Can an insurer set-off the amount it paid an insured from the commission due to a broker?

The High Court in Pietermaritzburg has said no.

A broker had failed to five soyabean fields from a policy brokered on behalf of a farmer. The fields were damaged in a hailstorm. Upon discovering the error committed by the broker, the insurer proceeded to compensate the farmer for the loss without consulting the broker and set off recover the additional amount paid from his commission.

The broker sued the insurer for the offset commission.

The insurer’s primary defence was rooted in the principle of common law set-off. It argued that although they initially owed commissions to the broker, he was indebted to them due to his error in obtaining inadequate insurance coverage for the farmer. The insurer contended that this mutual indebtedness allowed for an automatic set-off, negating their obligation to pay the commissions.

The insurer further relied on the “best endeavours clause” in the marketer’s agreement alleging that the broker had failed to comply with his obligations under this clause which entitled it to set off the two amounts.

Whilst acknowledging the bona fide error, the broker contended that he was not liable for the farmer’s loss as the farmer was afforded the opportunity to review the insurance proposal and approved same. To this end, the broker alleged that the farmer’s own conduct led to his loss or at least contributed to it.

The broker was not an employee of the insurance company but an independent contractor. This distinction was crucial because it meant that the insurance company could not automatically hold the broker liable for the loss without proving his indebtedness as damages.  In this case, the insurer could not prove that the broker’s mistake was the sole cause of the loss. The court emphasized that any loss suffered by the insurer was delictual, not contractual, and would require separate legal determination.

The court examined the principles of set-off and clarified that for set-off to be applicable, there must be an existing mutual indebtedness between the parties. The court found that the insurer failed to establish the broker’s indebtedness, as he did not admit to causing the loss and suggested that the farmer might have contributed to his own misfortune.

Regarding the insurers claim of contractual loss based on the “best endeavours clause,” the court concluded that the clause did not prescribe specific performance duties to the broker. As an independent contractor, the broker determined how to perform his duties, and the clause only outlined general conduct expectations.

The insurer was ordered to pay the commissions due to the broker, as there was no valid set-off to negate the debt.

Read full judgment here.