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Bermuda Embraces Contract Certainty
London and Bermuda Newsletter
The Association of Bermuda Insurers & Reinsurers (ABIR) and the Bermuda Insurance & Reinsurance Brokers Association (BIRBA) have implemented a Contract Certainty Code of Practice. The initiative mirrors market reforms introduced in the London and wider UK markets in 2004 and will serve to improve market practice as it relates to the agreement and documentation of coverage terms before coverage is bound.
The aim of Contract Certainty is to address the inherent difficulties associated with “deal now, detail later” underwriting. Such a manner of transacting business is problematic for (re)insureds because they cannot be certain whether they have effectively transferred risk to their (re)insurers as intended, and if so, on what terms. It creates legal, fiduciary and operational risks for brokers and exposes them to liability in the event a coverage dispute arises because of either lack of agreement on coverage terms or the absence of documentation confirming agreement on such terms. For underwriters it creates uncertainties in relation to the true value of underwritten risk. The problem of “deal now, detail later” is typified by the costly nature of the Silverstein/WTC coverage litigation.
Contract Certainty exists where all contractual terms contained in a (re)insurance policy are agreed at the time coverage is bound. It requires that all such terms be evidenced at the time coverage is agreed by a binder or other similar document. The (re)insurer’s share of any liability should also be agreed and documented. The contract of insurance must be issued promptly thereafter and in any event within 30 days of the later of: policy inception; the date upon which coverage is agreed; or where there are numerous participating insurers the date upon which the final (re)insurer agrees to grant coverage.
The Code of Practice sets out eight principles that members of ABIR and BIRBA are tasked with upholding. Additional guidance can be found in the Contract Certainty Code of Practice Guidelines.
The Code and Guidelines require brokers to provide (re)insurers with all information necessary to either underwrite a given risk or agree terms. The broker must ensure the underwriting submission contains copies of (or alternatively reference to) all applicable wordings or clauses. Brokers must also ensure the submission includes details of (or alternatively reference to) all information provided to (re)insurers as part of the application process. Moreover, it is the brokers’ responsibility to ensure the underwriting submission reflects the requirements of its clients. Brokers are required to advise their clients of all coverage terms and also to obtain their client’s consent to terms prior to binding.
The Code recognizes that subjectivities remain part of the underwriting process. In the interest of bringing about Contract Certainty subjectivities must now be clearly identified at the time of binding. Details of the action that is required must be set out together with details of the person responsible for carrying out the required action. The parties should agree and document a deadline by which each subjectivity is to be satisfied. In addition, the consequences of subjectivities not being met must also be documented.
As part of Contract Certainty, policy documents should be issued promptly. This reduces the problems associated with (re)insurers having to adjust claims that arise in relation to policies for which there is no wording in existence. Amendments after binding must be mutually agreed and documented in an endorsement which identifies the effective date of the change.
Members of the ABIR and BIRBA have been tasked with not only ensuring compliance with the Code of Practice but also with measuring compliance. The ABIR and BIRBA hope that 90 percent of contracts written in Bermuda at the 1 January 2009 renewal will comply with the Code.
This initiative evidences the Bermuda market’s commitment to international best practices and serves to protect the interests of (re)insurers and (re)insureds alike.
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