the general form of coverage. Other times the binder will simply commit the underwriter to the same type
of coverage offered by another insurer. But sometimes, the coverage is still to be agreed. This practice
permits coverage to be arranged, or renewed without waiting for the contract to be issued. Coverage need
not be delayed pending the agreement of all contract details. The potential downside is that the lack of
specificity offers leeway for dispute.
As a third illustration of incomplete insurance, some insurers such as Chubb Insurance company, have
made and protected a reputation for going the “extra mile” to ensure its personal (and other) policyholders
are happy with their claims settlements. The strategy is to resolve ambiguity over amount or coverage more
in the policyholder’s favor. Thus, there is a willingness to go beyond the narrow limits of the contract to
ensure that the policyholder is adequately compensated. This flexibility introduces a degree of contract
incompleteness, which is resolved after the fact in the claim negotiation. Chubb’s distribution system is a
set of independent agents and brokers. These intermediaries “own” the renewal rights and can advise clients
to move business if they become unhappy with Chubb’s claims performance. Chubb entrusts its reputation
to these agents and brokers in order to pre-commit to a “policyholder friendly” claim settlement strategy.
In each of these illustrations, the relationship is brokered. This is important in shaping the discretion the
parties can exercise. For example, suppose Chubb fails to make a suitably generous offer to settle a claim,
despite the fact that it promotes itself in this basis and charges higher premiums to cover such settlements.
The broker can now exercise discretion in its response.7 If it suspects that the claim is fraudulent or inflated,
it might condone Chubb’s lowball offer or refusal to pay. On the other hand, if the broker believes that
Chubb is failing to meet the reasonable expectations of a deserving policyholder, it might withdraw business
from Chubb. Thus, the reputation costs to Chubb from its unsatisfactory claim offer could be very high.
There is a corresponding mechanism to discipline the policyholder. If the policyholder plays fast and loose
on its claims, the broker may withdraw its services — indeed the broker’s reputation with insurers is one of
its most valuable assets and brokers may have a financial incentive to drop troublesome policyholders.
Alternatively, suppose insurance was offered on a binder but this minimal document was not specific
in the terms of coverage. A loss occurs before the policy is issued and the insurer baulks on payment.
7 Kingston, 2005, gives a parallel example of 18th century marine insurance in England. G iven slowness of communications,
captains of vessels were given considerable leeway in changing routs and even return cargoes. Thus, marine contracts were largely
incomplete and this incompleteness extended to insurance contracts. As Kingston notes, “reputation was key” to successful
underwriting and quotes a contemporary broker that “the private underwriters will settle a loss for a man of character, where
they will not for a man who they suspect.