When are the terms of an insurance policy created?
Several weeks before a client’s policy with its existing underwriter was due to expire, an insurance broker trades emails and phone calls with an alternative underwriter about placing the expiring client’s policy with that alternative underwriter.
The insurance broker and the alternative underwriter agree the key terms of cover. While they agree the start date of the replacement cover, they never discuss the start time on that day. However, they do agree that the new underwriter would go on risk from expiry of the client’s existing policy, as is usual.
The replacement underwriter’s standard policy wording, and the client’s schedule to it, both refer to the commencement date of cover, but not the commencement time. The expiring policy does state an expiring time of 4pm.
The date we are referring to here is 4 September 2010.
At 4.35am on that day, the first Canterbury earthquake occurred causing substantial damage to the client’s building. The expiring underwriter was clearly still on risk because the earthquake occurred before 4pm on that day.
The expiring underwriter asserted that the replacement underwriter was on risk as well because 4.34am was during the 24-hour period of 4 September 2010, so there was potentially double insurance. It argued that the policy wording and schedule governed the terms of the replacement policy, which only referred to the 24-hour period of 4 September and not to a time within that 24-hour period.
The policy wording and schedule do determine the terms of cover – correct. Wrong.
Offer and acceptance
In QBE Insurance (International) Limited v Allianz Australia Insurance Limited  NZCA 239, the New Zealand Court of Appeal applied conventional contract law to decide the matter. It looked at when the offer and acceptance process took place creating the contract, and what terms were agreed to at that time.
This contract formation did not take place when the policy wording and schedule were issued. Rather, it took place when agreement was reached in the emails and telephone calls between the insurance broker and the replacement underwriter weeks before expiry. The subsequently issued policy wording and schedule only evidence that contract.
Crucially, it was undisputed that one of the terms agreed to during the offer and acceptance process was that the replacement underwriter would go on risk from expiry of the client’s existing policy. The Court of Appeal said this:
 We further consider that it is immaterial [the broker] and [the underwriter] did not discuss a specific start time. What they did discuss and agree on was that the contract would take over from the existing QBE policy on the expiry of that policy, whatever time that might be. That was the whole purpose of the contract.
Where a contract is reduced to writing and what is written doesn’t reflect what was agreed to during the offer and acceptance process, a court may rectify the written contract to reflect what was agreed to. A court requires compelling evidence before it will agree to do this.
In this case, the Court of Appeal found the reference to just the date of 4 September in Allianz’s schedule was not inconsistent with the term that the replacement policy commenced when the existing policy expired, whatever time that might be. Therefore, the Court of Appeal held no rectification of Allianz’s policy was required.
In our respectful view, whether there was an inconsistency here is a fine point. The written terms of the policy made no reference to the seamless transfer of cover from one underwriter to the other, with no overlap. Absent that, a start date in the schedule with no time stated was potentially ambiguous, and therefore potentially not consistent with what the broker and the underwriters had agreed to.
However, the Court of Appeal’s refusal to rectify the Allianz policy did not affect the outcome. At the time of the earthquake, the QBE policy had not expired so the Allianz policy had not commenced. There was no double insurance.
What does this mean in practice?
In our experience, many brokers and underwriters are surprisingly casual about addressing and recording the key terms of cover agreed during negotiations.
When we have requested a copy of the underwriting file in the past, we often find the cover was bound by the exchange of only the briefest of emails.
The Court of Appeal decision is a healthy reminder of the importance of the offer and acceptance process. This is when the contract is formed and the key terms of the contract are created. Everything that happens after this point is merely procedural.
All brokers and underwriters should make it a priority to properly record the outcome of those negotiations and to ensure all key terms are agreed to.