Over the years, there has been much debate that the practice of the insurance market in allowing an insurance broker (acting as the agent of the assured) to receive commission from the insurer may contravene the equitable principle that an agent cannot make a profit from his office without disclosing the profit to his principal (the assured). It has also been argued that the practice breaches section 9 of the Hong Kong Prevention of Bribery Ordinance (Cap. 201) (PBO), which prohibits an agent, without lawful or reasonable excuse, from soliciting or accepting any advantage as an inducement or reward for doing any act in relation to his principal’s affairs unless he has been given permission by his principal and his principal had regard, before giving the permission, to the circumstances in which it was sought. It should also be noted that it is not a defence to show that such an advantage is customary in the trade. Section 9 also prohibits a third party, without lawful authority or reasonable excuse, from offering an advantage to an agent as an inducement or reward for doing any act in relation to his principal’s affairs.

In Jeremy Paul Egerton Hobbins v Royal Skandia Life Assurance Ltd & Anor., HCCL 15 of 2010, the Court of First Instance in Hong Kong held that commissions paid to an insurance broker by an insurer do not constitute an illegal secret profit provided that they do not exceed the amount normally paid in the insurance market. The Plaintiff purchased several investment-linked assurance scheme (ILAS) products from Skandia and other insurers. The ILAS products were arranged by Clearwater International Ltd (Clearwater) as an insurance broker for the Plaintiff. The Plaintiff signed client agreements with Clearwater which acknowledged that Clearwater would be paid commission by the insurers as a result of the Plaintiff having purchased the ILAS products. The Plaintiff subsequently alleged that the client agreements and insurance contracts were unenforceable and void for illegality or misrepresentation because Clearwater had never informed him of the amount of the commission it would be earning on each ILAS product purchased and that the contracts were either contrary to section 9 of the PBO or tainted by an underlying fraudulent misrepresentation.

Mr Justice Reyes observed that the practice of paying commission as in the present case was more than just a customary practice, and had been validated by over a century of judicial authority. Furthermore, he took the view that when the PBO was promulgated in 1971, the Hong Kong legislature had never intended to ban the practice of insurers paying commission to brokers. Mr Justice Reyes did not determine in this case the requisite standard of disclosure necessary to validate any permission given. He indicated that, as the minimum good practice for insurance brokers, they should disclose the fact that they would be receiving commission from the insurers; it was also necessary for that commission not to exceed the amount normally paid in the insurance market.

The court also rejected the Plaintiff’s contention that Clearwater was acting as Skandia’s agent and held that the mere fact that an insurer pays brokerage fees to a broker does not mean that the broker is undertaking to perform any obligation on behalf of the insurer.

The judgment is welcomed by the insurance industry as it upholds the long-standing commercial practice of insurance brokers receiving commission from an insurer for their services provided to the assured, provided only that the assured is made aware that the broker will be paid a commission and the commission does not exceed that normally paid in the insurance market. It should be noted that where the commission does exceed that amount, the insurance broker should make full disclosure of the commission arrangement (including the quantum) to its client and obtain the client’s express written consent before soliciting or accepting the commission. Clearly it will also be important for insurers to ensure that these conditions have been satisfied before paying commission to an insurance broker.