Master Policies: What you need to know

What is a ’master policy’?  A ‘master policy’ is underwritten when a named insured takes out an insurance policy for the benefit a certain identifiable group. Each member of the group is then enrolled, usually by the named insured who acts as sponsor, under the master policy and receives a certificate or evidence of insurance.  The named insured usually receives some form of compensation for its administration of the master policy program.

Under Canadian insurance law, there is no statutory recognition given to ‘master policies’ or ‘group policies’ for property and casualty insurance; however, there is no prohibition either.  Compounding the legal uncertainty in this area are the differing positions taken by various provincial/territorial insurance regulators.

Areas for consideration involving the use of a master policy:

1. The  group member only receives a certificate or some sort of evidence of insurance, but not the entire master policy as required by law.
2. Any compensation, remuneration or anything of value that the named insured receives (even indirect) for its role in marketing or servicing the insurance raises the risk that it will be considered a commission, contrary to the provincial insurance regulations.
   
   This has consequence for Lloyd’s and its intermediaries as it is an offence under the provincial/territorial Insurance Acts for an insurer to pay a commission to, or to commission split with, an unlicensed agent.
3. The named insured is acting as an unlicensed agent/intermediary through its administration and marketing of the master policy.

Given this regulatory environment and to help mitigate the risks noted above, master policy programs should be structured with caution.  Below are some key elements that should be included when structuring a ‘master policy’, as well some key points for Underwriters/Lloyd’s brokers/Intermediaries to consider when working with master policies:

1. Structure – the ‘master policy’ must be structured so that they it at least complies with the first Principles of Insurance Law as follows:  (1) the creation of a binding insurance contract (the offer and acceptance, parties, mutual agreement, consideration, legality of object);  (2) the named insured having a valid insurable interest; and (3) proper distribution rules are respected.
2. Insurable Interest: The named insured must have a valid insurable interest.
3. Additional Insureds: All covered group members should ideally become additional insureds.
4. Complete Policy Wording: All covered group members must receive a complete copy of the 'master policy', or at least have access to a complete policy through a website.
5. Broker of Record: A licensed retail broker must be involved in the placement and the administration of the program.  The licensed retail agent or broker will administer the issuance of confirmation of coverage, remit all taxes, and assist with the claims administration and handling.
6. Commission: The named insured does not receive any form of commission.  The named insured may receive some form of remuneration (generally not to exceed 5%) as a result of the administration of the master policy and collection of premiums. It may be possible for certain types of additional administrative services fees  in excess of 5% to be charged, provided that they are not directly related to the placing of the coverage with the covered parties and can be attributable to other activities the name insured undertakes on behalf of the covered party.
7. Administration: The named insured may assist in the marketing of the insurance program as a sponsor and should only help facilitate the administration of the insurance program.  The named insured when making this product available to the covered members should only provide general information regarding the insurance coverage.  All specific insurance coverage questions should be answered by the licensed insurance retail agent or broker who placed the master policy.
8. Claims: The named insured should not deal with or settle any claims on behalf of the insurer. Claims handling must be left to the insurer or licensed third party adjusters or its agents.

Finally, in order to protect Lloyd’s Underwriters’ interest, Lloyd’s strongly recommends seeking appropriate legal counsel to avoid any situation that could be considered in contravention of the federal or provincial Canadian insurance regulatory laws.

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