Binding authorities: personal liability of employees of agent

The commercial court recently held that individuals employed by an agent under a binding authority and named in the binding authority agreement may be personally liable to the insurers who granted the authority.

Insurers agreed binding authorities under which an agent was granted authority within defined financial limits to issue bonds. Although the agreement itself was between the agent and the insurers, three individuals (two directors and one employee) of the agent were identified in the binding authority as having authority to issue the bonds. The agent, through those individuals, issued bonds in sums greater than the financial limits in the agreement, and therefore outside of the delegated authority.

By virtue of it being an agent, the agent owed special duties (fiduciary duties) to the insurers. These fiduciary duties include duties: (a) to act in good faith; (b) not to make a secret profit; and (c) to avoid conflicts between the agent’s duties and its interests. The key question for the court was: did the insurers have a claim against the individuals personally?

The court held:

• Because they were named in the binding authority agreement, the individuals were sub-agents of the insurers, and owed them fiduciary duties.
• Two of the individuals had been engaged in a conspiracy to defraud the insurers by issuing the bonds outside the authorised limits and diverting premium from insurers to themselves. They were in clear breach of fiduciary duty to the insurer.
• A third individual was not involved in the conspiracy to defraud. He did not benefit directly from it. Nevertheless, the court held that he deliberately closed his eyes to the fact that he was unjustifiably signing the bonds outside the authority granted by insurers. As such, he had been dishonest, and therefore he too acted in breach of fiduciary duty.
• In signing the bonds on behalf of the agent outside the delegated authority, all three individuals knowingly procured the agent to breach its contract with insurers. This was so even though the two of them who were directors were the “directing mind and will” of the agent.

When identifying the individuals who are authorised under a binding authority to agree to the issuing of a bond, or to insurance cover, insurers stipulate those whose acts can bind them. In light of this decision, insurers also have potential recourse against those named individuals personally: they are sub-agents, and therefore owe special fiduciary duties. The decision also serves to highlight that where someone suspects that an authority is being breached, it will not be enough to stay quiet or to raise objections but then accept spurious explanations. Even if the person is not himself making a profit he may be held to have been fraudulent, with all the consequences that flow from that.

Further reading: Markel International Ins Co Ltd v Surety Guarantee Consultants Ltd and Others [2008] EWHC 1135 (Comm)