New York State Insurance Superintendent Eric Dinallo has issued a bulletin to insurers advising them to take steps to provide "contract certainty" for coverage agreements, his department announced today.
The new rule, which goes into effect in 12 months, requires firm policy language to be in place within 30 days, the statement said, in order to avoid the kind of protracted claims litigation that followed the attack on the World Trade Center.
"There was no final detailed insurance policy on the World Trade Center before the 9/11 attack, just a broad agreement, and that uncertainty surrounding the nature and terms of the insurance contracts led to both sides spending six years in court and hundreds of millions of dollars in legal fees in a vain effort to resolve the issues," the announcement from his department related.
Those disputes continued for nearly six years, it was noted, until Mr. Dinallo became involved in the process and facilitated a $2 billion settlement last year.
Because the WTC contract language between developer Larry Silverstein and insurers had not been firmed up before terrorists flew two airliners into the Twin Towers, a legal battle developed over whether the destruction required reimbursement for one or two occurrences.
Juries found that some policies required reimbursement for two events and others for one occurrence.
To help avoid situations similar to the protracted WTC dispute, Mr. Dinallo issued the bulletin called a circular letter to insurers.
The "contract certainty" he demanded, it was explained, refers to the complete and final agreement to all terms of an insurance policy or reinsurance contract by the date the policy goes into effect, and the issuance and delivery of the policy or contract before, at, or promptly after that inception date.
"As the World Trade Center dispute shows, all sides need to be clear about the terms of an insurance policy before coverage begins," Mr. Dinallo said in a statement. "The alternative hurts everyone. Resources that should go to rebuilding get diverted to legal fees. Delay is added to the [WTC] damage."
He said he was acting to remove a possible obstacle to New York Gov. David Paterson's efforts to strengthen the state's economy.
The department statement said contract certainty is not an issue with most insurance policies because they are written on standardized forms that the department approves.
However, it was noted, in some cases, because of the size or unique nature of the risk covered, issues concerning contract certainty are more likely to arise. These include the special policies issued to large commercial entities or to special risks, policies written in the excess line market, and policies to other insurers via reinsurance.
The circular letter tells insurers, agents and brokers in New York that all terms of such a policy should be agreed to and the insured provided with a copy of the policy, normally within 30 days of the policy's inception.
Insurers, agents and brokers should, within 12 months, develop and implement practices to assure that policy documentation is delivered within 30 days, the letter said.
If terms and conditions are not clearly agreed upon before coverage commences, or if proper documentation is not provided, "insureds may not know what coverage they actually have and may assume they are covered for certain risks when they are not. This could lead to confusion at best, complex litigation at worst," the department stated.
The department noted that while resolving the World Trade Center dispute it had discovered certain common industry practices could result in contracts remaining uncertain for months after a policy's inception.
Mr. Dinallo's circular letter, it was explained, "is designed to eliminate these practices and their potentially harmful effects on the insurance market and New York's economy."
The New York action, the department said, is similar to that taken by the United Kingdom Financial Services Authority (FSA) in 2004. The FSA called on industry in the London market to provide greater contract certainty at the inception of a contract, with full documentation delivery promptly thereafter.
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