London moves from the language of the handshake to the written word. Will contact certainty become the law in the U.S.?

By Coletta Kemper

You’ve heard it: “Nothing’s certain in life except death and taxes.” But not so fast.

Regulators in the United Kingdom think another thing in life should be certain—insurance contracts. The Financial Services Authority (FSA) was so convinced that contracts should be “certain” that they required the industry to meet contract certainty requirements in 2006. In January they announced that 90% of contracts in the subscription market and 88% in the non-subscription market are now achieving contract certainty.

It seems reasonable that customers should know the terms and conditions of an insurance policy before they buy, but the process of binding coverage and then sorting out the details of the policy language later has been a long-standing practice in the London market. Deal now, details later. A handshake has bound coverage for hundreds of years for thousands of risks.

It’s also a practice that is unique to the insurance industry. Most business people wouldn’t sign a contract without knowing what they had agreed to. As Nick Prettejohn, Lloyd’s former chief executive, once noted: “There are a number of features of our industry process at which an outsider would wonder. The concept of multi-million pound exposures being assumed without a precisely agreed contract is peculiar to our industry.”

Peculiar it is, but for the most part it has worked. It works, that is, unless a claim comes in before the final wording is drawn up and there is a dispute over what is and is not covered. In more cases than not, the insurer and claimant are able to work it out with the help of the broker. But trying to negotiate the policy wording after the fact can place the parties at odds with the broker in the middle. The most recent, high-profile example resulted from the property claim filed after the World Trade Center attack. The resulting litigation showed just how high the stakes are when terms aren’t nailed down in advance. The FSA believes contract certainty will reduce disputes and result in a more efficient UK market for buyers, brokers and insurers. 

The FSA also sees it as part of the larger transparency debate. Contract certainty goes hand-in-hand with broker disclosure and other consumer protections. The FSA says it is watching the industry with “four eyes” to see if it voluntarily implements transparency and consumer safeguards.

Contract certainty has caught the eye of at least one U.S. regulator. Eric Dinallo, who was nominated to be New York’s insurance superintendent by Gov. Eliot Spitzer, told us last year that the winds were blowing east and that one day we will have to be contract certain in the U.S.

In anticipation of Dinallo’s agenda, I asked a few commercial brokers if they thought contract certainty was needed in the U.S., and I got some interesting responses.

• “By and large, we don’t seem to have an issue with timely issue of contracts—if we do it’s usually with surplus lines or Lloyd's contracts.”
• “I am not really sure this is as much of an issue in the domestic market. The London market has always been a problem when it comes to trying to issue formal documentation. The FSA requirements were a response to this. I would be concerned if indeed there is a push to create an FSA-type regulatory environment here in the U.S.”
• “From my perspective, this is not a significant issue and is one that can be managed in the ordinary conduct of business. Certainly, it is not something that requires government/regulatory intervention.”
• “While we occasionally have delays in receiving insurance policies (mostly on new business), I can’t recall any situation that would give rise to the need for regulations. That being said, I also don’t think it’s a bad idea to have some minimum expectation for contract delivery.”
• “We do view this as an important issue, as the lack of contract certainty leads to potential E&O [problems] and dis-serves our clients. We don’t see any potential downsides to clients at all, as uncertainty is never a good thing for them.”

As another broker pointed out, there is never 100% certainty in a contract even when policy language is in place. The insurer ultimately decides whether a claim is covered.

For the client’s perspective, I looked at RIMS’ 2006 Quality Survey. On the question of how satisfied risk managers are with policy accuracy, the answers were closely split between those who said they were “somewhat satisfied” and those who were “somewhat dissatisfied.” On timeliness of policy issuance, most of the risk managers said they were “somewhat” or “very” dissatisfied. Also, the majority of the risk managers said they received policies from between 46 and 120 days after binding. The FSA standard is 30 days.