|The Unspoken Word
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
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
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
- “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
- “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.