Certainty on Paper Only
A broker places a £12m D&O and commercial crime programme for a FTSE-listed support services group on a Lloyd's lineslip led by Syndicate 5678. The lineslip is written 'as attached', so individual declarations bind on the slip terms and are confirmed by the managing agent. Cover is due to incept on 1 April. On 3 April the managing agent confirms the declaration, but the underlying policy wording is still in negotiation, the endorsement adding a newly acquired Dutch subsidiary (about 30% of group revenue) is not issued until 20 May, and that endorsement carries a note that a sanctions limitation wording 'remains to be agreed'. On 15 April the group notifies a €6m claim arising from the Dutch subsidiary's activities. The broker has not yet issued the client with a policy schedule or summary of cover.
1. What does contract certainty mean, and was it achieved for this programme on 1 April?
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Contract certainty means complete and final agreement of all terms between insured and insurer before the contract is entered into, with the intention that the contract is enforceable, and with those terms recorded clearly - the discipline behind the Market Reform Contract.
For a lineslip written 'as attached', certainty is achieved when each declaration is confirmed on those terms. The policy wording can follow, because the slip is the contract and the policy is only its evidence.
Here the 3 April confirmation looks like certainty but is not. A fundamental term - the sanctions limitation - is still 'to be agreed', and the acquisition endorsement is outstanding. That is an agreement to agree, which is exactly what the contract certainty standard exists to prevent.
So certainty failed for this declaration at 1 April. The broker should have recorded the open item, escalated it to the managing agent and closed it before or at inception.
2. Does the Dutch subsidiary have cover for the 15 April claim?
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Work through two routes.
Route one - automatic acquisition clause. Most D&O wordings cover a newly acquired subsidiary from completion for a period (commonly 90 days), subject to size thresholds and notification, after which it must be added by endorsement. If that clause is in the slip, the Dutch company is covered from acquisition in March, the 20 May endorsement is merely confirmatory, and the 15 April claim is inside the cover.
Route two - no acquisition clause. Cover then depends on an agreed endorsement. An endorsement issued on 20 May with an open sanctions point is not a complete agreement, so there is a genuine argument the subsidiary was uninsured in April, and the insurer will run it.
The broker must produce the slip and check whether the acquisition clause exists, whether the revenue/size condition is met, and whether notification was given in time. The answer is in the wording, not in the date on the endorsement.
3. What are the risks to the broker in the way this placement was handled?
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Four exposures:
- Commercial/E&O - if the subsidiary was uninsured and the client can show it relied on the broker to add it, the broker may end up funding the gap through its professional indemnity insurer.
- Contractual - the broker owes the client a clear record of what is and is not covered; issuing terms 'subject to' open items without a schedule is not that.
- Regulatory - FCA rules require the broker to act in the client's best interests and communicate clearly. Leaving a fundamental term open and telling the client nothing is hard to defend.
- Market standing - contract certainty metrics and Lloyd's performance frameworks pick this up.
Remedy now: close out the sanctions wording or delete the point, issue the endorsement, send the client a definitive schedule, and document the chronology so the file shows what was agreed and when.