Certainty in law of contract is a principle in national and international law which holds that parties to a contract should always look to ensure that a contract is certain. If a contract is incomplete or uncertain, then it may be found to be unenforceable. An agreement doesn't create a binding contract.

Certainty Law and Legal Definition

Certainty can be defined as being free from any doubt, a state of being absolutely certain, as in the certainty of death. In terms of contract law, a contract is certain when the provisions are properly described and explained and clearly set forth.

Contract Certainty? What Lessons Can Be Learned From Recent Judicial Decisions on Policy Interpretation?

It's only when there is a loss that the wording of a contract is analyzed. Contract certainty is achieved by having parties agree to the wording before formally committing to the contract. However, cases of contract interpretation still occur. How do courts interpret policy terms? There is a perception that courts interpret contracts quite literally, agonizing over every single detail. Although clear drafting is still essential, it does not correctly reflect their approach.

In 1997, through a frequently-cited English contract law case (Investors Compensation Scheme Ltd. v. West Bromwich Building Society), Lord Hoffman laid the groundwork for some fundamental principles for interpreting unclear wording in contracts. He determined the principles of contractual interpretation should be interpreted in the following way:

  • One party's subjective understanding of the contract or any evidence of previous negotiations is unacceptable proof of what the contract means.
  • Words should all be utilized in their ordinary and natural meaning.
  • When interpreting a contract, understanding should be relative to a reasonable man who has all the background facts.

The Key Pressure Points: Scope of Cover

The courts believe a certain amount of flexibility and common sense should be utilized when interpreting any kind of policy wordings. Determining what losses are covered is often disputed. The noticeable lessons are to make sure:

  • That the scope of cover has been clearly defined
  • All parties contractually state the steps to take when a loss is created by more than one hazard
  • That consistency is maintained within the terms of the cover

The limits for each peril or hazard are clearly stated, as well as total limits where a number of hazards may subsequently contribute or cause a loss. If losses were created by both flooding and windstorms, which limit should apply to each loss? Parties need to make sure they clearly state in their wordings whether limits should apply as a stack or run together.

They also need to determine whether terms are labeled as warranties or conditions precedent. This doesn't guarantee a status, but helps provide insight into the party's intent.

The Key Pressure Points: Aggregation

Aggregation is still a significant negotiating point, causing a lot of controversy around the various wordings that are available to the market. The following terms have been judicially interpreted and defined:

  • Event
    • Something that happens at a specific place and time
  • Occurrence
    • Synonymous with an event, unless the situation indicates otherwise
  • Cause
    • Something significantly wider
  • Originating cause
    • Wider than a typical cause

Conventional property covers based on cause or event wordings are in many cases being replaced with more modern words, such as those based on a catastrophe (that hasn't been judicially identified). Remember, it's important to determine the exact coverage that's being provided, as well as making sure that the hour's clause is used logically with the terms regarding coverage.

The Key Pressure Points: Claims Cooperation/Claims Control Clauses

There is a huge difference between claims control and claims cooperation clauses. Claims control relates to situations where control still belongs to the cedant, while claims control is where the reinsurer takes over the claim. When working with claims, the responsibilities and rights of each party should be clearly identified in the contract.

It is recommended to avoid using the term "follow the settlements" clause besides any claims cooperation/control clauses. A follow clause requests the reinsurer to trust the cedant's handling of the claims. A claims cooperation/control clause hopes to confine the cedant's ability to work the claim.

The Key Pressure Points: Governing Law

Laws governing policy coverage have been established in all states. Regulators negotiate with insurance providers on the behalf of consumers using the backdrop of English law. The most complicated aspect of the negotiations revolves around the sense of what the established laws provide and how they'll govern conditions precedent, good faith, and warranties.

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