To BE or not to BE: underwriters’ position in the subscription market
The subscription market operates to allow individual subscribers to a slip to sign up to policy terms at different times, with common practice being that the lead agrees terms first and the following market thereafter.
The law governing the contractual position was confirmed in the (now) long-standing case of General Re ; each individual underwriter is bound on the date upon which they scratch their line on the slip, the slip constituting the offer of a contract and the scratch constituting the acceptance. Practice has, however, moved on somewhat since 1983.
In what is a unique character of Lloyd’s insurance, the slip constitutes a binding contract from the date of the scratch, notwithstanding the absence payment of the premium. By the time underwriters scratch the slip, they ought to have received a fair presentation of the risk and asked any questions arising from the same to satisfy themselves that they are content with the risk and terms.
Underwriters’ general practice is often to write their line on a “TBE” (to be entered) basis to indicate their acceptance of the presented terms and their agreement to enter a reference at a later date. This is sufficient to bind the underwriter to the contract. One senior marine cargo underwriter notes that:
Clients or brokers may require a stamp to be placed on the draft policy wording shown to Underwriters at the time of the broke to formally confirm their involvement. This is based on the information provided to Underwriter at the time of placement. The Underwriter will then date, initial and enter their share against their respective Syndicate’s stamp, usually in pen but can be in pencil, once they have agreed to the terms and conditions. The stamp is then struck through in pencil, signalling the reference is TBE (To Be Entered).
At firm order stage, the broker will revisit the syndicate, where they are obligated to advise the Underwriters of any changes, amendments or additional information the Underwriter was not privy to in prior discussions in order for them to reconsider or confirm their participation. Anyone with underwriting authority can erase the pencil line and enter the reference in ink. If the Underwriter does not agree to the changes or is provided with additional information that is not satisfactory to them, the Underwriter can withdraw their support. If there are no changes or additional information, the Underwriter would be entitled to believe there are no changes.
Following the introduction of electronic placing platforms such as PPL, the practice has changed slightly. At firm order stage, the policy is uploaded into the system and sent to Underwriters for them to enter their references. There is a ‘comments’ box for brokers to enter any changes, amendments or additional information since Underwriters were last shown the risk. The Underwriter can review this before confirming their lines and either accept, reject or ask for further clarification.
Often, policies are subject to unilateral amendment after underwriters have scratched the slip, which can cause significant issues when claims are presented in future. Amendments that are made to the slip, and not re-broked to underwriters, may in fact give rise to a document that is not a binding contract and is without legal effect. Indeed, changes to policy terms without agreement on both sides may lead to future non-disclosure issues. As the above source notes, electronic placing platforms might begin to create a more reliable trail of when and if changes occurred to policy terms after a line has been entered.
Each underwriter is entitled to receive a re-broke for any material alteration to the terms of the policy from the date they became bound. A change in terms amounts to a variation of contract terms and therefore requires agreement from each party to that contract, save for other mechanisms in place, such as General Underwriters Agreement terms.
Protecting underwriters’ position
Underwriters, as a matter of good practice, should be wary of entering references blindly on slips that were previously scratched. Precautionary steps should be taken to have the broker confirm that the policy wording is as per the document scratched and warrant no changes to the agreed terms. Notes or electronic records of the dates when the scratch was written and the date the reference was added are advisable to evidence the development of the formation of the insurance contract.
Underwriters should also be cautious about taking ‘tidy-up’ wordings at face value and a prudent course of action would be to check no material changes to terms have been made post-contract formation without their express agreement to the same. Document change analysis and similar technology should begin to assist with these checks and provide protection to underwriters’ position under the contract of insurance.