The need for any contract to provide certainty is, on the face of it, important. This allows each party to the contract to know exactly what their rights and responsibilities are.
As a contract of insurance is, to my mind, the most important contract a business owner enters into in their business life, coupled with the fact that insurance is a product that does not follow the principle of ‘buyer beware”, but rather requires utmost good faith on both parties, it goes without saying that it is more important for an insurance contract to provide contract certainty.
The fact that the policy wording on the World Trade Centre towers had not been agreed on, was a stark reminder to the insurance industry for the need for contract certainty. Having insurance in place saying “wording to be agreed” is naturally going to lead to a massive dispute when a large claim arises before the wording is agreed.
Contract certainty is now compulsory for brokers and insurers in the United Kingdom and this has been welcomed by consumers. In summary, the standards in the United Kingdom’s Financial Services Authority’s Code of Good Practice require confirmation of the agreed wording to be used before placement.
But this is just one issue. The other is when the policy purports to provide coverage, but when it comes to the crunch the insurer refuses to grant cover.
One example is the cover afforded for statutory fines and penalties. When this cover first came out I questioned whether it had a place. My concern was that it may be regarded as being against public policy. I have written articles on this subject, such as the proposal by a group of students to offer insurance for fines for fare evasion. Refer http://www.allanmanning.com/traminsurance-its-illegal-on-so-many-levels/
In discussion with underwriters they advised that statutory fines and penalty cover for, say, a breach of employment practice law was different and it was to protect the directors and senior offices that may be innocent, but caught up in a breach. I could see how this had a place to protect such people but the policies did not spell when a claim would be paid or when it would not be.
A number of insurers who have issued such cover are now refusing to pay claims for statutory fines and penalties due in their belief that any such payment would be against public policy.
So what is insurance against public policy. An insurance contract that violates government legislation, is contrary to public policy. Similarly, if it plays a part in some prohibited activity the insurance policy/contract will be held unenforceable in court. An insurance contract that protects against the loss (fire or theft) of illegal drugs, for example, is contrary to public policy and is therefore unenforceable.
The trouble for the Insured and, as such, for the broker that advised them to take out this coverage, is that the Insurer picks and chooses which fines they will pay for and which ones they will not, after the event. The only way this can be overturned is to take the matter before a judge.
What needs to happen so that clients do not have an insurance contract, which in effect they are playing Russian roulette with? Either the cover for statutory fines and penalties has to be removed completely from contracts by Insurers who are uncomfortable about providing any coverage, which they believe may, under some circumstances, be against public policy or Insurers need to include in the policy wording a clear set of conditions as to when an insurer will not pay the claim. This allows the client and their broker to know the rules in advance. It also assists in protecting the brand insurance, which has been tarnished in so many ways of late. The third option is to pay all claims arising from statutory fines and policy limits.
As for the brokers, if you hear of an insurer rejecting a claim under one of these policies, due to a belief on the part of a claims officer that the circumstances giving rise to a particular claim are against public policy for indemnity to be granted, how then are you going to explain the benefits of the policy to your client? What exposures do you create for your own practice by recommending such cover without contract certainty as to what will and will not be paid? Please give this serious consideration before you find yourself caught trying to explain a denial to one of your clients.