Why getting your insurance broker service agreement right is so important
The job of identifying, assessing and presenting risk to the insurance market is an issue that is rocketing up the corporate agenda as the Insurance Act 2015 starts to drive insurance buyers to articulate a “fair representation of risk” and the revised UK Corporate Governance code begins to take effect.
So who should be responsible for an organisation’s risk retention and risk transfer strategy and how can an organisation make sure it transfers the right risks to insurers on the right contractual terms?
An effective and appropriate risk retention and risk transfer strategy should emerge from a board’s overall policy on risk management, informed by a comprehensive and enterprise-wide risk register. Whether or not an organisation has internal risk management capabilities, professional input from the organisation’s insurance brokers will be highly influential in formulating its policy and in developing the organisation’s overall approach to risk retention and risk transfer. This makes the brokers’ service agreement a mission-critical legal document, and one which needs to be negotiated extremely carefully.
Badly drafted service agreements can result in responsibilities falling between two stools and potentially expose an organisation’s balance sheet, capital value and reputation. A good service agreement should comprehensively capture the services to be provided, required service levels, fee structure, payment arrangements and the key performance indicators by which an organisation can monitor and measure its broker’s performance throughout the contract period. Other key issues to watch out for are any limitations of liability, counter-indemnities, change of control provisions, data protection and intellectual property rights ownership provisions and, importantly, termination and handover provisions.
Following a decision to transfer a particular risk, the wording of insurance policies comes into sharp focus. Airmic, and commentators such as Mactavish, have been putting emphasis on the need for more thorough stress-testing and legal review of policy wordings. Some risk and insurance managers are seeking greater input from those that have handled a company’s previous claims and from specialist accountants and insurance lawyers.
This alone will not guarantee success but it should reduce the number of coverage issues arising from inappropriate exclusions, conditions and warranties and ambiguous policy wordings which a recent survey of Airmic member suggests are on the rise.
A combination of internal and external know-how and technical expertise is likely to result in better risk strategy, better broker input, better policy wordings, better coverage and, ultimately, better balance sheet protection.