Trust, But Verify

If you want an example of why contract certainty is such a huge issue for the industry, think back to an episode from the classic 1970s sitcom, “The Odd Couple,” in which the normally meticulous Felix Unger was somehow talked into buying insurance from a shady broker 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) before moving to close the deal with a handshake.

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

“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 asking for a formal document before sealing his deal. Yet all too often that is still how business is conducted in the commercial insurance industry, much to the chagrin of risk managers and the delight of trial lawyers–who get to sue over what insurers meant to cover.

This is not an isolated problem. Indeed, only 18 percent of risk managers responding to last year's National Underwriter “State of the Market” survey agreed that “we receive our final insurance policies in a timely fashion, error-free”–down from 25 percent in 2004.

The controversy will be addressed at next month's Risk and Insurance Management Society conference in Honolulu, which includes a session on “Contract Certainty: An Imperative Or An Impossible Dream?”

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

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

This is not an academic exercise. The industry cannot afford another coverage debacle like the one after terrorists destroyed New York's World Trade Center. The trials to determine whether the 9/11 loss qualified as one event or two were very embarrassing to carriers, brokers and risk managers alike.

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

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

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

Similar pressure from regulators here could go a long way toward cleaning up the industry's act. If the National Association of Insurance Commissioners doesn't move to spur state action, perhaps contract certainty mandates could be incorporated into the proposed State Modernization and Regulatory Transparency (SMART) Act in Congress to force the issue.

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