New York Insurance Dept. Issues Circular Letter on Contract Certainty

The New York State Insurance Department has issued a circular letter regarding the Department’s position and expectations regarding contract certainty with respect to property/casualty insurance policies and all reinsurance contracts.

The department said it was issuing the letter to insurers today, advising them to take steps to provide “contract certainty” to help avoid situations similar to the protracted WTC dispute,
The department’s news release said 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.

“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.

The circular letter informed 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.

According to the Department, 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.

The department said the action was 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.