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Legal Ease by Scott Sinder Certainty Not!

Inquiring minds want to know what the New York Insurance Department means when it talks of contract certainty and how it is certain the idea will work.

By  Scott Sinder and John Fielding

The more I know, the more I realize I don’t know. Nothing brings this home more than the New York Insurance Department’s Oct. 16 Circular Letter No. 20 (2008) on “contract certainty.” Superintendent Eric Dinallo has made this a centerpiece issue. The genesis is twofold: litigation over the 9/11 World Trade Center coverage—arising from the fact that there was no final contract cementing the precise scope and terms of that coverage—and the UK’s Financial Services Authority’s successful 2005 challenge to its insurance industry to change traditional practices by 2007 and achieve “contract certainty” within 30 days of the binding of coverage at least 90% of the time.

The concept of the New York circular is straightforward:

‘Contract certainty’ refers to the complete and final agreement of all terms to an insurance policy or reinsurance contract by the date of inception, and the issuance and delivery of the policy or contract before, at, or promptly after inception.

This closely tracks the UK definition as well as the UK’s 30 days/90% time directive for all “licensees” for all “policies that are not already subject to a more stringent requirement, such as policy forms subject to approval under the New York” insurance laws and regulations.

The justifications for the new requirement are all motherhood and apple pie:

[A] lack of contract certainty may give rise to situations where insureds do not know what coverage they have actually obtained, and may assume that they are covered for certain risks when, by the terms of the final contract, they are not. A lack of contract certainty also can result in insureds having broader coverage than they had identified, needed, or desired…This uncertainty exposes insureds, insurers, and producers to increased legal risk….

Statistics compiled by the London Market Brokers Committee (LMBC) from 2005—immediately before the FSA challenge began—showed only 35% of the commercial insurance contracts achieved “contract certainty” within 30 days of being placed in the UK.

David Hough, LMBC’s executive director, says “it was critical to understand exactly what the problem was; only then could we work out what the solution to the problem had to be.”

In 2005, the Brits quickly discovered it was not a single problem but a collection of problems, and they varied by sector. There were broker problems in the Lloyd’s/London Market space because the brokers there really assume the burden of assembling the master contracts to which multiple syndicates and other London markets will sign on. And there were carrier issues in the more traditional commercial space. There were few problems in the personal lines arena.

To attack the problems, all of the relevant players had to come to the table. They broke down the overarching contract certainty objectives into seven relatively straightforward “principles,” such as: “When entering into the contract, have you clearly and unambiguously expressed all terms including any conditions or subjectivities?”

In the London Market space, the brokers assumed the lead compliance role because of their traditional lead role in assembling the contracts. In the UK commercial contracts space, the carriers assumed that role for the same reason. They made an extensive effort to educate all market players on the developing objectives consensus. How to achieve those objectives was left to each market participant.

Hough makes clear that what keeps everyone at the table is the FSA’s regulatory threat and its power to enforce that threat against every relevant market player.

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