Marine Insurance: Law and Practice
CHAPTER 6
THE CONTRACT
I FORMATION OF CONTRACT
Placing the risk
6.1 As it is a contract, the formation of a contract of marine insurance is prima facie governed by the general rules as to formation of contracts. The traditional practice is as follows.1 It is becoming modernised as a result of the Market Reform Contract (“MRC”),2 which should be used inter alia for all marine open cargo covers and declarations attaching thereto on the Lloyd’s market. 6.2 The prospective assured may first seek one or more “quotations” for the risk. If so, he is simply obtaining information upon which he may or may not decide to act; a “quotation slip”, on which his broker obtains terms upon which an insurer is willing to contract, will have no binding effect.3 When he has decided to insure, he instructs a broker to place an “order”, either for the whole risk or for part of it (in which case the assured will be his own insurer for the remainder unless he insures that elsewhere). The broker then prepares a “slip”, a documentary summary of the principal terms to be agreed, habitually in the abbreviated style familiar to those in the business. These will include the subject matter and interest to be insured, the period of insurance, the risks and any special terms. Guidance is prescribed for a comprehensive list of matters by the MRC. 6.3 The broker makes a proposal for the desired insurance by presenting the slip to an underwriter, who, if several underwriters are to be involved, is known, traditionally, as a “leading underwriter” or, under the MRC, as the “slip leader”. The so-called “underwriter” may be an individual insurer acting on his own behalf or a member of a syndicate of insurers4 on behalf of which he is acting; in the latter case, he will be both an insurer and an agent for other underwriters. The word “underwriter” is frequently used to describe an underwriting agent, whether acting on behalf of an individual insurer, a syndicate or an insurance company. 6.4 The initial presentation of the slip constitutes an offer by the assured to contract with the underwriter, although it is more than likely that the broker and underwriter will make amendments to the slip—and will need to, to insert the agreed premium.5 The slip contemplates its eventual replacement by a policy in standard form. But the full terms of the policy are not included in the slip. Thus, the relevant standard clauses, assuming they are to be used, may be incorporated by reference, and it is unnecessary to include statutorily applicable provisions. But any deletions of or additions to the standard terms must be included in the slip. Moreover, if it is an original insurance (ie, the first contract between the assured and the leading underwriter covering the risk in question) and specifically agreed terms are to be included, they should be sufficiently included (even if in an abbreviated form) in the slip. Where the parties are negotiating to renew a previous insurance, the principal matter for negotiation is the premium, so, subject to the inclusion of different terms, the slip may simply refer to the previous contract, the underwriter’s liability being described as “as expiring”. 6.5 The importance of including the principal terms of the insurance in the slip lies in the fact that the contract is traditionally concluded by the underwriter’s “initialling” or “scratching” the slip, ie by writing on the slip his principal’s name (and/or his own if he is not merely an agent) plus the amount by which he has agreed to be bound.6 6.6 The general rule, in the Marine Insurance Act 1906, section 21, is that “A contract of marine insurance is deemed to be concluded when the proposal of the assured is accepted by the insurer, whether the policy be issued then or not; and, for the purpose of showing when the proposal was accepted, reference may be made to the slip or covering note or other customary memorandum of the contract”.7 This illustrates in terms of the traditional practice for the formation of marine insurance contracts the general contractual rule that a contract is made when the parties are agreed on its essential terms, in accordance with conventional rules on offer and acceptance and as demonstrated on the available evidence. Consistently with that general rule, in appropriate if exceptional cases, the time of formation of the contract may be proved by other evidence, including by email, and may be before the slip is scratched.8 The test is whether and when agreement is unconditional. If the agreement is not subject to reservation, there will be a binding contract even though the insurer’s scratch is underlined,9 written in pencil10 or marked “TBE” (“to be entered” in the underwriters’ records).11 The Law Commissions have opined that the words in section 21 italicised above are unnecessary, and potentially confusing, so should be repealed and the normal rules of contract interpretation left to apply.12 6.7 It is common for the underwriter who agrees the terms of the contract to initial the slip for only a part, whether a percentage of the risk or a specified amount, ie to “write a line” as a leading underwriter. It is, therefore, important for the broker to secure a good lead from an underwriter who has a reputation in the market as an expert in the kind of cover required and whose lead is likely to be followed by other insurers in the market, particularly since subsequent negotiations (eg, as to variation in the cover) have mainly been conducted between the assured and the leading underwriter. Indeed, an object of the MRC is that the lead underwriters should be responsible for managing relations between the parties. Thus, the contract may well contain a “follow the leader” clause, stipulating that in specified circumstances underwriters will follow the lead of a named underwriter (commonly but not necessarily the leading underwriter).13 6.8 It is the normal case, therefore, that each line written on a slip gives rise to a binding contract pro tanto between the underwriter and the assured for whom the broker is acting when he presents the slip; this is not subject to the risk’s becoming fully underwritten.14 Thus, an assured cannot rescind such a contract where the whole risk is not underwritten, nor can a reinsured rescind a varied reinsurance contract before all the reinsurers have initialled an endorsement slip.15 In such a case, however, it is the market practice for the insurer to permit rescission, subject to a possible “time on risk” premium.16 6.9 The broker “likes to present to following underwriters a slip containing lines with high percentages, presenting an impression of confidence. Therefore, small lines are relegated to the back of the slip or put on a separate piece of paper as ‘promised lines’ to be added to the slip itself at a later stage when they will not spoil its appearance. A promised line is, by the practice of the market, of the same effect, as if it was written on the slip itself. It gives both parties the right to have that promised line written on the slip”.17 6.10 Exceptionally, however, there is a binding custom that the underwriter’s liability will be “signed down” on “closing” to the extent that the slip is oversubscribed,18 in which case his “closed” or “signed” line will be the proportion that his written line bears to the amount subscribed and there will be an adjustment of the premium due to him. 6.11 The market recognises the entitlement of the broker to oversubscribe the slip and the entitlement of the underwriter by an appropriate notation on the slip to exclude the signing down of his line.19 The underwriter can do this by writing after the percentage “to stand” or by writing the line as a specific sum of money. This is more common for aviation than marine insurance, where the insurer relies more on his line being signed down in accordance with a signing indication from the broker.20 6.12 It is common for a broker to continue acquiring signatures after the risk has been fully subscribed even with the result of having the risk heavily oversubscribed. This enables him to show his business, and to test the market and to increase the likelihood of obtaining future insurances. It is such a common practice that it is expected to occur and so encourages the writing of larger lines, which in turn encourage further large lines. Underwriters for their part are willing to write lines in order to get business and to indicate their willingness to transact future business. Their exercise of commercial judgement goes principally to the size of line which they can write. If the broker offers a package of risks, a small line may be written on an unattractive one so that a larger line may be written on another. The broker is thus able to reach 100 per cent sooner than he might normally be able to, which is particularly advantageous if time is short. Moreover, larger written lines make it easier for the assured to increase the insured values or add further vessels to the slip. 6.13 Furthermore, as Scrutton L J has remarked:21“In the insurance market large quantities of risk are pressed on well-known underwriters of high standing, whether companies or Lloyd’s men. They have more risk in a particular interest than they wish to take, and they desire to reinsure part of their lines. On the other hand, original lines of insurance will not be placed with new companies, or foreign companies who are not well known, and if they are to get business they must accept reinsurances of the lines of the popular underwriters. They compete eagerly for these, and are ready not only to accept less premium than the original underwriter can get, but also to make agreements with him to reinsure a part of all his risks at a lower premium, leaving the selection of risks to him …