When a broker is instructed to obtain insurance and employs a sub-broker to place all or part of the business, the presumption is that the broker, not the sub-broker is responsible to the insured.

The doctrine of privity of contract states that someone who is not party to a contract can neither take the benefit of it nor be subject to its obligations.

This means that the sub-broker cannot be responsible in contract to the insured (unless the broker is authorised to effect a contract on behalf of his principal, or the principal confirms the intended contract with the sub-broker).

In May 2000 this doctrine was abolished by the Contracts (Rights of Third Parties) Act 1999. A third party can now enforce a contractual term if the contract confers a benefit on them and it does not exclude the operation of the Act.

Can the principal now use the Act to obtain redress from a negligent sub-agent?

A leading case upon the liability of insurance brokers – the second Superhulls Cover case [1990] – confirmed that an insurance broker can be concurrently liable to the insured in tort and contract. It also found that a sub-broker is not liable to the insured in either.

In fact, the broker and sub-broker were independent at the time of the contract that gave rise to the litigation, but had subsequently merged.

The devolution of liability after their merger was not an issue, since they constituted one entity and would be liable as such. But there was an issue about which company would be liable prior to the merger.

In his summary the judge, Mr Justice Phillips, said that the sub-broker was a sub-contractor whom the broker, as the client's primary reinsurance broker, employed to perform certain functions. The broker, accordingly, remained liable for any breach of its duties as that primary reinsurance broker, whether the fault was its own or that of the sub-broker.

Any tort in a storm
A spanner was then thrown into the works in the shape of Henderson v Merrett [1994], which gave rise to the possibility that a sub-broker could owe duties to the insured.

In Henderson v Merrett a Lloyd's Name had a contract with a Lloyd's member's agent. The agent advised the Name of syndicates in which the Name should participate. The member's agent then placed the Name on those syndicates.

The member's agent had a contract with a managing agent, which managed and underwrote for the relevant syndicates. The Name did not have any contractual link with the managing agent, although he did have a contract with the member's agent.

In this case the Name sued the managing agent in tort for negligent underwriting and the question was whether there could be any concurrent liability in tort between the Name (principal) and the managing agent (sub-agent) where a contract existed between the member's agent and the managing agent.

The House of Lords decided in favour of the Name, and of the argument that the managing agent owed a duty of care to the Name in tort.

Many cases since the 1960s have extended the liability of professional people in tort concurrently with their liability in contract. Affected professionals include bankers, solicitors, surveyors, accountants and insurance brokers.

But none of these cases involved a sub-agent, and Lord Goff specifically stated in Henderson v Merrett that: "It cannot be inferred from the present case that other sub-agents will be held directly liable to the agent's principal in tort."

Some eminent QCs and other lesser mortals have endorsed the view post-Henderson that a sub-broker could be liable to the insured in tort concurrently, for breaches of their contracts of agency with the broker.

This now appears to have been laid to rest by Pangood Ltd v Barclay Brown and Bradstock Blunt & Thompson Ltd [1999], in which the Court of Appeal firmly slapped down this and other canards.

Not so fast m'luds
A sub-broker had obtained a quotation for fire insurance at a nightclub from Lloyd's underwriters, which contained an "auditorium warranty" requiring certain daily precautions to be carried out. This was sent to the broker, who confirmed that the cover should be obtained as quoted.

A claim for fire damage was later made but rejected because underwriters alleged that it had been caused by a lighted cigarette which had not been cleared away in breach of the warranty.

The insured sued the broker for failing to alert it to the existence of the auditorium warranty, who alleged in its defence that it had so informed the insured.

The broker also claimed a contribution from the sub-broker in the event that the insured was successful against the broker, on the basis that the sub-broker should have explained the requirement of the auditorium warranty to the insured and that its failure to do so was negligent and a breach of contract.

The court rejected the possibility that there was any privity of contract or assumption of responsibility between the insured and sub-broker.

The insured relied on the broker to receive notice of the terms of the insurance on the insured's behalf and to inform it of any onerous or material clauses.

The sub-broker dealt with his principal, the broker, on the basis that the broker was knowledgeable and would communicate with the insured as necessary. There was no duty of care between the sub-broker and insured and therefore no breach.

Would the position change, however, if the sub-broker knew that the broker was incompetent and had not or would not inform the insured of any important clause?

Lloyd's Code of Conduct (July 88) states that a Lloyd's broker should take into account his client's awareness of risk and insurance, and if the facts were different it is arguable that the sub-broker could owe a duty of care to the insured on the basis that the insured is in reality relying on the sub-broker, who knows it.

So is it the case that a sub-broker can never be liable to the insured? Not quite.

The sub-broker cannot be held responsible by the insured for monies had and received, even though these are ultimately intended to reach the insured.

And any action for account by the insured against the sub-broker could not succeed because of the fundamental principle that an action in account is one in contract.

The insured could, however, seek redress from the sub-broker if the sub-broker acknowledges that he is holding money on behalf of or to the account of the insured.

Finally, does it really matter? Yes it does. The sub-broker may not be liable to the insured except in very limited circumstances, but he will remain liable to the broker for any breach.

The insured's perspective, however, may be very different, particularly after the broker has become insolvent or has been wound up, because the insured may recover nothing from the broker even though the sub-broker may have sufficient funds to meet any claim.

The insured could prevail upon the liquidator to sue the sub-broker, but any recoveries would be placed in the pot for all creditors, and the insured may only receive a small share.

The ability to sue the sub-broker direct is therefore potentially valuable and will no doubt (on the appropriate facts) make further appearances in the courts in due course.