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A GOLDEN OPPORTUNITY
FOR POLICYHOLDERS?
Jane Harte-Lovelace and Sarah Turpin
suggest that insurance market moves to
introduce contract certainty mean that
policyholders will have to be active in
ensuring their needs are met
T
he London insurance market, responding
to the challenge presented by the Financial
Services Authority (FSA), is looking for a
market-driven solution to the issue of contract certainty. This issue came to the fore following
the 9/11 attacks on the New York World Trade
Center, which led to a coverage dispute as to
whether the destruction of the twin towers was a
single event or two separate events.
The archaic practices of the insurance industry,
including the use of handwritten notes for temporary cover and long delays in the production of
policy wordings, were partly to blame for the dispute. The publicity which followed highlighted the
issue of contract certainty, or rather the lack of it,
and was part of the driving force behind the current
initiative. But what is contract certainty and what
does it mean for policyholders?
The idea is that contract certainty will be
achieved by the ‘complete and final agreement of all
terms (including signed down lines) between the
insured and insurers before inception’. The concept
of all policy terms being agreed before inception
may come as something of a surprise to some policyholders. The general practice for many years has
been ‘deal now, detail later,’ with the agreement of
precise policy terms and the production of policy
wordings, being delayed sometimes for weeks or
even months after the policy has gone on risk. It is
not unknown for the production of the wording to
be prompted only by the fact that a claim has been
notified. In the meantime, unless the policy had
been renewed on the same terms as an expiring
policy, the insured could be completely in the dark
as to the precise terms and conditions of the policy,
or at best have only the limited information set out
in the policy slip or confirmation of cover provided
by the brokers.
Fundamental changes
The contract certainty initiative should lead to fundamental changes in the way in which the insurance
market operates. The idea is that the full policy
terms wording should be agreed up front before the
inception date. It will no longer be acceptable for
terms to be left open for months after the policy has
gone on risk. The full wording may be a combination of wordings or clauses; either referenced or full
text; bespoke or model material. The insurer must
be satisfied that the contract certainty requirements
What is contract
certainty and what
does it mean for
policyholders?
40 APRIL 2006 StrategicRISK
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INSURANCE CONTRACT CERTAINTY
have been met before committing to the contract. It
is then up to the broker to notify the policyholder
of all policy terms and obtain its client's agreement
prior to inception.
A number of the practices employed which led to
uncertainty will be phased out. This includes the
use of the abbreviation ‘TBA’ (to be agreed), to indicate clauses where the precise wording has yet to be
determined. The use of such terms as ‘as expiring’
or ‘as original’, where a wording is dependent on
another wording, is still acceptable, but the wording
must either be attached or clearly identified.
Similarly, the term ‘subjectivities’ can still be used to
indicate issues which remain outstanding at inception, for example the provision of an outstanding
survey, but they must be clearly stated as conditions
of the contract, with responsibilities and timescales
for resolution and the consequences of failure
clearly specified.
Policyholders need to act
These represent promising developments, in so far
as the aim is to achieve clarity and to ensure that
policyholders are aware of the policy terms from
the date of inception. But do they go far enough to
address the needs of policyholders?
The focus at present is on the agreement of terms
prior to inception and not on the actual provision
to the insured of the complete policy wording. The
idea is that contract certainty should be achieved
when the policy goes on risk, with the policy wording being provided shortly thereafter. The concern
is that the use of ‘referenced’ terms will mean that
policyholders will not have the full text available to
them when asked to consent to the policy terms.
Moreover, the danger is that policyholders will be
pressed into agreeing policy terms in order to meet
the contract certainty requirements without fully
understanding the meaning or implications of what
they are agreeing to, and without being given adequate opportunity to negotiate improvements.
The point is that, while contract certainty may
reduce the scope for argument over what the policy
says, there may still be disagreement over what the
wording actually means, particularly where policyholders have not had the policy terms fully
explained to them. The insurer may regard the
policy terms as clear and unambiguous, but the
increased use of standard wordings means that the
insurer may well have drafted the proposed policy
wording in the first place. Some brokers do make
considerable efforts to explain significant policy
terms to their clients, but the practice is not widespread and brokers do not always have the
resources available to ensure that they are fully up
to speed on the legal implications.
From the point of view of policyholders, there are
two key issues which will assist in achieving contract certainty.
■ TIMING: In order to ensure that they are properly
consulted, it is essential that the placement or
renewal process is started much earlier than used to
be the case. This is the only way to ensure that policyholders have sufficient opportunity, not only to
agree the policy terms, but to ask questions about
them and seek clarification or improvements where
required. For some classes of risk, policy wordings
vary enormously, and comparing quotes can be difficult without proper explanation regarding the key
Policyholders must
understand what they
have agreed to
differences and the potential impact on the policy
cover. The danger is that there will not be sufficient
time available before the renewal deadline to go
through this process, and policyholders will be
pressed into agreeing whatever is on offer.
Policyholders can avoid this by taking the initiative
and insisting that their brokers begin the renewal
process much earlier.
■ NEGOTIATION: The increasing use by insurers
(and some brokers) of standard policy wordings
means that policyholders are often presented with
policy wordings as something of a fait accompli. The
problem with standard wordings is that they are not
designed to meet the requirements of the individual
insured and may not take account of the specific
risks faced by a particular line of business. Most
standard wordings are drafted by insurers with the
assistance of their lawyers and are designed to take
account of the insurers' interests, often to the detriment of the insured. There may be policy conditions which are unduly onerous, and where noncompliance will lead to the rejection of claims
which would otherwise be covered. There may be
policy exclusions which seek to exclude from cover
precisely the type of risks which the business needs
protection against. Such issues can, and should, be
addressed by policyholders before policy inception.
The fact that wordings are described as ‘standard’
does not mean that they are not negotiable. An
insurance contract is a commercial contract like any
other, and there is no reason in principle why policyholders (particularly those paying significant premiums) should not negotiate improved policy terms
to ensure that their interests are properly protected
The FSA has given the insurance market until
December 2006 to achieve contract certainty.
Failure to achieve the given targets will result in regulatory intervention. The insurance market therefore has little choice but to comply, and the stocktake conducted by the FSA at the end of last year
suggests that real progress has already been made.
There are of course advantages to insurers in
achieving contract certainty, not least because it
enables them to maintain greater control over the
cost of the underwriting process and over their risk
profiles. It has also been suggested that it may make
the London insurance market more competitive
internationally, because overseas buyers will be
attracted by the opportunity to have the policy
wording agreed at inception. It is, however, likely to
mean that insurers will make greater use of standard policy wordings, and policyholders will need
to be active in requesting changes, if they want to
ensure that their requirements are met.
The focus of the contract certainty initiative is on
the agreement of all policy terms, but certainty can
only really be achieved if policyholders fully understand what they have agreed to and are satisfied that
their interests are properly protected. There is no
advantage to policyholders in tolerating
unfavourable or ambiguous policy terms.
Policyholders should be looking to negotiate
improvements to the wording, and ideally risk managers, brokers and insurance coverage lawyers
should be involved in this process. This may sound
expensive, but it should be seen as a damage limitation exercise – pay now by taking steps to ensure
that the wording reflects the needs of your business,
or suffer later when an insurance claim leads to a
dispute over the precise meaning of the policy
exclusions. Such disputes, for example, the notification and presentation of insurance claims under
public liability and directors’ and officers' liability
policies, can be costly and protracted and can have
disastrous effects on the business.
It is not essential that the detailed review and
negotiation process is re-conducted at each and
every renewal. Policyholders who remain with the
same insurers should be able to stick with their
existing wording, subject to any necessary changes
being agreed each year. Similarly, policyholders able
to negotiate their own bespoke policy wordings
may be able to use them as their own ‘standard’
wordings, in much the same way as insurers.
The contract certainty initiative offers a real
opportunity for policyholders. In the words of the
FSA ‘this is the buyers’ golden opportunity to force
change’. The full benefits of contract certainty are,
however, only likely to be fully achieved by those
policyholders willing to take an active approach to
their insurance coverage.
Jane Harte-Lovelace is a partner and Sarah Turpin is a
solicitor in the litigation and dispute resolution practice of
Kirkpatrick & Lockhard Nicholson Graham:
■
www.klng.com
LONDON MARKET BEATS
FIRST TARGET
It was reported last month that the London market
has exceeded the first industry target for achieving
contract certainty. Figures show that 65% of all
contracts agreed during December were certain,
compared to the industry-set target of 30%.
Dane Douetil, chairman of the Market Reform
Group (MRG), the leadership group responsible for
modernising the market, welcomed the figures,
but warned against complacency, stressing that
much work still needed to be done.
Douetil said: "Today’s figures, based on our first
formal measurement of data provided by the
market, are a good start and show the level of
commitment that exists towards achieving contract certainty. But I cannot stress enough that this
is our first and easiest target, and we cannot be
complacent about the challenge that still lies
ahead. Much like running a marathon, it’s easy to
get into your stride but the last few miles are by
far the hardest."
"We recognise that the energy being shown by
many firms needs to spread to every corner of the
market if the end of year target of 85% is to be
achieved. MRG will continue to sponsor and drive
a number of initiatives to ensure that happens."
StrategicRISK APRIL 2006 41