR ACT

In this section, we addres s one basic question: as between the insurer

and the insured, which contract ing party should bear the consequences

of an error, omission, or wrongful act committed by an in surance inter-

mediary dur ing the negotiation process? In Section C, below in this

chapter, we will review the circum stances in which the intermediary

may be personally liable for his mistakes, but Section B deals with the

impact of these mistakes on the validity or applicability of the insur-

ance contract. To a large extent, the answer to this question depends

on the extent of the express and implied authority possessed by t he

intermediar y and on whether this authority comes from the in surance

applicant or the insurer. However, as we shall see, the answer also de-

pends on a handful of legi slative provisions and on whether the insurer

has created the appea rance of additional authority by maki ng represen-

tations to the prospective in sured with respect to the intermediary’s

authority.

1) Agency Law

At the outset, it is necessar y to give a brief summar y of agency law

as it applies to insurance inter mediaries.2 In insurance law, an inter-

mediary is f‌irst and foremost an “agent.” In this context, the ter m is

used in a broader sense th an it has been used thus far. In the law of

agency, an agent is someone who acts under the authority of his prin-

cipal and whose function it is to car ry out a specif‌ic mandate. Agents

operate in all spheres of social i nteraction. With respect to the forma-

tion and enforcement of insurance contracts, this def‌i nition embraces

all insurance intermediaries, including agents (in the strict sense of

the term), brokers, and adjusters. Potentially, it also includes people

who facilitate the sale and service of insurance products but who are

not licensed to act as agents, brokers, or adjusters. For example, f‌i-

nancial inst itutions and automobile dealerships will often play roles

2 For a complete review of agency la w, see Gerald HL Frid man, The Law of Agency,

7th ed (Toronto: Butterworths, 1996); Cameron Har vey & Darcy MacPherson,

Agency Law Prime r, 4th ed (Toronto: Carswell, 2009).