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.
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
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
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.