UK: Insurance “Contract Certainty” Revisited

Last Updated: 16 November 2006
Article by Benjamin Macfarlane

The events of ‘9/11’ shattered conventional thinking about insurance in a number of ways. A tricky debate has centred on the question of what cover had been provided for the Twin Towers at the time of the attack. By September 11th no final wordings had been agreed, there were only temporary contracts from the insurers pledging to provide insurance. After the Trade Centre collapsed, the leaseholder, Larry Silverstein claimed that there had been two events, based on the two plane strikes, while the insurers and re-insurers argued that there had been one event based on a single coordinated terrorist attack. It was out of this febrile atmosphere that a call came from the insurance market for greater contract certainty. And so the drive for clarity began, led by the FSA.

I. Introduction

The beginning of 2005 saw several changes in the London market. The regulator, Financial Services Authority ("FSA") took charge of the general insurance business. Recognising the need for standardisation and security in an industry known for its informal practice methods, the FSA gave the market an ultimatum.

In response to the regulator’s challenge, the market initiated a process of reform with various contract certainty governance groups consisting of brokers, members of Lloyd’s and other insurance industry committees and associations. In April 2005, the Lloyd’s market updated the existing (November 2003) slip and mandated a new slip form.

In September 2005, the non-subscription market-working group launched its Contract Certainty Code of Good Practice. The insurance industry is required to make a substantial improvement in the degree of contract certainty that exists between an insurer and the insured by the end of 2006. In order to achieve this, The Association of British Insurers ("ABI"), the British Insurance Brokers’ Association ("BIBA") and the Institute of Insurance Brokers ("IIB") have published a code of practice that became effective from 1st October 2005. The purpose of the Code is to make clear to policyholders, intermediaries and insurers the totality of coverage when General Insurance policies are incepted and renewed.

The overall objective of the contract certainty and documentation reforms is to achieve the prompt delivery of documentation evidencing coverage for the client. Although formulated as part of Lloyd’s quality assessment processes, it is hoped that the London Market Principles/LMP Slip will enhance the insurance market practice in general.

II. Process for Ensuring Contract Certainty and the Formulation of the Slip

FSA’s role in the process

Beginning December 2004, the market has been given two years by the FSA to adopt a certain standard in relation to contract certainty. Should it fail to meet this objective, the FSA will impose its own rules.

So long as the market delivers the aims and outcomes expected, the FSA has no preference as to how this end is reached. The FSA, however, wants to be a partner in the process and be kept informed of progress. It also wants to provide assistance and feedback where appropriate.

Market reaction has taken several forms, one of which has resulted in the issue of a Lloyd’s standard slip form mandated in 20041 for the first time in over three centuries. There has been general support for the FSA’s interest in the issue and also for setting a formal deadline for a solution.

Conscious efforts have been made to initiate a reforms process with the establishment of several groups to achieve this goal. Ultimate responsibility for the change has been given to the Market Reform Group (MRG), which consists of "movers and shakers", from the groupings making up the London Market: Lloyds, London Market Association (LMA), Lloyds Market Brokers Committee (LMBC) and the International Underwriting Association (IUA).

The need for uniform practice rules

Identifying the gap in practice standards of the commercial insurance covers, the market set out to define ‘contract certainty’2 and stated: "Contract certainty is said to be achieved by the complete and final agreement of all terms between the insured and insurers before inception of contract."3

The growing market recognition of the need for contract certainty was shown by the recently conducted "Lloyd’s Annual Underwriter Opinion Survey"4 in which contract certainty emerged as the second most important issue to underwriters in the London market.

There are several reasons why contract certainty has become a commercial necessity rather than merely an aspirational regulatory concept. These may be summed up as follows:

  1. Contract certainty is essential in order to minimise risk. This risk applies to underwriters and brokers. Underwriters are affected because they are uncertain with regard to their exposure, while brokers are exposed to ‘Errors and Omissions’ ("E&O") risk when wordings are unclear or non-existent.

  2. Uncertainty over exposure for underwriters leads not only to reserving risk but also to an inability to understand business performance properly and therefore pricing. Inability to calculate exposure properly leads to capital misallocation.

  3. Lack of contract certainty leads to delayed negotiations and legal disputes. These generate higher costs and slower movement of cash.

  4. Lack of contract certainty means that the policyholders do not have clarity of coverage, or documentation of it, when they purchase coverage.

Lloyd’s adopts the LMP Slip

Contract Certainty and LMP Reform

Contract certainty forms one of the fundamental objectives of the LMP reform, intended to improve services to clients. Increased efficiency should help to retain existing business and attract new quality work to the London Market. Contract certainty can be summarised as having the following aims:

  • To provide clarity with regard to contractual terms;

  • To ensure certainty of coverage;

  • To minimise disputes;

  • To reduce time wasted;

  • To reduce legal bills;

  • To improve downstream processing.

In broad terms the changes require the following attributes in any commercial insurance contract written in the London Market:

  • That the terms of the contract should be clear and unambiguous

  • That the law and jurisdiction and arbitration clauses should be clearly referenced and complete.

  • That all duties in relation to the insurance cover are clearly allocated, including processing of contract changes, document production and claims processing.

  • That it is clear what information was provided to insurers to enable them to assess the risk at the time of placement.

One aspect of the requirement for clear and unambiguous terms that has very recently come into the spotlight again is the issue of broker’s commission. In a speech for the Insurance Institute of London5, John Tiner, head of the FSA said that it was becoming "palpably clear" that there was "little chance of a market solution" over the issue of broker commissions. Further that: Authority would now take a "closer look at commission disclosure in our business plan for 2007".

III. Conclusion

The MRG’s first formal measurement in March 2006 revealed that 65% of the contracts agreed in December 2005 were certain against the requirement of 30%. The MRG targets are 75% by the end of September 2006 and 85% by the end of 2006. The non-subscription market working group has agreed to full compliance with its code by December 2006.

John Tiner (FSA chief) has called on UK risk managers to do more to push for progress on contract certainty, announcing that regulatory intervention would be put on hold subject to review in September 2006. However, the FSA has expressed concerns about the quality, accuracy and currency of the data being collected by the market. It identified the following key objectives in the run up to September 2006:

  • Critical analysis of the market and individual firm data to ensure that contract certainty is being achieved;

  • Identification of the key factors inhibiting cultural change in the medium to long term; and

  • Evidence of progress in relation to legacy issues and milestones for reducing historic risks.

Over the coming months, the emphasis will be on maintaining the momentum and ensuring that firms are not just paying lip service to the notion of contract certainty but are actively implementing changes within their working culture and focusing on qualitative as well as quantitative measurement.

Footnotes

1. The Lloyd’s slip form is a short form record of an insurance agreement done in the London Market.

2. For this purpose it looked at the general definition provided by the FSA chief, John Tiner in a Speech at a Symposium in New York ‘Costs and opportunities related to best practices for global players; how regulators will respond to a global insurance market’ delivered on 13th December, 2004.

3. Recognised as an interim definition by the Market reform Group (MRG).

4. The Press Release issued for this survey was on 20th April 2005.

5. 2nd October 2006 in the Old Library at Lloyds.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions