LO C2 - Policy Wording

2.1 Importance of knowing identity of the contracting parties

Importance of knowing the identity of contracting parties

1. State/Government compulsory types e.g. Motor, 3rd party liability, employers liability
2. Companies transacting with new partners = PI insurance
3. Bank lending money (Banks sent out terms)
4. Broker providing professional advise (advises clients of insurance options)
5. Risk manager
6. Other insurers

SETS OUT T&Cs
How are they evidenced?
What difficulties might you face if there is a dispute some time after the agreement was supposedly made?
BUSINESS PARTNERs need confirmation of insurance cover before starting work.

COMPULSORY Insurance State make motor, employers’ liability, professional indemnity for certain professions such as solicitors, and public liability

Flexibility VS Ambiguity:
Brokers job is obtaining an insurance agreement that meets the client’s requirements and is as wide and flexible as possible.

Clients can be active or passive in creation of insurance contract

1. Insured Insurance knowledge
2. delegation to broker
3. If they have inhouse risk management/legal function involved in the process

Who are the parties of the contract

Insured

Main Insured + Additional Parties (EDF Oman + panel manufactures)
JOINT = Two or more parties are insured and their interests are the same (e.g. co-owner of a property)
COMPOSITE = A landlord and tenant not the same interest

IF composite then 1 entity innocent is exempt

Insurers

A Coverholder/MGA is the third party to which underwriting authority can be delegated under a binding authority

Who has right and obligation under the contract ?

1. Joint policies is indivisible so if one of the insureds breach any terms WILL lead to insurers have right to invoke LEGAL remedies
2. Regulation tells you whether you can transact with them at all.

How other parties obtain access to insurance policies

Contract law

1. Privity...
   • Normally, only the parties to the contract have rights and obligations under it.
   • A third party does not automatically have the right to enforce the insurance contract.
2. Third party (Rights against Insurers) Act 2010 - The Act lets an injured person claim directly from the insurer when the person or company responsible for the loss is insolvent
3. Contract (Rights of Third Parties) Act 1999 - Rights to outsiders to enforce a contractual term.
   1. A third party can enforce a contract if the contract expressly says they can OR Clearly identified.
   2. Insurance contracts can specifically exclude the operation of the Act.

2.2 Importance of Policy Wording

Desired end result, which is an agreement that meets the client’s needs and is clear and unambiguous.

Contract Certainty and its implication if not achieved

Complete and final agreement of all terms between insured and insurer when the contract is entered into; and contract documentation being supplied promptly afterwards.

Steps:

1. Entering into the contract
   1. All terms are clear + Unambiguous by time offer is made
   2. Within TERMS... Conditions OR Subjectivities expressed (which are a type of terms)
2. After entering into the contract
   1. Final Docs shared
3. Demonstrating of performance
   1. Proof of steps 1 and 2 above
4. Contract changes
   1. Must be certain and documented promptly

OR

More than 1 participating insurer:

1. Contract contains: Agreed basis on which each insurer's final participation determined
2. post-inception over-placement should be avoided.

Consequences include:

• disputed claims, delayed settlement, litigation/arbitration, additional costs, financial uncertainty, reputational damage.

The WTC example

More Info LM2 Contract Certainty

Specific reequipments for consumer insurance policies

Consumer Insurance (Disclosure and Representations) Act 2012
Insurance Act 2015 Power to the consumer if there is a breach of warranty

micro-enterprise treated AS consumers VS commercial customers
DEFINED as small businesses with up to 50 employees or turnovers of less than £6.5m
can use the Financial Ombudsman Service (FOS)
Consumer Rights Act 2015
clear; • fair; and • not misleading.

Clear and unambiguous insurance policy

2.3 How can Policy wording be constructed

Clearly drafted policy wording

consensus ad idem or ‘meeting of minds’ = parties are in complete agreement.
Both parties must be in complete agreement.

EXAMPLES BELOW OF Provisions of an insurance contract
&
What can go wrong

Insured: Is entity a sanction? checks and additional insureds
Insurers: Buying Reinsurance? is rating poor?

Subject Matter Insured: Correct vessel?
Location of risk: Check if correct?
Regulatory breaches: Correct PERMISSIONS to write risk in a location!

Policy limit structure:

1. Each and Every Loss?
2. Aggregate?
3. Sublimits?

Excess or Deductible

1. Full stated policy limits SITs above it
2. Deducted from stated policy limit

Cost in addition - NOT erode policy limit
Cost inclusive - (Exposure excess layer insurers or shouldered by insured) think legal cost

Policy period - Include time zone and 24 hour format

Conditions - What are Renewable energy market standard clauses?

1. Perils covered: All, EQ, Fire, SCS, Flood, Wind,
2. Excluded
3. Terms with Power of Warranties (Insurance warranty)
4. Terms with Precedent to Liability (Insurers obligation to pay is conditional upon "terms" requirement)
   1. Is Cyber Crime covered?

Price - Currency value vs SOV value

Post-bind decision makers & Dispute resolution provisions

More info on Key terms and conditions used in policy wording

Implication of ambiguity within a policy wording

Relevance of who has drafted the policy wording

Impact of broker-drafted contracts on same topic

Contracts includes other Clauses
2 separate elements of text could contradict each other.

Clients like broad Terms & Conditions + More added = increase chance of contradiction/conflict and ambiguity.

Broker clauses act differently e.g. ROD in addition or within sublimit

How regulation may affect the drafting of policy wording + Impact of using wording outside the london market

Regulators require specific wording For consumers

General requirement in the USA for a service of suit clause to be inserted into contracts.

France/Israel - forms, cover notes, contracts must be in French/Hebrew.
Lead by non-London market OR client wants wider wording
If CHANGES are made to a model wording IS uncertainty or ambiguity created
https://crystalplus.lloyds.com/home

Overseas wording: check has an inbuilt dispute resolution contract e.g. a law and jurisdiction clause or an arbitration clause).

Careful using an US-based insurer wording in other countries to dispute resolution

For example LM2 - C8 - Business process#Type of Conditions precedents are + remedies for breach
are not legally recognised in some jurisdictions

c. The wording might have a different interpretation under English law.

Reverse Engineering for Wording

Used mainly in reinsurance/fronting arrangements where the reinsurer ultimately wants to carry the risk, but a -
Local regulations require an admitted/local insurer to issue the policy.
Insured → Local/Fronting Insurer → Reinsurer

Key Risk – Wording Mismatch

Direct policy broader than reinsurance → Fronting insurer may have an unreinsured exposure.

Why might wordings differ?

• Drafting errors / clauses missed.
• Local regulation requires clauses or cover in the direct policy that aren't in the reinsurance.

DIC – Difference in Conditions

Can be used within global programmes where local policies provide narrower cover than the wider global/master programme.

Main concern: Avoid gaps between the direct policy and reinsurance protection.

Advantages and disadvantages of MRC and requirements for preparation

MRC - About history and purpose of document!

1. Open Market
2. Lineslip
3. Binding authority
   Blue print 2... MRC v3...

Advantages:
Mandatory headings, guidance supports correct completion; flexibility exists for class-specific needs; data appears in the same place regardless of broker/class;
Disadvantage

• if the MRC is issued directly to the client, it may not be the easiest document for an “outsider” to the market to read

2.4 Importance of Complete Contract Wording

(Good as its Papers Worth)
Courts interpretation of Documents (MRC slip and Policy wording)
so if a term is deemed unfair under the provisions of the Consumer Rights Act 2015 it will be interpreted in their favour.

Benefits of Wording libraries

Broker, insurers or clients can create wordings starting from a blank page
Committees create new/update wordings (insurance act 2015 or enterpise act 2016)

Deleting exclusions will widen coverage (Look for extreme coverage examples)

Brokers can reference ‘library code’ which might, for example, start LSW/CL, LMA or similar.
EVERYONE NEEDS to KNOW model clauses
If as the broker or insurer you want to amend a model clause, you can either do so using tracked changes or list the amendments by clause or section number.

Side letters and Purpose

A side letter is a separate contractual agreement that sits alongside the main MRC/slip.

Common Uses

• Clarification – confirms details not fully known when the MRC was finalised.
• Late changes – records last-minute agreed amendments without altering the signed MRC.
• Confidential matters – keeps commercially sensitive agreements between specific parties.
• Administrative arrangements – records practical matters such as reporting, surveys or information requirements.
• Variation of standard terms – documents agreed departures from a party's standard T&Cs.

Example

MRC: Engineering survey required within 90 days of inception.
Side Letter: Confirms the agreed surveyor, timing, information requirements and/or allocation of survey costs.

Key Risk

Having contractual terms spread across the MRC + side letters can create contract certainty issues, particularly:

• Which document takes priority?
• Who is actually party to the side letter?
• Are follow insurers bound?
• Does the side letter conflict with the MRC?
• Did the leader have authority under the GUA to agree the matter for followers?

Follow Market Perspective

A leader signing a side letter does not necessarily mean followers are bound by it. Check the parties, wording and GUA authority.

Key question: Why is this in a side letter rather than the MRC?

Side letters are less concerning when used for clarification, confidentiality or bilateral administrative matters.

Greater caution is needed where they materially alter coverage, deductibles, premium or policy obligations.

Common law rules of interpretation and their meanings

Ordinary meaning - Courts normally assume words were intended to have their ordinary meaning.

Technical or legal meaning - A recognised technical or legal meaning may be used where appropriate.

Inconsistencies from model wording adaption were what the party intended
policy wording trumps SLIP

what if the allegation is that the contract is ambiguous? Who will win the argument? The court looks at who drafted the wording. Once this is established the benefit of the doubt will be given to the other party!

Interpretation issues with client contract

If the client drafted the contract (or inserted bespoke wording into it), then the client becomes the drafter — so any ambiguity in that wording would now be interpreted in the insurer's favour instead.

Role of wording specialist

Persons responsibility to check contracts fit together properly, are clear, fair, non-misleading, cohesive and above all make sense.

1. considering them in their entirety for ambiguity/ contradictions
2. development of new products/contracts considers Regulations and statutory requirements both home and overseas
3. issues which arise from claims and complaints, and assisting underwriters and placing brokers with possible solutions
4. monitoring changes in law

Wider business risk

Principle of Solvency II LM2 - C4 - Market Security#4B) Solvency II instructs insurers to consider other types of business risk such as operational or counterparty risk.

contract will be found to be deficient, exposing the insurer to financial and reputational risks?

Principle 1: Underwriting profitability
High-level Principle: managing agents should produce and execute syndicate business plans that are logical, realistic and achievable, and ensure the delivery of a sustainable profit, including expense management.

Sub-Principle 3: have underwriting controls, monitoring and reporting in place that are appropriate to their risk profile in order to deliver the agreed business plan. The practical guidance under this sub-Principle includes:

• pre- and post-bind reviews to be done; and
• use of specialist legal/wordings personnel to assist with the production of wordings.

Ensuring that Contract Certainty is achieved.

Key points