Brokers in the trenches

The controversy over monies owed by brokers to the estate of collapsed Independent Insurance has been reignited with the recent letters from the provisional liquidator, PricewaterhouseCoopers (News, 16 February 2006)

But the liquidator's demands for commissions and premiums to be paid by brokers could be the start of a long battle.

When PricewaterhouseCoopers (PWC) was appointed as the liquidator of Independent Insurance in June 2001 confusion reigned.

It was unclear what monies were owed to the failed insurer, and how much cash was left to be paid on outstanding claims.

Some brokers took the initiative to cancel policies with immediate effect. Meanwhile, PWC searched for a way to appease broker demands as the pressure mounted upon it to claw back cash to pay off unpaid claims.

The following year was spent bashing out a deal with brokers and, in June 2002, PWC proposed a settlement. Brokers would pay back commissions owed and 'time on risk' premiums.

For the broking community it was a bitter pill to swallow but still it averted the threat of a legal battle. The liquidator persuaded 90% of brokers to sign up. Peter Staddon, Biba's head of technical services, says: "The market unilaterally agreed the deal. PWC could have brought the market to its knees if it wanted. It didn't do that, it sought an alternative."

The 10% of brokers which did not sign up would face years of uncertainty, as it was not until early this year that PWC began telling them to pay up or face litigation. The tone of the liquidator's, letter together with the limited time given to pay back the cash, has once again riled brokers.

Staddon says allowing only 10 days for brokers to respond to its demands could provoke brokers into putting "obstacles in its way".

There are brokers who still say they won't hand over the money. Richard Roberts, a partner at Mid Counties Brokers, says the commissions the company earned from Independent helped it pay for the time spent transferring risks to alternative insurers after the insurer's collapse.

Black hole
He adds: "We wouldn't mind if it [PWC] said the commission was going to offset the claims still owed to the customer, but as far as we can see the money is going into a black hole to pay Independent's other debts."

Mike Slack, chairman of the Fyfe Group, did sign up to the initial agreement but says brokers should not be pressured by PWC's "bully boy" tactics.

He says: "PWC makes the rules up as it goes along. I say people should stand up to it. Everything it has done, it has done by using bully boy tactics."

But, lawyer Kenneth Underhill, a partner Reynolds Porter Chamberlain (RPC), says brokers refusing to pay are on shaky grounds. He says: "If they have received the benefit of the policy then they have to pay."

Staddon agrees. He says broker have to be "grateful" for the efforts of Dan Schwarzmann, the partner at PWC handling the Independent case. "Brokers are upset that they have to pay this money, but they have to do it," he says.

Where the broker continually refuses to pay up, policyholders are being contacted directly by PWC.

The letter, which was sent out in late January, reminds customers that they are legally obliged to pay premiums for time on risk, even if they have already handed the money over to their broker.

It says: "We have previously contacted your insurance broker requesting payment of this outstanding premium, but no settlement has been obtained. The responsibility for the payment rests with you..."

Legally, Underhill says, the policyholder cannot fight the liquidator. He says: "If you look at it from their point of view they [the policyholders] have had the benefit of the policy."

Staddon agrees: "This is a legally binding contract with PWC. Why should the broker be stuck in the middle of something like this?"

The question is easily answered, because brokers pride themselves on their relationships with their clients. When a letter of demand arrives on the doorstep from PWC, the client will contact their broker for advice.

Slack says PWC is using the client to increase the pressure on brokers: "It is a tactic to try to get at the broker," he says. "It is trying to shake up the clients so they go to the broker and force it to pay up."

When Michael Bright, the flamboyant former Independent boss, stands trial for conspiracy to defraud later this month it will undoubtedly make headlines.

How can a policyholder be expected to know the complicated workings of the insurers' collapse, when even brokers are uncertain about what is happening?

One broker, who didn't wish to be named, told Insurance Times: "My biggest problem is trying to explain this to clients, and understandably they are not very happy."

Regardless of this, there are likely to be some policyholders who refuse to pay, forcing PWC to seek legal action.

The liquidator's task of clawing back owed premiums and commissions is immense. There could be problems with tracing all the money owed. Further complications could become apparent when trying to ascertain whether policyholders have paid premiums to the broker.

And more confusion could arise when Bright comes to court.

Yet Biba's advice is that brokers and policyholders should work with PWC wherever possible. Litigation is a dangerous risk for brokers to take. As Staddon says: "There is no reason to fight it. Brokers should be reasonable." IT