ARE YOU A BLENDER?
PUTTING TOGETHER A NEW PACKAGE PRODUCT - A STARTER FOR TEN

Blending policies to create a ‘combined’ product has many benefits to clients and carriers, but the art of blending itself comes with risks. What are the pitfalls to avoid?

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Package products are insurance products that include multiple different covers under one banner. They are not new but in a soft market there seems to be a greater tendency to bolt covers together for medium sized clients presumably to save overall premium spend and enable those clients to buy some cover in areas where a more comprehensive standalone product might not be available to them.

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Bolting products together sounds easy but it isn’t. There are a number of things that need to be thought about. In this brief guide I set out some of the things I have realised through my package work.

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1. Decide how far to Blend

 

To Blend or Not to Blend – that is the question.

 

This is a threshold issue. It is possible to group policies together under one Schedule without making any substantive changes to them and dealing with all issues in the Schedule. This may superficially be attractive because it seems to involve the least work at the front end. We all want that obviously!

 

However, it won’t take long before you realise there are major drawbacks with this approach. First, the document will be very long indeed, difficult to navigate, and confusing for the client. It will contain a substantial amount of repetition and contradiction in the definitions, conditions and exclusions.  More importantly, as the policies being combined are not co-ordinated, you will have little idea where the overlaps and gaps are between the covers. Inadvertent gaps and overlaps can be a fertile source of red faces in the wordings dept and more importantly disputes on claims.

 

Also, the Schedule will need to be very carefully drafted to ensure it takes all nuances between the different covers (including their different expressions) fully into account – as everything is riding on it. Without the Schedule you just have a bunch of separate policies. Also, the Schedule is unlikely to be the best place to deal with interlocking issues between the policies – what happens when multiple covers are triggered at the same time or cover the same loss for instance?

 

So, assuming you decide it’s a good idea to do some melding of the products, you need to decide how far this goes. At the other end of the spectrum is the fully blended form. These usually look great and may be mercifully short, but probably will involve the most amount of drafting work. The drawbacks are that they can also lead to “over-simplification” of some things that should stay nuanced which could lead to unintended consequences, and a lack of flexibility if you want the client to have the option of buying some covers but not others. A fully blended product will make it difficult to split things out easily without a hefty-looking endorsement deleting sections.

 

So, in my experience, most policies tend to be somewhere in between those two extremes – blending some things but not others.

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2. What to Blend – the General Section

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In order to maximise space by avoiding unnecessary duplication but also allow flexibility many wordings have a “general section” that includes all the clauses that apply to all the covers. You need to decide which these are. This may include definitions that mean the same thing throughout the product wherever they appear, and conditions and exclusions that apply to all the covers. Examples of conditions that are likely to apply to all are “disputes” and “fraudulent claims”.  Common exclusions might include “prior matters” or “war & terrorism”.

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You may be realising at this point a complication – the products being melded may operate in different markets where the same issue is dealt with in different ways. This can be a real headache for us blenders! The affected clauses should either not go into the general section or compromises made to settle on language everyone can unite behind. The latter is preferable but not always possible.

 

Watch out for definitions that need to mean different things depending on where they appear in the product – “Loss” for example will mean something different in a Property section to a Casualty section. Not all examples will be as obvious. These types of definition should not appear in the general section. Sometimes it’s hard to decide whether something should have a common definition or not. Space and readability suggests you should lean in favour of more common definitions but avoiding pitfalls leans towards keeping them separate where unsure if an important nuance might be lost. An example of this might be “Terrorism” which may need to have a different meaning in a Crime exclusion from where it appears in specific Terrorism cover, or “Computer System” which may need to be defined a certain way in a Crime section but in a different way in a Cyber section war exclusion. 

 

Once you have decided your approach, this is where the blending takes place, leaving the covers themselves entirely separate (see next section).

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When blending, you may find it helpful to introduce a new “all embracing” definition for the things in all sections that trigger the cover during the policy period: namely “insured events”. Having such a definition can be helpful for use in general section clauses but just be careful not to use it if the clause in question doesn’t apply to all triggers, or make express exceptions.

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Through this process you can achieve a nice balance between general and bespoke and of course you can also add further cover sections that are designed to be bolted on to the general section.

 

3. What not to Blend – the Cover Sections

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Each cover section includes all the cover that’s unique to that section and no more. Typically, this will be via its Insuring Clauses, Extensions and the Exclusions. It will also contain any definitions and conditions that only apply to that section. You will have decided which these are if you have already drafted the general section. However, I have often noted the absence of any specific Crime conditions in a package policy containing Crime cover so this bit’s easily forgotten!

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4. Don’t Forget: Limits/Retentions and Interlocking Clauses

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If you do minimal blending it’s likely you’ll not consider these clauses at all and you probably won’t find them in the individual products being combined (and if you do, not consistently). But they are important.

These are the clauses – that go in the general section – explaining:

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(a) whether an overall limit of liability applies to the whole product or a separate limit of liability to each cover section independently, or a combination of both (as indicated in the Schedule);

(b) what happens to the limits and retentions when the same incident causes related claims under more than one cover section; or

(c) what happens where (despite best intentions) there is an overlap: more than one cover section applying to the exact same loss.

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Without dealing with these issues expressly you run the risk of a dispute when there are claims, possibly leading to unintended consequences.

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5. Also Don’t Forget… An Interpretation Clause

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Remember the general section will contain general definitions. You will need a clause explaining that they apply throughout the product unless there is a more specific definition of the same word in a cover section – in which case that more specific definition should apply in that cover section (ie override) only.

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Most policies contain an interpretation clause already, so that’s fine as far as it goes. However, in a package policy there’s an extra dimension in addressing how the interpretation of a word, phrase or clause in one cover section (or the general section) might assist in the interpretation of a word, phrase or clause in another cover section. This may or may not be desirable in any given case. And should you be able to refer to cover sections not even purchased for this purpose? (to this question I would say not, but it’s up to you). As described above, certain words may have deliberately different meanings throughout the product, or some words (“claim” and “loss” being good examples) should be deliberately undefined in certain contexts but defined in others (this issue is often exacerbated by poor drafting).

 

Should a word or phrase used in one context be used to help interpret another? These are for you to consider and decide, and when you have decided, make it clear in the general section. 

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6. A Word about … The Schedule

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As with all policies it’s preferable that all variable values are in the Schedule not in the wording. This allows the product to flex properly on each deal without going back to amend the wording. The wording simply refers to the Schedule when dealing with a variable item, for example a limit of liability amount, whether aggregate or AOC, a retention, or governing law.

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More specifically for the package product, the Schedule also indicates which covers have been purchased. Remember this isn’t as straightforward in a fully blended form hence the approach advocated above.