2022 renewals: risky practices
Gallery of horrors
Insurance practitioners over 45 years old remember: on September 11, 2001, the Twin Towers were insured by… a cover note. Gone are the days of insurance contracts negotiated for two or three years and tenders promising more coverage and less premium. By causing a reversal of the insurance market in 2017 in Asia and in 2019 in Europe, insurers have created a decrease in the insurance offer, reducing the amounts of coverage and multiplying the exclusions. The consequence is that renewal negotiations have become extremely rigid… and they are concluded at the deadline, or even afterwards. And when the limitation, or even the elimination, of the termination notice has not been sufficient, it is necessary to adopt extensions and find short-term solutions. Lawyers know that rushing is their enemy: it is the source of future litigation.
From the simplest to the most dangerous, an inventory of provisional renewal practices.
- Short term rate contract
Definition. Contract renewed for a short period of time (a few weeks or months) and carrying a specific premium for this duration, generally very high (and therefore dissuasive in case of non-agreement on a final contract). It is implemented when the negotiations were not completed at the expiration date, and it is replaced by the final contract if it is concluded.
Context. Common practice in the Anglo-Saxon market, quite rare in France.
Risk. Low if the variation only concerns the amount of the premium. However, it is a new contract: all parties, co-insurers, must agree to it.
- Cover note
Definition. Provisional document issued by the insurer or its agent. It takes the place of the insurance contract before the regularization of the final contract. Once regularized, the contract replaces the cover note. It is an autonomous pre-contract if it has been issued for a limited period of time, while the risk is studied (CA Toulouse, 27/11/19).
Context. The cover note is most often supposed to intervene once the final agreement has been reached between the parties. The final contract only confirms the details.
Legal regime. Quoted by the article L112-3 of the French insurance code, it is not subject to any condition of form. A certificate can be a cover note as well as an exchange of faxes between two agents.
Risk. It is rather for the insurer, or for his agent. If the terms of the contract are not clear, it will be interpreted in favor of the policyholder/insured. Litigious example: more restrictive condition of guarantee in the contract than in the cover note, the loss having occurred at an uncertain date.
- The held cover
Marsh France’s CEO announced, as a mark of seriousness, that no held cover was produced for the April 1st, 2020, renewals -during the Covid period-.
Definition. The held cover is a contract that maintains the terms of the terminated or non-renewed policy for an interim period.
Risk. Non-agreement of the coinsurers to this provisional renewal. This is because the held cover is in fact a new policy, requiring the agreement of all the parties.
- Coinsurance differential
The British market has not completely abandoned this practice and it seems to be returning in France.
Definition. The coinsurance differential is an insurance contract in which one or more co-insurers benefit from different contractual conditions (prices, cover texts, etc.).
Context. This is obviously a last resort, when the insurance intermediary has not been able to obtain from the co-insurers their complete alignment with the conditions negotiated between the lead insurer and the policyholder.
- Ordinary case. The lead insurer has agreed to a multi-year contract (LTA), while the coinsurers are only committed for one year.
- Reverse case. Under an LTA, the coinsurers are only committed for one year. At the time of the annual renewal, the lead insurer obtains from the policyholder the addition of a significant exclusion clause. Almost all the coinsurers accept it, except for one, which refuses it. Potential consequence: a claim covered under the year 1 policy wording but excluded under the new exclusion. In application of the management clause included in the policy, the lead insurer will therefore be required to manage, including before the courts, the application of a coverage that it excluded for itself.
- Coinsurance loophole
This is where risk becomes a reality, and it is no longer a hazard.
Definition. A part of the risk (co-insurance share) is not placed at the start of the policy. Claims are therefore only partially covered.
- For the insurance intermediary, if he has not clearly warned the principal, and the lead insurer, of the so-called “hole”. In this case, we can only recommend that the intermediary explicitly warn the parties by registered letter from the first day of the hole.
- For the lead insurer, there is a presumption of a mandate to represent the coinsurers if the coinsurance clause is not sufficiently clear and the coinsurers do not contest it.
- Provisional non-insurance
Definition. Failure of the placement within the given time. The risk remains uninsured for a few weeks, the time to find the contractual solution.
Risk. In addition to the obvious lack of insurance, the risk is for the intermediary: the failure to inform his principal of the non-insurance entails his liability.
- What about the insurance intermediary in all these situations?
There is no doubt that, in the absence of any kind of insurance guarantee, the search for the deep pocket may end up in the intermediary’s. It should be recalled that the intermediary’s fulfilment of his duty to inform and advise must be proved by himself, by written evidence. The urgent context of a provisional practice during the renewal of an insurance contract can result in neglecting to write. This is particularly true in a professional sector in which oral communication plays an important role. However, it is the opposite that must happen: the insurance intermediary must always write.