Trade Voice: Bila's Caroline Bell on why 2022 is the time for a renewed focus on wordings

Caroline Bell

Dr Caroline Bell, British Insurance Law Association committee member, and senior wordings counsel at Convex Insurance, reflects on the innovatory and future-proofing potential of policy wordings after a year that underscored that the words on the page – and not the insurers' intentions – are all-important.

A new year presents the opportunity to make any New Year’s resolutions. One such resolution for the insurance market could be a renewed focus on policy wordings.

Having clear and predictable wordings should be a given for the insurance industry, as they are at the core of its offering. Insurance is – after all – a promise that is recorded in a contract. Obviously, it is not a gratuitous promise: it comes with specific requirements and limits. The insurer’s commitment is to indemnify the insured for a loss it has suffered caused by a peril or fortuity, and all within the pre-agreed parameters. These parameters are key. For the insured, they scope the protection it will receive from the insurance. For the insurer, they drive its exposure, pricing and, ultimately, the financial viability of the business. Critically, these parameters are recorded in the contract of insurance.

Anyone who is involved in insurance knows that these contracts are not the most straightforward documents. This is because they are meant to define and set boundaries around a peril that may or may not happen in a way that is not always predictable. Also, these contracts may have to reckon with entirely new and sometimes unexpected perils. The Covid-19 pandemic is an obvious recent example. 

However, these complexities should not deter anyone from seeking to produce clear and effective policy wordings, and this is important for insurers and their clients. Time spent drafting these policies is time well spent. The past year, 2021, has indeed provided a number of examples of the importance of careful consideration of policy wordings.

The first such example was the Financial Conduct Authority test case, where some of the most senior lawyers and judges in the country argued for weeks about the meaning of specific words used in the policies. The Supreme Court was tasked with deciding whether a number of standardised business interruption clauses could, in principle, provide cover for Covid-related losses. Mostly, it found that they could.

ABN Amro v Royal & Sun Alliance and others provided another example in an entirely different context. In this case, a short paragraph added to the wording had the effect of turning a marine cargo policy into trade credit insurance. The Court of Appeal confirmed the primacy of the language when interpreting insurance contracts; the parties’ intentions or expectations were irrelevant. When it comes to coverage, the words on the page are what matters.

When it comes to coverage, the words on the page are what matters.

The London insurance market has a long history of adapting its wordings to new perils, threats and challenges. Cyber is a case in point. When the Prudential Regulation Authority impressed upon the industry the need to identify, quantify and manage its exposure to cyber losses, the market turned to wordings. Lloyd’s syndicates were mandated to add clarity by using clauses that would either explicitly include or exclude cyber in non-cyber policy wordings, and this approach has since been adopted by the London market.

There is no doubt that the industry will be facing countless new challenges in 2022. These could include volatile weather patterns due to climate change, increasing environmental, social and governance exposures, political instability, inflationary pressures, and so on. One way to prepare is for the market to renew its focus on policy wordings. This is not only a sensible approach, but one that provides opportunities. When risks are shifting, wordings can be an effective tool to future-proof exposures, and they can also be used to introduce innovation to face new challenges head-on.

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