Courts Leaves Bad Drafting Out In Cold.

Article by Sheila Simison and Denis Whelan

A great deal of insurance and reinsurance litigation owes its origins to badly drafted contract wordings.

In the recent case of J.R. Charman -v- New Cap Re and others [2002] EWHC (Comm), Mr Justice Morison added his voice to what is now a long line of judicial criticism. He described the clause he was asked to construe as "hopelessly, badly drafted and... hard to construe and implement" and commented that "lifting clauses from different contracts without much thought is all very well, but can lead to unnecessary disputes, such as this".

Badly drafted wordings is a problem with a strong pedigree. As long ago as 1915, Eve J in Law Guarantee Trust & Accident Society Limited -v- Munich Reinsurance Company[1915] 31 TLR 572 described a reinsurance wording as "made up...of paragraphs culled from different precedents and strung together without any accurate assessment of their relative consistency". More recently, in the case of Forsikringsaktieselskapet Vesta -v- Butcher [1989] 1 Lloyd's Rep 331 (HL). Lord Bridge spoke of the "desirability of the Lloyd's standard form of reinsurance being re-drafted in grammatical, intelligible and unambiguous language. The only people to profit from the obscurity of the present form J1 are the lawyers".

In Charman, the clause in dispute had been drafted by one of the parties to the contract and not, as is usually the case, by the brokers. However, as Mr Justice Morrison recognised "it is the brokers' job, normally, to provide at least intelligible wording". So what then are the duties of a reinsurance broker which is under an obligation to prepare a policy wording of the contract which it has placed? Broadly speaking, the duty is to exercise reasonable skill and care in the drafting of the policy. In failing to do so, the broker may be liable for breach of contract and probably also in negligence.

Traditionally in practice, reinsurance policy wordings have been drafted not by the individual broker who has been responsible for placing the risk, but by more junior staff in the broker's office. This is perhaps reflective in part by the fact that historically the drafting and production of reinsurance policy wordings has not always been a high priority for the London market. The Courts have attributed the difficulties with interpreting policy wordings to poor drafting skills, illegible and ambiguous use of language and a tendency to put together wordings from a patchwork of precedents, some of which may not be relevant to the reinsurance in question. As a result policy wording have failed to reflect the actual intentions of the parties to the contract.

Perhaps the classic example of the unfortunate consequences which can occur when a broker fails to prepare a policy which gives clear expression to the terms which have been agreed by the parties is the case of Youell -v- Bland Welch & Company (2) [1990] 2 Lloyd's Rep 431 (the "The Superhulls" case). In this case the brokers were instructed to obtain building risks insurances for three vessels to last for 32 months, subject to indefinite extension under "held covered" quotation provisions. However, the brokers approached reinsurers and prepared reinsurance slips which, at the insistence of one of the reinsuring underwriters, provided 48 months' cover only. The insurers were not initially told of this limitation, but simply that the reinsurance would be "as original". Later, however, the insurers were sent a policy wording, indicating that the period was limited to 48 months. Insurers did not appreciate the significance of this and accepted the cover on this basis.

In due course a claim was made by the original insured, which the insurers paid. The reinsurers resisted the claim by the insurers, on the basis that risks attaching to the original policy were limited under the reinsurance to 48 months. The insurers' claim against the reinsured failed on the wording of the reinsurance policy, and so the insurers sued the brokers for negligence.

Phillips J held that the brokers had failed to draft the reinsurance documents "so as to ensure that they gave clear expression to the terms which had been agreed". He went on to say that the relevant clause was "unclear and without precedent" and expressed in a sentence "the grammatical structure of which is far from clear". Furthermore, Phillips J pointed out that there were discrepancies between the reinsurance slip and the reinsurance policy. For example, in the slip the relevant clause was found in the section headed "Period", whereas in the policy it was found in the section "Interest and subject matter". It was evident that many of these problems were due to the fact that the policies had been drafted by individuals who had not actually been involved in the negotiation of the reinsurance contract.

The failure to draft policy wordings to reflect the true intentions of the parties to the contract may have particularly unfortunate consequences where there is any ambiguity in the policy wording. Where the broker is responsible for drafting the policy wording he does so as agent of the assured. In the event of any ambiguity in the policy wording the legal doctrine of contra proferentem requires that the contract must be construed against the party who drafted it. In the case of Abrahams -v- Mediterranean Insurance and Reinsurance Ltd [1991] 1 Lloyd's Rep. 216 it was unclear from the policy wording whether the reinsurance covered total loss only or extended to all risks. Hobhouse J, applying the contra proferentem rule, held that, as the policy wording had been drafted by the broker, it had to be construed in favour of the reinsurer's argument of cover for total loss only.

There are, however, currently two exceptions to this rule. Firstly, this rule does not apply where the ambiguity in question is contained within the wording of an exclusion clause. The rationale for this rule is the principle that the words of an exclusion clause are to be construed narrowly; this effectively cancels out the principle that ambiguities must be construed against the drafter of the policy. Secondly, with regard to consumer insurance contracts within the Unfair Terms in Consumer Contracts Regulations 1999, the courts are required under regulation 6 to construe all ambiguities in favour of the consumer irrespective of who drafted the wording.

This all begs the question how the drafting of policy wording may be improved. The key lesson seems to be that there needs to be closer cooperation between the broker handling the policy and the individual responsible for drafting the policy wording. Also, case law has indicated the need for improved drafting skills in drawing up policy wordings, by which is meant using precise and easily understood English, ensuring that the policy is consistent and comprehensible as a whole rather than being merely a patchwork of precedents (only some of which may be relevant to the reinsurance), avoiding reliance on other people's drafting by incorporating clauses from other policies into one's own policy wording, and avoiding the use of abbreviations.

By increasing the co-operation between the placing broker and the broker drafting the policy and ensuring that the latter employs careful drafting techniques, such as those mentioned above, one may ensure that the policy reflects the true intentions of the parties to the slip and may be easily interpreted as such, thus reducing the risk of later disputes.

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.

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