Premium

1. Introduction

The premium is the monetary consideration paid by the assured in return for the insurer’s promise of indemnity in respect of losses covered by the policy.

In the ordinary course of marine insurance business, the premium is paid by the assured to the broker; the broker pays the premium to the insurer and the broker’s commission will be deducted from the premium before the premium is paid to the insurer or the commission is afterwards credited to the broker’s account with the insurer.

The insurer is not obliged to issue the policy unless and until the premium has been paid or tendered (section 52 MIA). A contract of marine insurance is not technically enforceable in the absence of an issued policy (section 22 MIA). However, because the purpose of this provision no longer subsists, it is unlikely that the courts would now enforce this requirement (Eide UK Ltd v Lowndes Lambert Group Ltd).

The assured has an insurable interest in the premium (section 13MIA). This means that the assured’s investment in the premium may be insured and he or she may recover an indemnity in respect of the premium in the event that the subject-matter in respect of which the premium has been paid has been lost. The reason for this is that the value of the subject-matter insured is contributed to by the cost of insurance.

2. The Relationship Between The Insurer, The Assured And The Broker

Under section 53(1) MIA, the assured is not liable to the insurer to pay the premium; the broker is liable to the insurer for the premium. This custom of the broker’s liability for premium is based on a fiction that the insurer has been paid the premium and that the insurer has lent the money to the broker.

It is arguable that the fiction may no longer apply, given that section 52 MIA contemplates that no policy should be issued until the premium is paid; if the premium is deemed to be paid, there would be no useful purpose to section 52 (Allianz Insurance Co Egypt v Aigaion Insurance Co SA).

However, this arrangement may be departed from by agreement (section 53(1) MIA). For example:

a.There may be a provision in the policy that it is warranted that the premium will be paid within a specified period (‘a premium warranty’) or that the broker may cancel the insurance if the premium is not paid by the assured within a specified period (‘a broker’s cancellation clause’). The Court of Appeal held that such provisions, if found together, are not sufficient to constitute a contrary agreement to set aside the ordinary practice as laid down in section 53(1) MIA. However, a premium warranty by itself might suffice to displace the position provided for in section 53(1). It is unclear whether and how such premium warranties will be affected by sections 10 and 11 of the Insurance Act 2015.

b. There have been recent market agreements between brokers and underwriters at Lloyd’s by which brokers would not be held responsible if an assured defaults in the payment of premium unless the broker fails to comply with specified requirements (referred to in Prentis Donegan & Partners Ltd v Leeds & Leeds Inc). However, there is a danger that such market agreements will not be effective unless the assured also agrees to the change, because the agreement contemplated by section 53(1) MIA is probably a tripartite agreement between insurer, broker and assured (O’Kane v Jones).

c. If the policy has been issued and acknowledges receipt of the premium, that acknowledgement is conclusive as between the assured and the insurer (except in the case of fraud), but not as between the insurer and the broker (section 54 MIA).

Notwithstanding the above, in the event of a loss covered by the policy, the insurer is liable to the assured, not the broker, in respect of the indemnity (section 53(1) MIA).

3. Consequences Of The Failure To Pay Premium

Generally, the fiction underlying the custom referred to above assumes that, as between the assured and the insurer, the insurer has been paid the premium. It is likely, however, that this fiction is not contemplated by section 52 MIA.

In any event, section 53(1) MIA renders the broker, not the assured, liable to the insurer for premium. If, however, the assured is responsible to the insurer for the premium, what are the consequences of a failure to pay the premium?

A failure to pay the premium generally does not mean that the risk does not commence to run, unless of course the policy so provides. That is, even if the premium is not paid, the insurer may become liable to indemnify the assured if an insured loss occurs whereas the premium remains outstanding (Thompson v Adams).

The policy may contain a premium warranty which may automatically discharge the insurer from liability or a termination provision which may allow the insurer to terminate the insurance contract in the event that the premium is not paid.

This may be subject to the operation of sections 10 and 11 of the Insurance Act 2015. Absent any express provision in the policy, the insurer will not be entitled to terminate the insurance contract unless the assured’s failure to pay the premium may be said to be a repudiatory breach of contract.

The failure to pay the premium will be repudiatory and thus entitle the insurer to terminate the insurance contract prospectively (i.e. from the date of the breach) in the following circumstances:

(a) where the parties have expressly stipulated in their contract that the time fixed for performance must be exactly complied with, or that time is to be ‘of the essence’;

(b) where the circumstances of the contract or the nature of the subject-matter indicate that payment of the premium by the fixed date must be exactly complied with;

(c) where time was not originally of the essence, but one party has been guilty of undue delay, and the other party gives a notice requiring the contract to be performed within a reasonable time; and

(d) where the non-payment of premium amounts to a renunciation of the contract (i.e. a clear statement that the assured does not intend to perform the contract at all).

If the assured is not liable to the insurer for the premium, the insurer will have no recourse against the assured (unless the contract provides otherwise). If the assured fails to pay the broker the premium, for which the broker is liable to the insurer:

a) The contract may permit the broker to terminate the insurance contract (e.g. pursuant to a broker’s cancellation clause).

b) The broker may sue the assured for the premium.

c) Otherwise, the broker may exercise a lien on the policy

4. The Broker’s Lien

Under section 53(2) MIA, the broker has two types of liens upon the policy (as against the assured) which may be exercised if a debt is owed to the broker:

a) A specific lien in respect of the premium and the broker’s charges in respect of effecting the policy. This means that the lien may be exercised over the policy where the premium or broker’s charges in relation to that policy have not been paid.

b) A general lien where the broker has dealt with the person who has employed him as a principal, in respect of the balance on any insurance account which is due to the broker from such person, unless when the debt was incurred he or she had reason to believe that such person was only an agent. This means that the lien may be exercised over a policy even though the debt to which the lien

relates was not incurred in respect of the policy being liened.

The lien depends on the broker retaining possession of the policy. If the broker parts with possession of the policy, he or she will lose the lien.

However, if the broker reacquires possession of the policy, the lien will revive.

The lien may be exercised either:

(a) by retaining possession of the policy (which may be of little significance today); or

(b) by retaining any claims proceeds paid under the policy by the insurer to the broker as security in respect of his or her claim; or

The specific lien under section 53(2) MIA is available where the premium is owing to the placing broker by the producing broker: Heath Lambert Ltd v Sociedad de Corretaje de Seguros (No. 2).

The general lien, however, is not exercisable where the insurance is composite and the claims proceeds are due to assured A, but the debt is owed by assured

5. Held Covered Clauses

A policy may contain a ‘held covered’ provision, which operates to continue the policy’s cover notwithstanding that a term or warranty of the policy has not been complied with or the subject-matter of the insured has fallen outside the scope of the risk covered by the policy.

For example, a policy may provide that a vessel will not be covered if it trades to the Persian/Arabian Gulf, but may also provide that if the vessel does proceed to the Gulf, the vessel will be ‘held covered’ if certain conditions are complied with. Such conditions are likely to be the provision of notice to the insurer concerning the reasons why the assured requires to be ‘held covered’ or the agreement of an additional premium (as to the latter, see, for example, Institute Time Clauses – Hulls 1/11/95, clause 3; Institute Cargo Clauses A, B and C (1982 and 2009), clause 10).

Where an additional premium has to be agreed, if there is no agreement, the premium payable will be a reasonable premium (section 31(2) MIA). What constitutes a reasonable premium is a question of fact (section 88 MIA).

a) The change in the nature of the risk may be so insignificant that there may be no additional premium.

b) In some cases, the change in the nature of the risk may be so substantial that no ‘reasonable commercial’ additional premium could be obtained in the insurance market with the consequence that the ‘held covered’ provision would not apply.

c) In other cases, a reasonable premium should be capable of being calculated.

Where an additional premium is to be agreed, the assured will bear a duty of disclosure in respect of all circumstances which will be materialto the insurer’s judgment in calculating the additional premium (Overseas Commodities Ltd v Style, Liberian Insurance Agency Inc v Mosse and The Mercandian Continent).

6. Return Of Premium

Premium is returnable in the circumstances specified in sections 82 to 84 MIA.

‘Returnable’ means that if the premium has been paid to the insurer, the insurer is obliged to return the premium to the assured (sections 53(1) and 82 MIA). It also means that if the premium has not yet been paid to the insurer, the assured is entitled to retain the premium (section 82 MIA).

Premium is returnable if:

a) The parties so agree in the policy (section 83 MIA) (Institute Time Clauses – Hulls 1/11/95, clause 23). There may be an implied term that where the insurer exercises a contractual right of cancellation, the balance of the premium in respect of that part of the risk which has not yet been run should be returned (Re Drake Insurance plc; compare Swiss Reinsurance Co v United India Insurance Co Ltd).

b) The consideration for the payment of the premium fails totally, provided that there has been no fraud or illegality on the part of the assured or his agent (section 84(1) MIA). Consideration will fail for example where the risk insured does not incept (e.g. the property is lost before the commencement of the policy period). If the consideration fails only in part, no part of the premium is returnable unless the policy so provides. This is so, because the premium is deemed to be earned on the inception of the risk (Clydesdale Financial Services Ltd v Smailes); indeed, this may be so even if the premium is payable by instalments. However, if the consideration fails totally in respect of a severable (or apportionable) part of the risk, then a proportionate part of the premium may be returned (section 84(2) MIA).

c)The policy is void, or has been avoided, from the commencement of the risk, provided that there has been no fraud or illegality on the part of the assured or his or her agent (section 84(3)(a) MIA). This provision is to be read subject to Sch.1 of the Insurance Act 2015 (Part 3, para.12).

d) The risk has not attached (i.e. the subject-matter insured has not been imperilled) save where the insurance is taken out ‘lost or not lost’ and the insurer is not aware of the safe arrival of the vessel (section 84(3)(b) MIA). If there is a breach of warranty before the insurer comes on risk, then the premium may be returnable.

e) The assured has no insurable interest throughout the currency of the risk provided that the policy is not a gaming or wagering contract (section 84(3)(c) MIA). If the policy were a gaming contract, it would be void under section 4 MIA, and would potentially be illegal under the Marine Insurance (Gambling Policies) Act 1909. Where the assured has a defeasible interest which is terminated during the currency of the risk, the premium is not returnable (section 84(3)(d) MIA).

In addition, a proportionate part of the premium is returnable where the assured has over insured under an unvalued policy or by double insurance (section 84(3)(e) and (f) MIA). In the case of double insurance, there will be no return of premium, where a claim has been paid on the full sum insured or where the double insurance is effected knowingly by the assured or where the earlier policy has borne the entire risk at any time.

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