By Donald S. Malecki, CPCU

Author's note: This month's column delves into the subject of manuscripting, describing what it is and is not, why it is necessary, its trips and traps; pointing out that it often is a joint effort between insurers and agents/brokers; and providing some suggestions on how to possibly avoid problems. Next month's column will continue the discussion, focusing on an activity that becomes more prevalent during periods of hard market cycles--the tendency of insurers (rather than agents/brokers) to construct policies that are virtually incomprehensible.

Sometimes when a problem arises over the interpretation of an unusual form or endorsement, the conclusion generally is that it was a product of bad manuscripting. In many cases, however, policy manuscripting is not the culprit. Instead it is another practice among insurance people: a discombobulation of forms and terminology with a general disregard for an organized policy structure.

This is not to say that manuscripting does not create problems, because it does, and a plethora of cases proves this. But when one takes into consideration the other, more common practice noted above, insurance manuscripting often gets the bad rap.

What manuscripting is not

Insurance contract manuscripting is not easily defined. When, for example, a standard insurance policy is prepared by an insurer or agent/broker in a different font to appear as though it is typewritten, it may be called manuscripting; but in the technical sense, it is not.

Nor is manuscripting the practice of some underwriters who take copyrighted ISO material (which has been filed and approved) and change it with the addition of terminology or to even amend the existing copyrighted terminology.

Additionally, manuscripting is not what some people refer to as a provision that a court has held to be ambiguous; nor is it the practice of some insurers to combine standard ISO provisions with their own terminology and file it for use as an independently filed policy, form, or endorsement.

In fact, manuscripting is something entirely different and not static, since the meaning of manuscripting has changed over decades. This is why defining it is so elusive.

An attempt to define

At one time, when insurance was in its infancy, manuscripting was the practice of creating insurance provisions from scratch, because of the uniqueness of the language and intent desired. From the perspective of those who draft insurance provisions currently, originality is no longer necessary. It is simply a matter of borrowing some or all of another's efforts at drafting and, through the process of "cutting and pasting," creating the desired document.

One of the common trips or traps here is that when one relies on another's work, drafters do not always take into consideration the track record of the policy language. One would think that when manuscripting is performed, particularly by committee--a common practice--someone in the group would know whether the wording has been time-tested. Unfortunately, the learning process sometimes does not begin until after a costly dispute arises.

Interestingly, just about 50 years ago, an associate counsel of an insurance company, who was part of a drafting committee, lamented about his having to serve on a subcommittee to study and to resolve a point having to do with the proper placement of a comma.

Probably the most misunderstood point about manuscripting is the characteristic that sets it off from the other practices. It is this: To be considered a manuscript policy, form or endorsement, it can be used only once for a single purpose. If it is used more than once, it technically falls outside the realm of manuscripting. Thus, an endorsement drafted with the intention of issuing it for use with all future insureds is not considered to be a manuscript one and, instead, one that may likely be subject to insurance department approval.

One would think that insurance companies would have directives dealing with manuscripting, such as issuing warnings to underwriters about developing unique language. Perhaps they do--and are simply unaware of what some underwriters do in this regard.

The following is an example of an additional insured endorsement apparently developed by an insurer. It is uncertain whether it was used more than once, so we will not refer to it as a manuscript endorsement. But the idea of showing it here is to illustrate how careless drafters can get.

It is agreed that additional insureds are covered under this policy as required by written contract, but only with respect to liabilities arising out of their operations performed by or for the named insured, but excluding any negligent acts committed by such additional insured.

The general idea of this endorsement is to give the additional insured virtually nothing in terms of coverage, since it is meant to apply only when liability arises from the acts of the named insured. Arriving at that conclusion, however, is not easy for a couple of reasons. First, the insurer is saying that the additional insured is covered as required by contract. So, it is necessary to refer to the contract to determine what the additional insured has requested in terms of protection.

The rest of the sentence, however, gets a little murky. It seems to be saying that the additional insured is covered only in relation to operations having to do with the named insured. This is understandable, if that is what is meant by the verbiage. But to continue to the conclusion that whatever operations are conducted does not matter anyway really boggles the mind!

This particular endorsement actually has produced problems on two separate occasions in Texas, leading to the conclusion that it was not manuscripted for a single insured and purpose, but is to be used carte blanche for everyone. It therefore should have been filed with the insurance department. If anyone else encounters it in an argument, the insurer should be reported to the insurance department as the first order of defense.

In defense of manuscripting

Any number of reasons could be given for having to manuscript. Common among them are: (1) to accommodate a client who has specials needs, (2) for competitive reasons, or (3) to overcome the general dissatisfaction with existing policy language that may be too broad or too limited.

Insurers, as a general rule, are not too keen about manuscripting, since it takes the skill of more than one discipline. For example, someone needs to be a skilled grammarian. Judging from some of the manuscript forms produced, there seems to be a total disregard for the "King's English." Someone with legal expertise also is advisable, along with a person who has had long experience with insurance policy provisions and knows the track record of the terms and provisions to be used.

Unfortunately, these requirements often are disregarded, thus fueling arguments over the meaning of the provisions, and with respect to those who are responsible. As those who have been in the insurance business for some time know, a term is not ambiguous simply because a controversy exists among the parties. Ambiguity arises when a word, term, or provision, in the context in which it is used, is susceptible to more than one meaning and where reasonably intelligent people would differ as to what meaning is the right or proper one.

When underwriters are the sole drafters in cases of ambiguity, the defense of policyholders is that any ambiguity must be construed against its drafter, since the policy was issued on a take-it-or-leave-it basis (contract of adhesion), there was unequal bargaining power between the parties, or the policyholder had reasonable expectations that the coverage sought was to be provided.

The foregoing defenses of policyholders are also commonly grouped under the general heading of the "contra proferentem" principle--meaning that any ambiguity in policy language is to be construed in favor of the policyholder when the insurer has exclusive control of the drafting process.

It is not always the insurer, however, that is solely involved in manuscripting. It sometimes is solely done by the agent or broker, or the drafting is a joint effort with the underwriter. When the drafting is a joint effort, there is not much of a defense to be raised by either side; both generally are guilty. When the drafting is solely at the hands of an agent/broker, insurers often invoke the "sophisticated insured" rule to offset the issue that the burden falls solely on the insurer.

The reasons commonly advanced by insurers for invoking the sophisticated insured rule, as a defense of the contra proferentem principle, are: (1) the business size of the insured; (2) the sophistication of the insured as to insurance issues, e.g., it maintains a large insurance and risk management department; (3) the insured relies on the services of a large broker; (4) the policyholder's bargaining powers; or (5) any combination of the preceding.

In one case, a broker who drafted a property policy found out that he did not have any defenses when it came to determining the application of coverage. (Newport Assoc. Development Co. v. Travelers Indemnity Co., 162 F.3d 789 (3rd Cir. 1998).)

After inspecting the premises, and discussing the exposures with the principal of the New Jersey waterfront development property, the broker drafted the property policy. The broker, however, was unaware of the existence of a breakwater and the principal could not remember if he brought up this subject. In any event, the breakwater was damaged and the owner sought coverage as a result. The insurer denied coverage and the dispute went to court where the matter was decided against the policyholder.

On appeal, the policyholder attempted to invoke the doctrine of reasonable expectations and the rule of contra proferentem. The higher court held that since the breakwater was clearly not covered and the policy therefore was not ambiguous, it was not necessary to decide whether the policyholder reasonably expected the breakwater to be covered.

The policyholder also raised the defense of contra proferentem, arguing that the insurer selected the policy language and the drafter was the insurer's broker. The court, however, held that the policy was drafted by the broker or jointly with the policyholder and the insurer adopted the language without change, thus barring the issue of contra proferentem.

Principles of manuscripting

Manuscripting can be a hazardous occupation, particularly when the need for coverage arises and a dispute ensues as to coverage. Given its true meaning, however, manuscripting is likely to be a less common activity, in good times or in bad, than the other approach referred to as a discombobulation which we will discuss in this column next month.

It is nonetheless important to keep in mind the principles of manuscripting:

* Determine what the client's final product is to accomplish. This may involve considerable pre-planning including meetings with the client to grasp a good understanding of the client's needs.

* The drafter(s) must understand the nature of the problems that have arisen in the past in relation to the policy language to be used.

* The drafter(s) need to know whether the policy provisions to be used are copyrighted. (If the owner of the copyright does not bite the drafter, a court of law eventually may.)

* Choose a grammarian and a lawyer to read each of the drafts.

To simply manuscript without the recommended precautions can sometimes still work without a hitch. But if a problem does arise, the conclusion is like a game of roulette, because of the many variables that need to be taken into consideration in determining the ultimate meaning and responsible parties. *

The author

Donald S. Malecki, CPCU, is chairman and CEO of Donald S. Malecki & Associates, Inc. He is an active member of the CPCU Society, serves on the Examination Committee of the American Institute for CPCU, and is an active member of the Society of Risk Management Consultants.