Late Policies: Simple Problem Or Corporate Governance Issue?

The World Trade Center coverage dispute over the question of whether the loss was one event or two "demonstrates the importance of policy issuance," he said. (The policy for the WTC had not been issued before Sept. 11.)

When Susan Meltzer was president of RIMS in 1998-1999, she said she really pushed the paperwork issue. "I made a statement at the time that I was not going to pay for my policies until I received them, which wasnt a popular stance to take." Ms. Meltzer is assistant vice president risk management, Sun Life Financial, Toronto.

For the most part, her insurers have responded well to her insistence on receiving the policy before she pays the premium. "However, its not a practice that has been embraced generally by risk managers," she said.

Brokers warned her that this stance was dangerous for the risk management community in general because underwriters would cancel policies. "But I continued to push it because, to me, this has become a corporate governance issue," she said, which is aptly demonstrated by the World Trade Center dispute.

WTC is a prime example of why its such an important issue. "Its not just anal risk managers wanting to push paper, which is the reaction you get when you suggest that its important," she said.

Even binders are insufficient, she said, because "that would be the same as making an acquisition under a memorandum of understanding, instead of under a sale and purchase agreement. It would be like closing a deal before the sale and purchase agreement" is finalized.

Its just not acceptable to have policies issued six months or a year after inception, said Mark Butterworth, group insurance risk manager for Prudential plc, the U.K.-based life insurer.

"Everybody involved in the process, including the client, has to work hard to get the base contract agreed and signed prior to inception," he said during a recent speech at the European Insurance Forum in Dublin. "I will campaign for that strongly."

Mr. Butterworth is the former chairman of the Association of Insurance and Risk Management and the former chairman of the Institute of Risk Management, both in London.

Mr. Butterworth described the documentation problem as a corporate governance issue, rather than a problem. "Its an issue of how we, as customers, manage our contractual arrangements. And, of course, from the insurers point of view, for them to be perfectly clear as to the exposures theyre carrying."

Could such policy issuance problems open up a risk managers company to directors and officers claims?

"Yes, because directors and officers are required to maintain insurance coverage," Ms. Meltzer said. "But if you dont have the policy, if you havent read the policy, how can you go to the board and tell them you have coverage."

She suggested that brokers could also be opening themselves up to errors and omissions exposures as well.

Mr. Mandel thought the problem was more acute for the non-domestic players, such as the Bermuda and London markets.

While a subscription market, such as London, does complicate the issue, Mr. Mandel said thats still no excuse. "In many cases, underwriters are just willing to follow the leader, so theyre not technically issuing their own policy," he said.

While commercial insurance is generally a relationship game, Mr. Mandel said, his procurement people will say that a relationship gets in the way of good business. In every business transaction the most important aspect is performance, not relationship, and if things get bad enough, "youre going to go somewhere else," he said.

Before it gets to that point, Mr. Mandel, Ms. Meltzer and Mr. Butterworth have their own ways of dealing with the policy issuance problem.

Mr. Mandel recommends that risk managers agree with their underwriters ahead of time as what their expectations will be about policy issuance, whether it be one week or three months.

"Thirty days has been the de facto standard for a long time that some have met and many have not–and traditionally has been more of an unspoken understanding," he said.

If risk managers really want accountability, then they must craft incentive arrangements, which are easier to do with brokers and consultants than with underwriters, he said.

"The model Ive used in the past has been along the lines of, Ill pay you [the broker] a deposit amount for your services. So lets say, for arguments sake, thats $100,000. If you perform beyond my expectations, then you have the opportunity to earn up to $125,000," Mr. Mandel said.

"At the end of the period, when we evaluate the brokers performance, the result could be either payment as is or some refund of the amount paid," he said.

Money is a great motivator and the best way to drive accountability, he said.

Ms. Meltzer said its difficult for risk managers to replace their entire insurance program if service standards arent up to snuff, given the current hard market. "Thats why Ive chosen the I-dont-pay-premium route."

She said she makes it clear to her insurers that if she gets a cancellation notice, she will send the cancellation notice to the insurers chairman or president with an explanation "that I didnt pay this because of your poor service."

"We have established a service standard through our brokers and our insurers that policy contracts should be finalized prior to inception," said Mr. Butterworth, noting that this has been achieved on all the companys major coverages.

If the standard is breached, then "were into the normal situation where you think you know what youve agreed but you havent quite because you havent got a final contract."

However, he emphasized that he really endeavors very hard to avoid that situation.

Mr. Butterworth said he thought it was up to insurance buyers to be the motivators of service standards. Its up to the buyers to be discerning with whom they want to do business with, despite the hard market, he said.

"Perhaps in a hard market theres even more of a need to do this because theres less emphasis on relationships," he said.

(Future articles in this series will give the brokers and underwriters perspectives on the documentation issue, as well as some insights from legal experts.)

Reproduced from National Underwriter Edition, May 5, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.