The stormy economic conditions will prove a tough test for reforms intended to improve insurance contract certainty and overall standards. By Paul Wordley and Graham Denny
In December 2004 John Tiner, the then chief executive of the Financial Services Authority (FSA), challenged the insurance market and the ‘deal now, detail later’ approach it had to insurance business. He set the challenge of achieving contract certainty within two years. If it failed, the FSA would impose its own regulatory regime.
The need for reform was clear. There were increasingly more complex risks being placed through the London market and, together with the competition faced from other jurisdictions, the London market needed to change and modernise to stay ahead of its rivals. Clarity was needed in relation to policy wordings and the placing and claims processes.
Aims of market reform
Since 2004 we have seen considerable change. This has been driven from within the London market and has been led by the Market Reform Group (MRG). Its aims were:
- Contract certainty: To achieve clarity in the insurance contract so that both insurers and the insured were aware of all the terms from the outset. It was hoped that this would reduce coverage disputes, legal bills and improve downstream processing.
- Process efficiency: Essentially this meant establishing efficient processes to store data that could then be accessed by the market. The intention was also to reduce error rates.
- Service to clients: Adopting processes that speed up the agreement of insurance contracts, the issuing of documentation, the processing of claims and subsequent agreement of those claims.
- Global standards: Achieving accepted international standards for accounting, business processes and technology.
- Change since 2004
- There were principally three areas of change:
- As regards contract certainty, the target for the end of 2006 was for the market to achieve contract certainty in at least 85 per cent of cases. This was achieved and surpassed. In June 2007 a consolidated Contract Certainty Code of Practice was published applying to the entire UK insurance industry – subscription and non-subscription; commercial and retail. It was intended that the market use this code to establish best practice across all offices and branches.
- We also saw the introduction of the London Market Principles (LMP) slip. The aim of this was to ensure a common format and content to the way that insurance business was conducted. The LMP slip was followed by the Market Reform slip in an attempt to further increase the efficiency of the placement process. In June 2007 this was replaced by the Market Reform Contract (MRC), the use of which was mandatory for the London market from 1 November 2007. It was intended that the MRC would be the precedent standard for the contract of insurance between the insured and the insurer.
- The Insurers’ Market Repository was developed during 2006 to speed up the accounting and claims processes. It allows insurers to view all the documentation submitted by brokers in a secure central database that enables premiums and claims to be processed.
Reforms’ influence on litigation
The insurance processes, the placing of risks, and inefficiencies in handling claims before the change raised numerous coverage queries that on larger matters often led to disputes on coverage, but also increased the prospects of insurance intermediaries being sued for their failings in the renewal process, largely down to a lack of contract certainty and failures in the claims process. The way in which these processes were conducted and the lack of documentation evidencing what had occurred further fuelled litigation.
Since 2004 the improvements put in place to ensure that both the insured and insurer know the terms upon which they are contracting and the standardisation of the placing and claims processes should have the effect of reducing the problems that previously occurred, and thereby reduce the number of disputes.
However, outside the market reform we have seen a substantial amount of case law interpreting insurance contracts, which has not resulted in certainty. Examples of such cases in the past year include HLB Kidsons v Lloyd’s Underwriters & Others (2008); Kajima UK v the Underwriter Insurance Company (2008); and Aspen Insurance UK Limited and Others v Pectel Limited (2008). This case law has focused on the notification provisions of policies and the effect of conditions as conditions precedent to liability within policies. This lack of certainty allows room for argument, whether for an insured, an insurer or a reinsurer, and there will inevitably be further litigation in the future.
Part of the problem is the ‘tail’ involved in claims on legacy contracts before the contract certainty initiative, as well as the fact that there is still a need to push for quality in terms of contract certainty for the large complex risks. This push is ongoing and is increasingly being driven by corporate governance issues and the identification of procurement risk in the insurance contract process.
History has taught us that in times of economic downturn there is a greater scrutiny of contractual obligations and tortious duties in commercial relationships and transactions. The legal disputes that inevitably arise from this greater scrutiny affect and bring into play liability insurance policies, which in turn leads to greater scrutiny of those policies and whether cover is afforded by them. The current economic downturn, therefore, will be a good test and indicator as to the success of the contract certainty reform.
Paul Wordley is a partner and Graham Denny an assistant in the insurance and reinsurance department at Holman Fenwick & Willan