Contract certainty: one more move to avoid chaos
Willis Chairman and CEO Joe Plumeri last week hailed moves by New York’s insurance regulators to force insurers to provide policyholders with contract certainty.
Mr Plumeri has been at the forefront of efforts to convince brokers and insurers to speed up the delivery of final insurance contracts. As a relative industry outsider – he joined Willis in 2000 from the banking sector – he has made many speeches questioning the industry’s lax habits when it comes to contracts.
Lloyd’s CEO Richard Ward – another “outsider” who joined the market in March 2006 – has made the drive for contract certainty one of his mantras in the modernisation of the 420-year-old market.
Both have regularly expressed dismay at the fact that insurance cover is sometimes not covered by a formal contract for months – or, in some rare cases years – after the agreement comes into force. Now regulators are joining the push to ensure that insurance-buyers know what they’re getting before the policy comes into force. The UK Financial Services Authority is one regulator that has been pushing the issue since 2004.
Now New York Superintendent of Insurance Eric Dinallo has issued an order to insurers, agents and brokers, giving them a year to develop systems that will provide policy document to insureds within 30 days of a policy’s inception.
It’s appropriate that the heat is coming from New York. The issue of contract certainty came to a head in New York City after the terrorist attacks of September 11 2001, when most of the insurers and reinsurers of the destroyed World Trade Centre were found to be bound only by a temporary Willis policy rather than separate finalised contracts.
Willis represented the centre’s leaseholder, Larry Silverstein, and the “Wilprop” form, as it was known, carried a clause that bound insurers to treat multiple instances of loss as one occurrence. The clause was intended to protect Mr Silverstein’s interests by grouping related events as one occurrence, so that only one deductible would be payable. The maximum loss under the “one occurrence” rule was $US3.5 billion ($5.29 billion).
The large number of insurers bound by the Wilprop form took the view that the destruction of the two World Trade Centre towers should be regarded as one occurrence, thereby limiting their liability to only one of the towers.
The subsequent legal battle between the insurers and Mr Silverstein raged for several years. In September 2003 the US Court of Appeals affirmed an earlier court finding that nine of the 12 participating insurers and 20 Lloyd’s syndicates were bound by the Wilprop form.
Nine other insurers were bound under eight separate binders, and Allianz by a final policy. They were found to have agreed to a “two occurrence” payout.
Eight of the nine “two occurrence” insurers appealed. Tokio Marine reached a settlement with Mr Silverstein, while three of the remaining eight were bound by forms with no definition of “occurrence”. Five of them were bound by forms which defined “occurrence” as a loss, disaster or casualty, or a series of losses, disasters or casualties arising out of a single event.
Later appeals were based around the contention that “occurrence” was defined to be linked to an “event”, and that the attack was one event and therefore one occurrence. In those cases the court disagreed.
In May last year – more than five-and-a-half years after the World Trade Centre was destroyed – a final insurance settlement was reached when seven insurers agreed to pay $US2 billion ($3.04 billion) to settle all Mr Silverstein’s outstanding claims, bringing the final insurance payout to around $US4.55 billion ($6.88 billion).
The complex replacing the World Trade Centre, which will include several skyscrapers, a memorial and a railway station, is expected to cost more than $US12 billion.
For Mr Plumeri, who was still at Citibank when his company’s notorious Wilprop document caused so many problems, the move by the New York regulator to enforce contract certainty is one more step on the road to making the industry reliable and transparent in its dealings.
“We’re in the business of keeping promises,” he said last week. “The insurance industry as a whole can do no less.”
Mr Plumeri has been at the forefront of efforts to convince brokers and insurers to speed up the delivery of final insurance contracts. As a relative industry outsider – he joined Willis in 2000 from the banking sector – he has made many speeches questioning the industry’s lax habits when it comes to contracts.
Lloyd’s CEO Richard Ward – another “outsider” who joined the market in March 2006 – has made the drive for contract certainty one of his mantras in the modernisation of the 420-year-old market.
Both have regularly expressed dismay at the fact that insurance cover is sometimes not covered by a formal contract for months – or, in some rare cases years – after the agreement comes into force. Now regulators are joining the push to ensure that insurance-buyers know what they’re getting before the policy comes into force. The UK Financial Services Authority is one regulator that has been pushing the issue since 2004.
Now New York Superintendent of Insurance Eric Dinallo has issued an order to insurers, agents and brokers, giving them a year to develop systems that will provide policy document to insureds within 30 days of a policy’s inception.
It’s appropriate that the heat is coming from New York. The issue of contract certainty came to a head in New York City after the terrorist attacks of September 11 2001, when most of the insurers and reinsurers of the destroyed World Trade Centre were found to be bound only by a temporary Willis policy rather than separate finalised contracts.
Willis represented the centre’s leaseholder, Larry Silverstein, and the “Wilprop” form, as it was known, carried a clause that bound insurers to treat multiple instances of loss as one occurrence. The clause was intended to protect Mr Silverstein’s interests by grouping related events as one occurrence, so that only one deductible would be payable. The maximum loss under the “one occurrence” rule was $US3.5 billion ($5.29 billion).
The large number of insurers bound by the Wilprop form took the view that the destruction of the two World Trade Centre towers should be regarded as one occurrence, thereby limiting their liability to only one of the towers.
The subsequent legal battle between the insurers and Mr Silverstein raged for several years. In September 2003 the US Court of Appeals affirmed an earlier court finding that nine of the 12 participating insurers and 20 Lloyd’s syndicates were bound by the Wilprop form.
Nine other insurers were bound under eight separate binders, and Allianz by a final policy. They were found to have agreed to a “two occurrence” payout.
Eight of the nine “two occurrence” insurers appealed. Tokio Marine reached a settlement with Mr Silverstein, while three of the remaining eight were bound by forms with no definition of “occurrence”. Five of them were bound by forms which defined “occurrence” as a loss, disaster or casualty, or a series of losses, disasters or casualties arising out of a single event.
Later appeals were based around the contention that “occurrence” was defined to be linked to an “event”, and that the attack was one event and therefore one occurrence. In those cases the court disagreed.
In May last year – more than five-and-a-half years after the World Trade Centre was destroyed – a final insurance settlement was reached when seven insurers agreed to pay $US2 billion ($3.04 billion) to settle all Mr Silverstein’s outstanding claims, bringing the final insurance payout to around $US4.55 billion ($6.88 billion).
The complex replacing the World Trade Centre, which will include several skyscrapers, a memorial and a railway station, is expected to cost more than $US12 billion.
For Mr Plumeri, who was still at Citibank when his company’s notorious Wilprop document caused so many problems, the move by the New York regulator to enforce contract certainty is one more step on the road to making the industry reliable and transparent in its dealings.
“We’re in the business of keeping promises,” he said last week. “The insurance industry as a whole can do no less.”