Just where are we on contract certainty and clarity?

For a good few years now (and perhaps it has always been the case), risk managers and insurance buyers have been concerned about contract certainty. Which isn’t surprising, as it is fundamental to the whole idea of purchasing insurance – knowing what is being purchased and how it will deliver, and having all the ends tied up and policies issued before inception.

It is something the insurance industry has struggled with for years, and in particular when it comes to global programmes. Indeed, in one of the very first issues of International Programme News (IPN) in 2012, the previous incarnation of Global Risk Manager, a leading insurance executive said local policies not being issued on time was a particular bugbear of his.

The problem, he noted, is that the industry leaves everything to the last minute, especially in terms of premium-allocation agreements, which inevitably takes time. “If you don’t consider this to be important and see it as a post-binding activity, you are bound to end up being late,” he said, which is a problem because an increasing number of countries operate the principle of cash before cover.

One solution is to start the process earlier and not leave things to the last minute: “Spend a few more minutes upstream and save hours downstream,” he said. And having claims protocols agreed before inception would dramatically improve the claims process. The other solution, which the insurance industry is investing a lot of time and money in, is digitalisation, which will undoubtedly have an impact.

But contract certainty isn’t just about having policies issued on time. It is above all about clarity. Everyone knowing and understanding exactly what is covered, what is not, and how the claims process will work. And as recent events have shown with business interruption (BI) and Covid-19, this is still a live issue. And the only people who are happy with the current situation are the lawyers.

Six years ago, Airmic issued a report on the importance of business-critical insurance, launched at its annual conference. In it, Airmic suggested that policyholders should be willing to pay higher insurance premiums for contract certainty. Which was surprising to say the least. As IPN noted at the time: “It is like paying a higher mileage rate for a taxi to ensure it actually gets you to the right destination. Or a higher fee to a builder that guarantees to finish the job in hand.”

Of course, what Airmic meant was that buyers should look for an insurance partner that they trust and fully expect to deliver contract certainty – rather than simply buying insurance on price alone. In other words, they should place claims efficacy, as they put it, above any industry moves to commoditise commercial insurance. Which is a very fair point. You get what you pay for.

But it seemed then, as now, a damning indictment of some parts of the insurance industry that having some sort of certainty over claims being paid, which after all is why anyone buys insurance, is seen as an ‘extra’, an additional service that somehow requires an additional or higher fee. Rather than insurers being penalised if they fail to ensure contract certainty.

Have we moved on?
Whether things have improved is a moot point. Just a few months ago, the UK insurance regulator, the Financial Conduct Authority (FCA), told Lloyd’s and London company market insurers it is concerned they aren’t delivering contract certainty. The FCA said it is concerned that contract uncertainty “may be more widespread”, in response to the market’s handling of BI insurance claims. The FCA said contract wording is often “ambiguous” and, alongside “misaligned” customer expectations, can create coverage uncertainty.

The debate appears to be moving towards contract clarity – making it crystal clear about exclusions and coverage. A buyer needs to know that what they are buying – the coverage they believe they are purchasing – is what is actually delivered when a claim comes in. Ideally, both buyers and the insurance industry would follow the age-old principle of uberrima fides (utmost good faith).

Back in the day, the insurance industry knew the value of its reputation, particularly Lloyd’s of London. Which takes us back to more than 100 years ago, and two major disasters – the San Francisco earthquake of 1906 and the sinking of the Titanic in 1912. For the former, Lloyd’s famously paid all policyholders, irrespective of the terms of their policies, while White Star was paid in full within 30 days of the Titanic’s loss.

Part of the problem has clearly been the long soft market, which saw expanded terms and conditions, very broad coverage and not enough premium. Not to mention the growing use of lawyers and the courts in coverage disputes. So perhaps the hardening market, while not welcomed by buyers, will at least see greater clarity in wordings.

After the BI debacle, clarity is the key word and policy wordings will be under intense scrutiny. But ultimately it should be to everyone’s advantage. Buyers know what they are getting and what is excluded, while insurers have a better handle on their responsibility and financial liability. And as for speed and certainty, digitalisation will make a huge difference – at least that is the hope. But don’t expect the lawyers to be dismissed just yet.

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