Magazine article Risk Management

Contract Wording

Magazine article Risk Management

Contract Wording

Article excerpt

Risk managers have access to a wide array of policy wordings offered by competing insurance companies. Not satisfied with off-the-rack forms, they demand customized policies matching specific exposures and risk financing arrangements. However, establishing coverage goals and negotiating terms is not the end of the process. The risk manager must be in a position to depend on contract language to define the rights and duties of the parties to an insurance transaction. The following are a few ideas on how to get the wording right.

Review complete terms before accepting a proposal--It is nice to imagine that the people involved in negotiating an insurance transaction would, in the event a term in a coverage document is uncertain, agree on what was intended. Unfortunately, once a claim takes place, the task of interpreting policy language usually shifts to claims specialists and others. While courts consider the negotiating history, in most cases that history is significant only if the contract language is ambiguous.

Any insurance document, whether a binder, cover note, policy or reinsurance contract, should express the terms of the agreement with easy and certain interpretation. Unambiguous wording minimizes the chance of a coverage dispute.

Do not give up the advantage of interpretation--Most risk managers understand the importance of interpretation against the drafter doctrine (contra proferendum) in insurance coverage disputes. But the exceptions to this doctrine are not well known. The main rationale for contra proferendum is that the policyholder did not have an opportunity to negotiate the language of the policy. This is true even if the policyholder mixes and matches optional features. In such cases, the insurer still offers policy text on a take-it-or-leave-it basis--the policyholder merely has a choice of what to take and what to leave.

The rule does not apply, however, when a policyholder or their representative participates in drafting the policy language. Control suggestions regarding policy wording submitted by the broker to the underwriter. Ascertain whether the broker is representing your organization or the insurance company. If the broker is acting as an agent of your organization, ask for a stipulation in the policy that the language is regarded as drafted by the insurance company.

A policyholder should not accept a label or other description implying negotiation of the policy text when, in fact, the insurer offered the text on a take-it-or-leave-it basis. Insurers have used such policy descriptions as "manuscript" and "custom" to avoid application of the doctrine. …

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