If you want an example of why contract certainty is such a hugeissue for the industry, think back to an episode from the classic1970s sitcom, “The Odd Couple,” in which the normally meticulousFelix Unger was somehow talked into buying insurance from a shadybroker recommended by his lax roommate, Oscar Madison.

The broker wrote down the price and coverage terms on a napkin(which sloppy Oscar mindlessly used to wipe his mouth) beforemoving to close the deal with a handshake.

“Wait a minute!” protested Felix. “Don't I get a policy inwriting?”

“You don't need a policy,” the broker replied with a wide grin,still gripping Felix's hand. “I trust you.”

Felix might have been finicky, but he was not out of line askingfor a formal document before sealing his deal. Yet all too oftenthat is still how business is conducted in the commercial insuranceindustry, much to the chagrin of risk managers and the delight oftrial lawyers–who get to sue over what insurers meant to cover.

This is not an isolated problem. Indeed, only 18 percent of riskmanagers responding to last year's National Underwriter “State ofthe Market” survey agreed that “we receive our final insurancepolicies in a timely fashion, error-free”–down from 25 percent in2004.

The controversy will be addressed at next month's Risk andInsurance Management Society conference in Honolulu, which includesa session on “Contract Certainty: An Imperative Or An ImpossibleDream?”

“Despite the dispute surrounding recent high-profile claims, itseems our industry is still finding it difficult to issue policieson a timely basis,” laments the RIMS program blurb about this“age-old problem.”

The blurb goes on to pose some excellent questions: “Will suchuncertainty be acceptable in the new [Sarbanes-Oxley] world? Shoulda new industry standard be set? What issues need to be overcome tosolve this perpetual problem?”

This is not an academic exercise. The industry cannot affordanother coverage debacle like the one after terrorists destroyedNew York's World Trade Center. The trials to determine whether the9/11 loss qualified as one event or two were very embarrassing tocarriers, brokers and risk managers alike.

For inspiration, go to London, where the U.K. Market ReformGroup announced that 65 percent of all contracts agreed to as ofDecember were “certain”–double the industry's target of 30percent.

The London market's “contract certainty” initiative–looking toachieve “the complete and final agreement of all terms between theinsured and insurers before inception”–is well on its way tohitting its goal of 85 percent by year's end.

You would think customer satisfaction and the need to knowexactly what you are agreeing to cover in a policy would beincentive enough to get contracts finalized before they takeeffect, but obviously that hasn't been the case thus far. Instead,a hammer drove the reform process in London, as any insurer failingto get on board has been threatened with some serious “regulatoryintervention” by the U.K.'s Financial Services Authority.

Similar pressure from regulators here could go a long way towardcleaning up the industry's act. If the National Association ofInsurance Commissioners doesn't move to spur state action, perhapscontract certainty mandates could be incorporated into the proposedState Modernization and Regulatory Transparency (SMART) Act inCongress to force the issue.

President Ronald Reagan, in negotiating arms treaties with thenow defunct Soviet Union, said his philosophy was “trust, butverify.” Risk managers should follow the same standard withinsurers. If a handshake wasn't good enough for Felix Unger, itshouldn't be good enough for corporate insurance buyers.