RMG107

Contract Certainty –

An Imperative or an Impossible Dream

April 26th, 2006

8:00am – 9:30am

IntroductionRoger GillettACE Risk Management International

A Broker’s Point of ViewAlan WaringCrump International Ltd.

A Lawyer’s ViewpiontKim WilkersonAttride-Stirling & Woloniecki

A Risk Manager’s PerspectiveDiane LabradorIntel Corporation

RMG107 – CONTRACT CERTAINTY – AN IMPERATIVE OR AN IMPOSSIBLE DREAM

A Broker’s Point of View

Presenter: Alan WaringCrump International Ltd.

Overview

• Overview of Contract Certainty and Current Performance Expectations.

• Most wordings are not agreed to prior to inception.• Creates uncovered claims, errors and omissions, massive legal bills

etc…• Why…? Fingers pointed in all directions.• Underwriters – not flexible, treaties, slow, best terms issue.

Brokers – slow, not demanding, poor planning – time frames.

Clients – expect a lot, push for best wording – creates delays.

Current Performance Expectations

• Clients expect more … however there has to be dramatic change.

• “Contract Certainty is achieved by the complete and final agreement of all terms (including signed lines) between the insured and insurers before inception”. *

• “The full wording must be agreed before any insurers formally commit to the contract”. *

• Policy issued within 30 days.

( *Definitions used for London Market business.)

Current Performance Expectations

• Insurer/Broker Standard Wordings – Clients do not want it.

• “Best terms” being mandated by most insurance carriers.

• Barriers to improving … something has to give.

• “Insurers need to change most – Insurer resource and mind set … biggest obstacles to contract certainty … brokers more agile”. (AIRMIC Client Survey 1/06)

• Clients/Broker must meet with underwriters 3-4 months prior to meetings.

• Complete policy wording in submission – no need to “overtweak “wordings.

• Statement from client/broker in submission saying they will not accept “Best Terms” wording.

Comparison by Major Markets

• Comparison - London, Bermuda and the U.S.A.

• FSA, the Market Reform Group, Sarbanes, Spitzer, Bermuda Monetary Authority

• Regulating

• The Insurance Carriers, Brokers and Clients

• Multiple markets on large risks with different regulations and procedures. Creates conflict.

Comparison by Major Markets

• London market – Financial Service Authority• Well ahead of the pack – Exceeded the first industry target (poor history)• 65% of all contracts agreed during December were “certain”, target was 30%• 85% is year end target (set 4/05)• Contract Certainty Code of Practice and checklist – 250 have formally signed their agreement. • Seminars, communications, training courses, etc.......• Code of practice set for legacy policies• Per the FSA, no more “deal now, detail later”.• USA - Spitzer & Sarbanes Oxley • Focus on premium, income, transparency & marketing• Less on Contract Certainty • Bermuda - Very few mandates to date• Following the US and London • Insurance Carriers taking the lead (ACE Bermuda) • Bermuda Monetary Authority – no visible role

RMG107 – CONTRACT CERTAINTY – AN IMPERATIVE OR AN IMPOSSIBLE DREAM

A LAWYER’S VIEWPOINT4 Propositions on Contract Certainty

Presenter: Kim WilkersonAttride-Stirling & Woloniecki

Propositions

1. It’s the last agreed contract that counts – so get it right the last time

2. An agreed and timely issued policy will not cure all disputes – but will go a long way

3. The rush to “certainty” brings its own challenges

4. The more innovative the product, the less likely “certainty” is achievable

PROPOSITION NO. 1

It’s the last agreed contract that counts – so get it right the last time

•The relationship of binder/slip v policy•The legal status of these contractual documents •One lesson from WTC

THE BINDER

SR International v World Trade Center Properties LLC

• An insurance binder is a unique type of contract. While not all the terms of the insurance contract are set forth in the binder, “a binder is a present contract of insurance…”

Ell Dee Clothing v Marsh, 247 NY 392 396 (1928)

• A binder is “a short method of issuing a temporary policy for the convenience of all parties, to continue until the execution of the formal one.”

Lipman v Niagara Fire Insurance Co., 121 NY 454, 548 (1890)

• The New York Court of Appeals has made it clear that when a binder is signed, “the contract of insurance is closed and the binder becomes in effect the same as a regular insurance policy…”

THE SLIPLondon Market Practice

• Prima facie, an insurer in the London market is committed to a risk when he scratches a slipERC Frankona Reinsurance v American National Insurance Company

[2005] EWHC 1381 (Comm)

• When the policy has been issued it is the policy and not the slip which constitutes the contract between the parties

• Where there is no subsequent policy or wording, the slip stands alone.

PROPOSITION NO. 2

An agreed and timely issued policy will not cure all disputes – but will go a long way

Governing Law Clauses (or the lack thereof) – Express Yourself!!

US service of suit + no express law = $$$

PROPOSITION NO. 3

The rush to “certainty” brings its own challenges

The use of standard agreements and clause books• Dornoch v Royal Sun Alliance• Longmore J: The concept of “business common

sense”

PROPOSITION NO. 3

Dornoch v Royal Sun Alliance“business common sense”

The Question:In interpreting the meaning that should be given to words in a contract, why can’t judges just apply the “business common sense” meaning, which is after all, surely what the parties would have intended?

The Answer:

Longmore J:

“Attractive as the proposition is in general, there are dangers in judges deciding what the parties must

have meant when they have not said what they meant to say for themselves. This is particularly

dangerous when the parties have selected off the shelf or the precedent book a clause which turns

out to be unsuitable for its purpose”

PROPOSITION NO. 4

The more innovative the product, the less likely “certainty” is achievable.??

Cat Bonds/Industry Loss Warrants Insurance??? Proper Contractual Framework even more necessary

RMG107 – CONTRACT CERTAINTY – AN IMPERATIVE OR AN IMPOSSIBLE DREAM

A Risk Manager’s Perspective

Presenter: Diane LabradorIntel Corporation

Key Points

• Painful Lessons – A Surprise Legal Review

• Internal Expectations– Governance

– Collectibility

• Risk Manager’s role- Change (& enforce) the expectation– Setting the expectation

– Process Discipline

– Vendor Accountability

– Legal Certainty

Practical Considerations

• Communications• Incentives

– Broker Scores ‘points’ for on time policy delivery– Insurer is acknowledged/recognized with a kudo /other positive

reinforcement

• Disincentives– Loss of points/penalties for every day outstanding– Installment premium payments (1/2 down; remainder on

delivery)

Other Tricks:– Visible tracking mechanism: email diary notification issued to all

program participants ( 14 days to renewal, 13 days, 12…)– Weekly notice to broker/insurer of lack of delivery, with an

escalation to management chain

Ideal : Use of Technology

• Model: digital version of the policy is provided at date of renewal

– Pre-renewal Working sessions (ex. on line Net meeting) tracking changes/modifications.

– Set aside items where parties disagree, and set up separate time line to complete them

– Direct involvement of RM team, not defaulted to the broker

RMG107 – CONTRACT CERTAINTY – AN IMPERATIVE OR AN IMPOSSIBLE DREAM

An Underwriter’s Perspective

Presenter: David CashEndurance

Contract Certainty – An Underwriter’s Perspective

In considering Contract Certainty two items dominate the discussion

1. Document Certainty :– Delivery of a completed contract within a reasonable [30 day] period of time.

2. Coverage Certainty :– Delivery of a contract that provides the RM with certainty as to the extent and interpretation of coverage.

Depending upon the coverage being provided both items can present challenges to the client, broker and insurer

Impediments to Achieving Contract Certainty

1. Complexity of Coverage :– 3rd Party Liability vs. Named Peril coverage.

2. Competition on the Basis of T&C’s :– This has long been considered desirable both for clients and insurers.

3. Large Scale Syndication :– Layering represents a best practice as respects pricing, but not coverage certainty.

4. Dynamic Exposures and Unsettled Law :– This is particularly significant for the risks and covers most likely to generate contract certainty issues.

Underwriters perspective on current situation

1. Undesirable :– The lack of pre agreed and standardized wordings has many undesirable implications for insurers:

Inability to estimate costs and to risk manage Increased legal risk to insurer Adversarial relationships with clients Operational Inefficiency

2. Unsurprising :– While not desirable, this situation is unsurprising.

Large risk insurance has always been very difficult area in which to create standards

There are natural trade offs for clients on this issue

Achieving Reasonable Contract Certainty

1. Understand the Trade Offs :– For key covers, be willing to trade price for continuity and service. Expect the same from your insurers

2. Consistent Approach to Purchasing Coverage :– Underwriters value consistency, it allows them to take positions on risks they could not do for new clients.

3. Better Information :– Improve the quality of disclosure to underwriters. Where non standard coverage is sought be prepared to provide an economic analysis in support of request.

RMG107

Contract Certainty –

An Imperative or an Impossible Dream

April 26th, 2006

8:00am – 9:30am