New York State
Eric R. Dinallo Superintendent of Insurance 25 Beaver Street New York, N.Y. 10004
|ISSUED 10/16/2008||FOR IMMEDIATE RELEASE|
DINALLO SAYS INSURERS MUST PROVIDE CONTRACT CERTAINTY
There was no final detailed insurance policy on the World Trade Center before the 9-11 attack, just a broad agreement, and that uncertainty surrounding the nature and terms of the insurance contracts led to both sides spending six years in court and hundreds of millions of dollars in legal fees in a vain effort to resolve the issues until New York State Insurance Superintendent Eric Dinallo facilitated a $2 billion settlement last year. To help avoid situations similar to the protracted WTC dispute, Dinallo issued a bulletin, called a circular letter, to insurers today, advising them to take steps to provide “contract certainty.”
“Contract certainty” refers to the complete and final agreement to all terms of an insurance policy or reinsurance contract by the date the policy goes into effect, and the issuance and delivery of the policy or contract before, at, or promptly after that inception date.
“As the World Trade Center dispute shows, all sides need to be clear about the terms of an insurance policy before coverage begins,” Dinallo said. “The alternative hurts everyone. Resources that should go to rebuilding get diverted to legal fees. Delay is added to the damage. Governor Paterson’s commitment to strengthening New York’s economy means we have to remove possible obstacles like this.”
Contract certainty is not an issue with most insurance policies because they are written on standardized forms approved by the Department. But in some cases, because of the size or unique nature of the risk covered, issues concerning contract certainty are more likely to arise. These include the special policies issued to large commercial entities or to special risks, policies written in the excess line market, and policies to other insurers via reinsurance.
The circular letter tells insurers, agents and brokers in New York that all terms of such a policy should be agreed to and the insured provided with a copy of the policy, normally within 30 days of the policy’s inception. Insurers, agents and brokers should, within 12 months, develop and implement practices to assure that policy documentation is delivered within 30 days.
If terms and conditions are not clearly agreed upon before coverage commences, or if proper documentation is not provided, insureds may not know what coverage they actually have, and may assume they are covered for certain risks when they are not. This could lead to confusion at best, complex litigation at worst.
While resolving the World Trade Center dispute, the Department discovered certain common industry practices could result in contracts remaining uncertain for months after a policy’s inception. The circular letter is designed to eliminate these practices and their potentially harmful effects on the insurance market and New York’s economy.
The New York action is similar to that taken by the United Kingdom Financial Services Authority (FSA) in 2004. The FSA called on industry in the London market to provide greater contract certainty at the inception of a contract, with full documentation delivery promptly thereafter. Significant progress toward contract certainty in that market resulted from the FSA’s action.
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