Hunt begins for thousands of clients of failed insurance broker Herbert Insurance Group, alleged to have withheld premiums from insurers

By Amanda Morrall

Thousands of former clients of failed insurance broker Herbert Insurance Group are being sought to determine whether their policies are valid, as the Serious Fraud Office (SFO) begins an investigation into allegations of premiums being withheld.

The Auckland-based insurance broker, which has some 4,000 domestic and commercial clients, was placed in liquidation on March 4 and receivership on March 7, following an attempt to voluntarily liquidate the company and sell assets.

SFO director Adam Feeley said today the investigation by his office had only just begun, but he confirmed the SFO would be looking into allegations premiums received by Herbert weren't passed onto the insurers and were, instead, diverted for "other purposes."

"It's very early days,'' said Feeley.

Feeley said his office had been alerted to the allegations late last week by receiver KordaMentha.

"Our first priority was, and remains, simply securing what may be evidence. Beyond that we haven't had a chance to review bank accounts or any other financial records. Most of the information we're working off is what the auditors put together."

'It was the finance companies wot did it'

In a liquidator's report prepared by Waterstone Insolvency, Herbert's directors attributed the company's demise to "a reduction in revenue due to the "failing of finance companies during the recession.''

It further states, that the "sustained level of overheads caused the business to be no longer viable.''

Liquidators Waterstone Insolvency said while they accepted the director's explanation as "accurate," further investigation was required to "produce a more detailed picture of the causes of the failure."

Of particular concern, the liquidators note, were the "methods employed by the firm to maintain the high level of overhead once the sales revenue declined in recent years.''

Aon New Zealand, which has taken over the failed firm's client base, was besieged Friday with hundreds of phone calls from individuals frantic to know whether their policies were still insured.

Aon's chief executive Geoff Blampied said the company would have to review each file on an individual basis as Herbert had dealing's with 10 different insurers.

While Aon was attempting to make contact with those clients whose names and files it had obtained, Blampied said the company and receiver would be placing advertisements to alert other clients who had not yet been reached.

Herbert, in business since 1999, brokered a broad mix of insurance policies including domestic, marine and commercial.

Blampied said Aon could not divulge the name of those commercial businesses apart from saying some of them were "very big."

'Bound policies' in question

Insurance Brokers Association chief executive Gary Young said the status of individual policy holders would depend on whether Herbert had entered into a formal relationship with insurers.

For clients with documented proof of insurance cover, policies would be protected, even if Herbert had not passed on the premiums. What remained unclear, was how many 'bound' policies Herbert had with insurers.

"The issue you can have and which may be the case here, is that if the broker has not in fact placed the insurance with any insurance company but nevertheless taken the money in. Then of course the protection doesn't work because there is no insurer for the premium to have been passed to.

"In that case, that's where you could have an issue for the client, where they don't have any insurance at all."

In addition to their retail operation dealing with members of the public and business, Herbert Insurance Group also had a wholesale arrangement where they took business from other brokers and placed it into overseas markets such as Lloyd's, said Young.

Its operations are also believed to have included a "premium funding company'' which works like a finance company.

"It's where a client might say 'look, can I spread my payments over a year or 10 months or whatever and the premium funding company pays the premium to the insurance company and then recovers it like a normal finance deal from the client over a period of time?' Obviously with interest."

In normal circumstances, insurance brokers keep a "premium account" into which all client monies for premiums is paid. That money is then passed onto insurance companies or rebated to individuals.  Under law, insurance brokers are not allowed to tamper with any of the money held in that account apart from taking out commissions.

Young said it was possible there were some violations of that policy.

"There may be an issue there from the SFO point of view, that money was taken out that should not have been. We shouldn't be prejudging but it would appear they've  come across some real issues.''

The Insurance Brokers Association represents about 170 insurance brokerage firms, which employ 1,800 to 2,000 brokers. Exact numbers are unknown because of regulatory gaps covering the industry set now to be filled by the Reserve Bank. (For more on the Reserve Bank's role see this explanation on its website.)

Young said the association and other industry players were dismayed by the incident.

"It's not a good look for the industry to have something like this happen but fortunately it is very rare.''