[the introduction of contract certainty] should see an end to the “deal now, detail later” mentality. But will we see wordings which truly and clearly represent the parties’ bargain?

For over seven years the London Market has been spasmodically progressing towards the goal of “contract certainty”, in a belated response to international criticism of its practices, in particular its apparently endemic inability consistently to produce policy wordings, either on time or at all, or in terms which accurately reflect the cover the parties believed had been written.

The chaotic state of the London Market with respect to the placing of insurance business is well illustrated by a single case. This is the decision of the Commercial Court in GNER –vs- Avon (unreported; confirmed by the Court of Appeal (2001) 2 All ER 526). The story is a salutary, but sadly familiar, one.

Following the privatisation of the UK Rail Network, GNER were granted a five year franchise to operate the Inter City East Coast Service. As a condition of the franchise it was necessary for a full programme of insurance to be put in place. GNER appointed brokers, Fenchurch, to obtain the necessary coverage. Property Damage and Business Interruption Insurance was eventually placed with Avon Insurance Company, by means of a slip. The slip specified that coverage should be for “All Risks of physical loss or damage, howsoever arising including breakdown….”. GNER had, in fact, specifically instructed Fenchurch that they required “full breakdown protection”. The broker’s form of wording was to be used.

Coverage commenced on March 29th 1996. Some months later someone in the Policy Wordings Department of Fenchurch, apparently without the knowledge of the actual broking team who had negotiated this contract, sent out a standard “All Risks” Policy Form to Avon. Someone at Avon (without the knowledge of the Underwriter who had actually agreed the cover) stamped and returned it. This document was then apparently filed in Fenchurch’s records without having been seen or approved by any relevant executive.

The Fenchurch Wording contained a swingeing exclusion clause which effectively robbed the policy of any breakdown cover. No one, apparently, noticed.

Just as the contract was due for renewal, GNER changed brokers: from Fenchurch to Jardine. With little time to familiarise themselves with their client’s requirements, Jardine were content to renew cover as expiring. By the time the second renewal approached, however, Jardine had prepared a substantial, so-called, “Market Presentation” which was, in effect, a draft policy wording in all but name. This document – which was introduced with the words “we are seeking terms for the renewal of GNER’s Property “All Risks” Insurance Programme as outlined in the following Presentation” – contained a far narrower exclusion clause than that which appeared in the Fenchurch Standard Terms.

The Document was sent to Avon some two weeks before a key meeting between a Jardine representative (not a broker) and the Avon Underwriter. At that meeting each party had a copy of the Presentation but did not refer to it. It later transpired that the Underwriter had never, in fact, bothered to read it. Nor, for that matter, had he read (since he was not aware of) the Fenchurch Wording. He had written, and twice renewed, a quarter of a billion pounds of cover on the basis of the Fenchurch slip alone. A brief exchange of faxes some days after this meeting confirmed “renewal of the Policy”.

Four months later a GNER train was derailed and substantial business interruption losses were incurrred. The cause of the derailment fell within the exclusion clause contained in the Fenchurch wording, but not within the exclusion clause contained in the Jardine Market Presentation. If the Fenchurch Wording were operative during this third year of cover the insurers would be excused; otherwise they would be liable to pay.

It fell to the Courts to make sense of this cacophony of incompetence. Given that:

(i) the Fenchurch Wording had been issued without the scrutiny or approval of the broking team
(ii) was a standard form, not specifically crafted to the needs of a train operating company in general nor one seeking “full breakdown protection”, in particular; and
(iii) which, in fact, excluded virtually all breakdown cover in its entirety

and given that:

(iv) the Market Presentation was manifestly a document intended to contain contract terms; which
(v) had been sent to the Avon Underwriter in good time prior to the renewal meeting; and which
(vi) a reasonable Underwriter might have been expected to read prior to such meeting;

it would seem strongly arguable that the Jardine Wording should prevail, or, at the very least, that the Fenchurch Wording should not.

However, the Judge concluded that the Fenchurch Wording did apply throughout. This wording had, after all, been issued by the Assured’s agent in accordance with the terms of the slip and had been duly stamped by the Underwriter as approved (even though this process would appear to have been entirely mechanical on both sides). The Judge then ruled that the Underwriter on the second renewal was entitled to assume that he was being asked to renew on expiring terms (even though he was entirely unfamiliar with those terms) unless specific alterations or enhancements were drawn to his attention by the Broker and his agreement to them obtained. The faxed reference post-meeting to “renewal of the Policy”, in the judge’s opinion, supported his analysis of events.

The Court of Appeal approved this reasoning, even though it left the Assured, who had paid a substantial and specific part of the premium for “full breakdown protection”, with no such protection at all.

Will the onset on “contract certainty” free the London Market from practices, and outcomes, such as this? Certainly we should see an end to the “deal now, detail later” mentality. But will we see wordings which truly and clearly represent the parties’ bargain? Here lies a possible paradox: for when the parties omitted to produce a wording, the law could, through techniques refined over hundreds of years of examining commercial relationships, elucidate the parties’ contractual intentions from the evidence surrounding that relationship and the making of the particular contract in issue. (This is why, incidentally, there can be, in law, no such thing as “contract uncertainty”: if there is a contract, then, by definition, all its terms can be extrapolated.) If, however, a full wording is produced, then – assuming its terms are unambiguous – the law will look no further for its meaning, even if those terms do not represent the parties’ original agreement. In other words, if the old practice of churning out boilerplate provisions or standard forms persists – but is simply brought forward in time to the point when the bargain is struck. Furthermore, that full wording may well contain provisions which the market believes it understands but to which the law attaches a quite different meaning – witness the courts’ interpretation of the “actually paid” clause in Charter Re –vs- Fagan or “follow the settlements” in Hill –vs- M & G.

It is clear that a radical revision, not only of market practices, but of market philosophy, is required. No more “deal now, detail later”; but also: no more relegating the production of wordings to a low-grade back office function. Otherwise “contract certainty” will be no more than window-dressing.

This Special item appeared in issue 107 of JTW News - July - August 2006

Author: David Tiplady | Mike Palmer - Beachcroft LLP | Helix UK Ltd