The Location of the Risk of Broker and Policy Holder Insolvency in Contracts for Marine Insurance: Section 53 of the Marine Insurance Act and the Case for its Reform

Abstract

Under normal rules of agency, a broker procuring cover from an underwriter acts as agent of the assured. In the event of the assured’s insolvency the insurer will not be entitled to look to the broker for outstanding premiums, instead he must prove in the assured’s insolvency. If the broker becomes insolvent, then it is his principal, the policyholder, who will be left to recover pari passu. Section 53(1) of the Marine Insurance act 1903 alters this distribution of liabilities for contracts of marine insurance by making the broker liable to the insurer for the premium and the underwriter liable to the assured for losses.This article sets out the case for reform of s 53(1). In doing so, it advances three arguments. First, it contends that there is no justification for the altered distribution of risk in modern insurance law. Second, it criticises the need to draw a distinction between contracts of marine and contracts of non marine insurance. Third, it observes that s 53(1) codifies a legal fiction which, if it is held to subsist within the provision, serves to invalidate clauses which purport to terminate the contract in the event of non-payment. Whilst the more recent cases do not apply the legal fiction their reasoning is criticised and a conclusion that they are open to challenge is offered. These three observations serve to demonstrate that the law in its current statement is both unprincipled and unpredictable. It is for these reasons that it is argued that reform is to be welcomed.