5.2 Principal Duties, Agency Liability and Termination

Study Focus

Principals owe agreed remuneration and appropriate indemnity for authorised lawful acts. Schedule 9 modifies the treatment of information given through insurance agents.

4. Duties of the Principal to the Agent

The Contracts Act 1950 also establishes reciprocal obligations owed by the principal to the agent:

1. Duty to Pay Agreed Remuneration / Commission (Section 172)

The principal is bound to pay the agent the agreed commission or remuneration when earned under the terms of the agency contract. Under Section 172, the agent's remuneration does not become due until the completion of the act contracted for, subject to the contractual terms.

• In Malaysia, the commission structures payable to insurance agents are subject to BNM's operating cost controls, which cap commissions and other distribution expenses so that they do not erode policy value.

2. Duty to Indemnify for Lawful Acts (Sections 175 to 177)

• Indemnity for Lawful Acts (Section 175): The principal is bound to indemnify the agent against the consequences of all lawful acts done by the agent in exercise of the authority conferred upon them.
• Indemnity for Good Faith Acts (Section 176): Where one person employs another to do an act, and the agent does the act in good faith, the employer is liable to indemnify the agent against the consequences of that act, even though it causes injury to the rights of third persons.
• Limitation: Under Section 177, where one person employs another to do an act which is criminal, the employer is not liable to the agent, either upon an express or an implied promise, to indemnify the agent against the consequences of that act.

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5. Legal Liabilities and Misrepresentation

The interaction between principal, agent, and third party can create legal liabilities depending on whether the agent acted within or outside their authority:

Vicarious Liability of the Insurer (Respondeat Superior)

Under the doctrine of respondeat superior, an insurer is vicariously liable for the wrongful acts, torts, or misrepresentations committed by its agents, provided those acts were committed within the scope of the agent's actual or apparent authority, or within the course of employment.

• Under Section 191 of the Contracts Act 1950, misrepresentations made or frauds committed by agents acting in the course of their business for their principals have the same effect on agreements made by such agents as if such misrepresentations or frauds had been made or committed by the principals.
• However, misrepresentations made or frauds committed by agents in matters that do not fall within their authority do not affect their principals.

Agent's Personal Liability to Third Parties

An agent is generally not personally liable on contracts entered into on behalf of a disclosed principal (Section 183, Contracts Act 1950). The contract is between the principal and the third party. However, an agent becomes personally liable in the following circumstances:

1. Where the agent expressly contracts in their own personal name.
2. Where the agent acts for an undisclosed principal (Section 183(b)).
3. Where the agent breaches the implied warranty of authority—by falsely representing that they possess authority to bind the insurer when they do not, causing damage to an innocent third party.
4. Where the agent commits an independent fraud or criminal act outside the scope of their employment.

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6. Dual Agency and the Intermediary: Whose Agent is the Intermediary?

A foundational question frequently tested in the PCEIA examination is: Whom does the insurance agent represent during the sales process?

+-------------------------------------------------------------------------+
|                    WHOSE AGENT IS THE INTERMEDIARY?                     |
|                                                                         |
|   COMMON LAW RULE (Newsholme Brothers, 1929):                           |
|   * When the agent assists the proposer by writing answers on the       |
|     proposal form, the agent acts as the AGENT OF THE PROPOSER.         |
|   * The proposer remains 100% legally liable for all inaccuracies.      |
|                                                                         |
|                                   VS                                    |
|                                                                         |
|   MALAYSIAN STATUTORY REFORM (FSA 2013, Schedule 9, Paragraph 12):     |
|   * The insurer's agent is deemed the INSURER'S agent when the          |
|     contract is formed, so the agent's knowledge is IMPUTED to the      |
|     insurer (except collusion, or after the agent has left).            |
+-------------------------------------------------------------------------+

The Common Law Doctrine: Newsholme Brothers v Road Transport & General Insurance Co Ltd (1929)

Historically under English common law, an insurance agent is the agent of the insurer for soliciting business. However, in the landmark case of Newsholme Brothers v Road Transport and General Insurance Co Ltd [1929] 2 KB 356, the court established that when an insurance agent fills up the proposal form on behalf of a proposer, the agent acts as the amanuensis (scribe) or agent of the proposer, not the insurer.

• Under Newsholme, even if the proposer orally tells the agent the true facts (e.g., disclosing a prior heart condition), and the agent writes down false answers on the form ("No pre-existing conditions"), the signature of the proposer on the proposal form renders the proposer fully responsible for the false statements.
• The legal rationale was that completing the proposal form is the proposer's contractual duty. Consequently, the insurer could repudiate the policy for material non-disclosure, leaving the innocent consumer without coverage.

The Malaysian Statutory Modernization: Schedule 9 of FSA 2013

The harshness of the Newsholme rule generated significant consumer injustice. In Malaysia, Parliament reversed this position through Schedule 9, Paragraph 12 of the Financial Services Act 2013, which applies to every contract of insurance, whether or not it is a consumer contract:

1. Agent Deemed the Insurer's Agent: A person authorised by an insurer as its agent who solicits or negotiates a contract in that capacity is deemed, for the formation or variation of the contract, to be the agent of the insurer, and the agent's knowledge is deemed to be the knowledge of the insurer (Paragraph 12(1)). If the proposer tells the agent the true facts, the insurer is treated as knowing them.
2. Agent's Statements Bind the Insurer: A statement made or act done by the agent is deemed to be made or done by the insurer, even if the agent breached Paragraph 11 or any other provision of the Act (Paragraph 12(2)).
3. Two Exceptions: These rules do not apply where the agent and the proposer colluded or connived in forming or varying the contract, or where the person had ceased to be the insurer's agent and the insurer had taken all reasonable steps to inform policy owners (Paragraph 12(3)).
4. No Contracting Out: For consumer contracts, Paragraph 3 voids any term that would leave the consumer worse off on disclosure matters, so a declaration that "the agent acts for the proposer" cannot defeat these protections.

This statutory safeguard balances consumer protection with professional accountability, holding insurers responsible for the conduct and training of their agency force.

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7. Termination of Agency

An agency relationship can be brought to an end either by the acts of the contracting parties or by operation of law, as governed by Section 154 of the Contracts Act 1950.

A. Termination by Act of the Parties

1. Revocation by the Principal (Section 154 & 156):
   • The principal may revoke the agent's authority at any time before the authority has been exercised so as to bind the principal.
   • If the agency is for a fixed term and the principal revokes without just cause, the principal must compensate the agent for premature termination (Section 158).
   • Reasonable notice of revocation must be given; otherwise, any resulting damage to the agent must be compensated (Section 159).
   • Exception (Section 155): An agency coupled with an interest (where the agent has a personal financial interest in the subject matter of the agency) cannot be revoked by the principal to the prejudice of that interest.
2. Renunciation by the Agent (Section 154 & 158):
   • The agent may renounce the business of the agency by giving reasonable notice to the principal.
   • If the agency is for a fixed period and renunciation occurs without reasonable cause, the agent must compensate the principal for resulting losses.
3. Mutual Agreement:
   • Both the insurer and the agent may mutually agree to terminate the agency contract at any time.
4. Completion of the Agency Business (Section 154):
   • Where the agency was created for a specific transaction or fixed undertaking (e.g., placing a single complex engineering risk), the agency terminates automatically once that business is completed.

B. Termination by Operation of Law

1. Death of the Principal or the Agent (Section 154):
   • The death of either the principal or the agent immediately terminates the agency relationship by operation of law.
   • Section 162 Duty: Upon the death or unsoundness of mind of the principal, the agent is bound to take, on behalf of the representatives of the late principal, all reasonable steps for the protection and preservation of the interests entrusted to them.
2. Mental Incapacity / Unsoundness of Mind (Section 154):
   • If either the principal or the agent becomes of unsound mind, the agency is terminated automatically.
3. Bankruptcy or Insolvency of the Principal (Section 154):
   • An adjudication of bankruptcy against the principal terminates the agency because the principal loses legal capacity to control their estate and assets.
4. Frustration or Illegality (Section 57 Contracts Act 1950):
   • If an event occurs that renders the agency illegal or physically impossible to perform (e.g., outbreak of war, permanent destruction of the subject matter, or revocation of the insurer's operating license by Bank Negara Malaysia), the agency contract is discharged by frustration.
5. Expiration of Fixed Term:
   • If the agency agreement was executed for a defined calendar period (e.g., 2 years), the relationship terminates upon the expiration of that period, unless expressly renewed.

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Comparison: Termination by Act of Parties vs. Operation of Law