Contract uncertainty

Many firms have been struggling with contract certainty but it will cause changes. Although not in the rules issued by the Financial Services Authority, there is a code of practice and checklist that has been agreed by the Association of British Insurers, the British Insurance Brokers' Association and Institute of Insurance Brokers, and the FSA will apply rules if the code of practice is not successful.

Contract certainty means that the wording and all terms must be agreed between the client and the insurer before cover commences. In practice, this may lead to standardisation of wordings in the subscription market but will also mean that in the provincial market it is likely that underwriters will start to provide electronic copies or internet access to the policy wording at the time of quotation.

To avoid having to issue more paperwork at quotation stage, brokers may therefore, want to start asking customers for e-mail addresses, and obtain confirmation from them that it is ok to provide information by this method, so they can provide pdf wordings, or web links to the policy.

The checklist, which is available from the ABI website, also details the information which will be required from brokers when requesting quotations.

Two issues likely to affect you are the removal of subjectives, such as 'subject to survey', and fixed timescales for insurers to issue the policy.

As the purpose of contract certainty is to allow the policyholder to be sure of the terms, endorsements, warranties and cover provided, use of subjectives would detract from that certainty. Insurers will be required to detail what cover actually applies and ensure that any such requirements are stated clearly as conditions of the contract, with responsibilities and timescales for resolution, and with the consequences of failure clearly specified.

Finally, the code places strict requirements on the insurer (or, under delegated authority policy issue arrangements, the broker) to issue 'appropriate evidence of cover'. Interestingly, the code makes no allowance for delays due to the proposer failing to provide relevant documents, and this evidence of cover, consisting of the full policy wording and schedule, must be provided within 30 days in respect of commercial business and within only five working days for retail business.

The FSA has given the market a 'target' of 95% contract certainty by December this year, failing which it will apply rules, so the ABI, Biba and the IIB have also agreed a reporting sheet which is available from any of them, enabling brokers to provide statistics in a pertinent format.