While they may never meet the certainty standard of death and taxes, some nine out of 10 insurers in the London market now deliver clear proof of coverage to buyers within 30 days of their policy's inception–a major improvement from past performance–thanks to a joint industry effort responding to the gauntlet thrown down by local regulators.

For several years now, London brokers, regulators and carriers have been working together to come up with protocols to ensure that provisions of any insurance contract are well-understood and codified before they go into effect.

Earlier this year, the United Kingdom's insurance regulator, Financial Services Authority Chief Executive John Tiner, reported 'mission accomplished,' with 90 percent of contracts in the subscription market and 88 percent in the non-subscription sector meeting the terms of the U.K. Contract Certainty project.

Given its colorful origins in the Lloyd's Coffee Shop, much lore has grown up around the London market, with big deals settled on a handshake.

But those legendary folkways, along with the forests of paper needed to complete deals, proved to be more of an encumbrance than asset as the 20th century turned into the 21st, and so market stakeholders set out to do something about it.

Lloyd's Chief Executive Officer Richard Ward said in a recent speech that the London market's service could be described by the Dickensian “best of times and worst of times” label.

“Sadly, we have a reputation for having some of the most archaic back-office processes, which can mean that some insurance policies have expired before the policy documents are actually delivered,” he added.

However, the U.K. regulatory authority put its foot down in December 2004, when Mr. Tiner said the days of “deal now, detail later” should come to an end, giving the industry two years to find a solution.

“This work has also demonstrated the benefits of our preference for working towards market-based solutions, in which we use our influence to effect change rather than our formal powers,” Mr. Tiner said of his final imprimatur earlier this year.

The contract certainty effort will serve as a catalyst for ongoing, wider reform of the industry's operations, and will further raise the competitiveness of the U.K. market, Mr. Timer predicted.

John Hobbs, vice president of the London-based International Underwriting Association, called the entire effort “a very useful exercise to go through.”

“There was certainly acknowledgement in the London market as a whole that we were not very good at producing contract documentation in good time. It was not very good from a customer's point of view and not very good from an insurers' perspective, either,” he said.

Coverage disputes will always exist, he conceded. However, he added, “the problem before contract certainty is that you may not have even had that policy in place before the claim arose. Therefore, the first debate is, 'Where is the policy?'”

Mr. Hobbs expressed the hope that the entire effort will produce clearer contracts “so that the likelihood of any dispute will diminish.”

As for a possible rash of unemployment within the ranks of coverage attorneys, Mr. Hobbs said, with a chuckle, that “as insurers, we might like to think so, but I doubt that will take place.”

Jonny Atkinson, chief executive officer of WNA London & Bermuda, who served as a member of the Willis Contract Certainty Task force in the United Kingdom, feels the insurance industry was slow on the uptake in recognizing the problem.

“The insurance industry should have arrived at the need for an implementation of contract certainty on its own,” he said. “The FSA should not have had to spur them into action.”

If a viable alternative coverage provider had been offering contract certainty, clients would have left the traditional carriers “in droves,” Mr. Atkinson added.

One word of warning amidst all the good cheer: No amount of contract certainty will totally obviate the need for mediation and arbitration, London market players contend.

However, the contract certainty effort could pay off in terms of dispute reduction in a number of ways, according to Paul Moss, London-based head of claims for the Australian underwriter QBE.

Speaking at a recent seminar in New York City, Mr. Moss noted that Hurricane Katrina impacted the way insurers thought about conflict.

“Katrina was such a great learning curve for the industry. When it happened, lawyers were rubbing their hands together with glee, but the litigation just didn't happen because the insurance industry had to grow up overnight,” he said.

Thus, stakeholders looked to forms of conflict resolution other than litigation and even arbitration, and mediation began to look more appealing, with less cost and acrimony, he added.

“Almost 99 percent of contracts at the moment have arbitration clauses in them, but contract certainty gives us the opportunity to ensure mediation clauses are overlying arbitration clauses in the contract,” he said.

However, other evidence exists that insurer-reinsurer disputes are on the rise, although most of it is anecdotal since there is no real repository of such data.

New York-based attorney Vincent Vitkowsky said the contract certainty movement could ameliorate some conflicts.

“Historically, many reinsurance disputes involved questions of contract meaning and interpretation, arising because the slip has not been memorialized in a formal contract wording,” he said.

Still, there is a point of diminishing returns, he warned. “If contracts are constructed in haste to meet certainty deadlines, they may contain provisions that are not specifically drafted to reflect the intent of the parties, or they may contain inappropriate or inconsistent provisions,” he said. “So disputes will continue.”

So the question remains: How relevant is the issue to the American market? After all, contract certainty was one of the major problems exposed in the dispute over coverage for the Sept. 11, 2001, destruction of New York's World Trade Center, with many policies covering the facility in flux at the time of the terrorist attack.

Coletta Kemper, vice president of industry affairs at the Council of Insurance Agents and Brokers, said the issues surrounding contract certainty in London have not surfaced all that much in the American market.

“The London market is a different kind of market than ours,” she said. “It is hard to tell if we are just a little bit better at it than they are because it was always a gentleman's agreement across the table at Lloyd's for hundreds of years.”

If the issue does get raised, it will be through the Risk and Insurance Management Society, representing big commercial buyers, or via the National Association of Insurance Commissioners, she said.

RIMS President Michael Liebowitz, who is the director of insurance and risk management for New York University, believes the United States could do a better job on this front and has been working with all stakeholders to develop a protocol similar to FSA's to ensure a more efficient contracting process.

He said that in the course of a couple of years of travel throughout the country, he has found virtually no risk managers who receive their contract within 30 days of inception. Mr. Liebowitz said he believes that insurers and brokers can meet that standard–but added that buyers themselves can slow down the process if they are not proactive.

“I don't want to lay blame, because blame is bad, but it is the risk manager who is often the problem,” he said.

Risk managers trigger the renewal process, but they can serve as bottlenecks if they sit on information “or if we don't dictate to the markets what our expectations are,” he added.

“We don't have underwriting meetings or strategy meetings with our brokers six months in advance. We need to sit down six months ahead of time with the broker and say, 'This is what our strategy is for renewal,'” he explained.

Mr. Liebowitz, whose RIMS terms ends at the end of August, hopes to get some sort of protocol approved by the RIMS board now that he has the general agreement, he says, of the underwriting and brokering community.

To a certain extent, the entire broker compensation scandal dealt with the issue of contract transparency, if not with the issue of contract certainty. So, if U.S. regulators do tackle the issue, they will be on somewhat familiar ground, market observers say.

That is why Mr. Liebowitz, on the advice of Mr. Tiner, has decided to put a plan in motion now before some event triggers action from the NAIC.

“A voluntary solution is always preferable,” he said.

Special Reports /

Contract Certainty Becoming The Rule, Rather Than The Exception In London

Related Stories

Recommended For You