Importance of robust agency arrangements in insurance sales and supply chains: Caroline Harbord and Charlie Paddock write for Insurance Post

Dispute Resolution Partner, Caroline Harbord, and Trainee Solicitor, Charlie Paddock, have authored an article for Insurance Post entitled 'Importance of robust agency arrangements in insurance sales and supply chains'.

Axa is suing Santander for £624m, a loss that Axa says it has suffered as a result of successful Financial Ombudsman Service claims concerning Axa payment protection insurance policies allegedly mis-sold by Santander.

"This is why it is important to have robust contractual arrangements in place. These arrangements should make it clear where and with whom liability sits when things go wrong."

With Axa suing Santander for £624m over its payment protection insurance policies, Caroline Harbord,partner, and Charlie Paddock, trainee solicitor at law firm Forsters, discuss the importance of robust agency arrangements in insurance sales and supply chains.

Axa is suing Santander for £624m, the quantum of loss that Axa says it has suffered asa result of the tsunami of successful Financial Ombudsman Service claims concerning Axa payment protection insurance policies allegedly mis-sold by Santander.

This case provides a salutary lesson for insurance companies regarding the importance of having robust contractual arrangements in place.

For background, Santander was engaged to sell Axa PPI policies to consumers pursuant to the terms of an agency agreement between Axa and Santander. Axa now alleges that Santander mis-sold the PPI in breach of the express terms of the agency agreement and the Association of British Insurers’ code of practice of general insurance. Axa is seeking to recover its significant losses via: the indemnity in the agency agreement, general contractual damages, and the terms of an unexecuted settlement agreement. The status of the settlement agreement is in dispute between the parties and has formed the basis of Santander’s recent strike out application.

What is particularly interesting about the facts of the case is that when the PPI liabilities first started to arise, neither party appears to have been clear about who was responsible for the liabilities. Initially, Santander paid out on all the FOS judgments. Then Axa started to pay out for certain liabilities but was compensated by Santander. That lasted until Santander decided it was no longer happy with that arrangement and asserted that Axa should bear certain liabilities in their entirety.

This is why it is important to have robust contractual arrangements in place. These arrangements should make it clear where and with whom liability sits when things go wrong. This is particularly crucial when it comes to selling insurance and financial products, given the associated regulatory requirements which must be complied with at the point of sale. Agency agreements should, therefore, also contain robust compliance, supervisory and audit provisions, so that the insurer can satisfy itself as to its agent’s continued compliance with regulatory obligations.

Achieving contractual nirvana is, of course, often easier said than done. It is impossible to predict all the ways in which liability might arise and this can be particularly complicated when supply chains are multi-jurisdictional. In cases where unexpected liabilities do arise in a sales and supply chain, the parties would do well to get the lawyers in early to establish and record who is responsible for the losses. Had Axa done this back in 2014, it may have found its bottom line to be better off by the tune of £624m.

Axa is, however, in some ways fortunate that the agent in question is an institution of significant financial standing.This is important because it makes suing Santander worthwhile. If Axa succeeds in the claim, it has a good chance of being able to successfully enforce the judgment and receive the cash back in to its pocket.

The contractual considerations raised in the preceding paragraphs are rendered entirely academic in cases where the party in the supply chain that is contractually liable for losses has no financial substance to meet them. In these cases, the party in the supply chain with the deepest pockets may find itself forced to bear all third-party liabilities irrespective of what any agency or supply chain agreements provide about who should technically bear these liabilities as a matter of contract.

The article was first published on Insurance Post on 15 April 2022. You can read the full article here, behind the paywall.