Adherence to new market codes on contract certainty will certainly require fundamental procedural changes but legal disputes will still arise. Ling Ong explains
The current drive towards contract certainty poses particular challenges for the London subscription market. The commercial and regulatory need for reform is not in dispute and improved standards of contract certainty will greatly assist in reducing confusion over what the parties have and have not agreed.
However, the way in which the London market does business, referred to as the 'deal now, detail later' practice by Financial Services Authority chief executive John Tiner, may prove difficult to change.
The London Market Principles' Contract Certainty Code of Practice defines contract certainty as the complete and final agreement of all terms, including signed lines, between the insured and insurers before inception.
In addition, the full wording must be agreed before any insurer formally commits to the contract, and an appropriate evidence of cover is to be issued within 30 days of inception. In this context, full wording can be a combination of: wordings and/or clauses; referenced and/or full text; together with bespoke and/or model material.
Eight principles under the Code will dramatically alter how the market goes about its business. In particular, the first three principles are important. Principle one states that brokers' submissions must satisfy the contract certainty definition and checklist to obtain firm quotes and place firm orders.
Principle two requires that each insurer must be satisfied that the submission meets contract certainty requirements, before formally committing to the contract, and any conditions or subjectivities must be clearly expressed. Principle three states that brokers must notify all terms to their client and obtain their client's agreement before inception.
Complying with these principles will, inevitably, result in a certain amount of front loading. Wordings and technical staff will need to emerge from the back office to play a greater role at an early stage, and the use of standard wordings and clauses is likely to increase. Technology will, therefore, be crucial. With only 30 days permitted from inception to the delivery of an appropriate evidence of cover, resources will need to be put in place to be able to meet this deadline.
Practical considerations aside, contract certainty is not the same as contract clarity. From a legal perspective, while great improvements can, and will, be achieved, disputes will still arise. Too often in the past, wordings have been cut and pasted together from various sources by someone long after the risk has been placed. This has sometimes resulted in inconsistency and, in some cases, undeniable contradiction between the policy terms.
Under the new regime, time limits will be much shorter, so there will be less chance of important details being forgotten. The focus of all these new pre-contract checks, however, will be to ensure the proposed terms meet the requirements for contract certainty.
An increased use of standard clauses will presumably assist in that process. Whether those standard clauses, together with the bespoke clauses chosen for a particular risk, will actually make sense in the context of the policy as a whole is a different question entirely, as cut and paste will still be cut and paste.
The Code also gives rise to additional, more fundamental questions. When, for example, is the contract actually made? There are three requirements for a contract to come into existence: firstly, an offer made by one party that is accepted by another; secondly, contractual intention on both sides; and, thirdly, consideration.
Within the London market, where business is normally transacted on a slip basis, it is established that the insured's request for cover, that is to say the slip, constitutes the offer. Acceptance occurs when the underwriter subscribes to the slip and, consequently, the moment of contract is the point at which the underwriter initials the slip.
Under the Code, broker submissions must satisfy contract certainty before the underwriter can give a firm commitment. The underwriter may, however, give an indicative quote even if contract certainty is not met. In this situation, the broker may then have to obtain further information, and instructions from the insured, before returning to the underwriter. Assuming that the underwriter is now satisfied, a firm quote will be given, and the broker will revert to the insured for agreement and then returns to the underwriter for a firm order/bound line.
So at what point does the contract come into existence? Taking one view, an indicative quote does not give rise to an offer because there was no intention on the part of the underwriter to be bound by the contract at that stage. Would the offer then be made when the broker reverts to the underwriter with the requested information? Or would it only be made when the underwriter gives a firm quote, so that there is no contract until that offer has been accepted by the insured?
This point is an important one because it is generally accepted that the pre-contract duty of utmost good faith, in particular the duty of disclosure, survives until the contract is made - traditionally when the underwriter scratches the slip. The new Code introduces several potential new stages to the formation process that could make the cut-off point more difficult to determine. Ultimately, of course, each case will turn on its individual facts.
There are, however, areas where contract certainty will achieve a great deal. Choice of law and jurisdiction clauses, for so long the Cinderellas of the drafting world, probably use up more court time than any other contract terms, and frequently they are left out altogether. In other cases they are simply meaningless - the classic example being UK or US law.
Under the Code and checklist, however, a choice of law and jurisdiction must be specified before the contract can satisfy the contract certainty requirements. There is, therefore, great potential for the contract certainty reform to reduce some of the easily avoidable disputes within the market.
- Ling Ong is a partner within the reinsurance group at DLA Piper.
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