New Insurance and financial products and avoiding disputes

By Clive O’Connell, Partner and Head of Insurance and Reinsurance at McCarthy Denning

Insurance products are promises to pay in the future should certain circumstances occur.

Those future circumstances are necessarily unpredictable. Insurance requires fortuity. It is therefore, essential, that those future circumstances are described as precisely as possible. Both parties to the transaction need to know, with certainty, when and how the promise to pay will crystallise.

Disputes arise where the language in the contract is unclear or in anyway ambiguous. There have been times when the drafters of significant clauses have deliberately incorporated ambiguity into wording on the basis that they were incapable of predicting the events that might give rise to a claim.To mask this deficiency, they defer the issue to the time of claim, hoping that no claims will be made or that they will be long retired before they are.

While in some cases, ambiguous wordings have survived unchallenged, in a number of significant cases, losses did occur and subsequent generations were left with the costly and time consuming task of eliciting what the natural and ordinary meaning of confusing language was and, in so doing, discovering that the cover purchased was not what had been envisaged by one or possibly both parties.

In order to avoid disputes and to ensure that both parties know at all times what promise they are buying and selling, it is imperative that the language used in all insurance and financial products is clear, unambiguous and certain. Unfortunately, when dealing with uncertain future events, this is not always possible.

Historically, insurers have coped with this dilemma by using tried and tested language. Where the courts had pronounced on a clause, phrase or a word, the precise meaning of that word was known and so its repetition gave some form of certainty. Language, once scrutinised by the courts, was used with certainty.

This approach has much to commend it. It has, however, often been ignored. On some occasions, the insurance market has held a belief that a certain word or phrase meant a particular thing. The courts disagreed and some insurers, rather than repricing their product to take the court’s interpretation and the certainty that it gave into account, sought to amend the words to reflect the cover that had originally been thought to have been given. While understandable, this approach contained a flaw. New words, unscrutinised by the court, were as capable as the old words of an unfavourable interpretation by the courts.

On other occasions, particularly at times when premium rates were declining and a buyer’s market operating, some insurers or brokers, seeking a competitive advantage, would introduce new terms and conditions, jettisoning as they did, tried and tested language. Again, a departure from understood language came with risk. In addition, a departure from language widely used in the market means that when an unforeseen claims situation arises, one is left unable to follow any market wide resolution of the issue. Dispute and litigation is more likely to ensue.

Perhaps the greatest assault on the approach of using historically interpreted language has come from the requirement that plain English is used. Words approved by Victorian courts are not necessarily easily intelligible to a lay person today. The difficulty of paraphrasing existing language to make it plain and intelligible is that it can be less precise and, it will certainly be untested. That said, there is much to applaud in the use of language that is easily understood. It is important to ensure that, with its clarity, it is also unambiguous.

It is also important to ensure that it is clear that improvement of language is not seen, where it is not, as an amendment to the terms but simply a better way of expressing existing terms.

The language of contracts is key to the avoidance of disputes. There are many pitfalls. Time effort and money invested in the creation of properly worded and understood contracts pays dividends in providing certainty.