Author: Carlton Harker, FSA, MAAA
This critique reflects the common and industry practices of clerical errors with reinsurance and excess insurance each of which has a unique legal meaning and which should apply to stop-loss even stop-loss is not exactly the same as reinsurance or excess loss.
Both the common law and industry practices view stop-loss (i.e., reinsurance and/or excess loss insurance) as a mutually beneficial risk sharing arrangement between consenting adults. Such an honorable arrangement should be based upon (a) good faith, (b) fair dealing and (c) prompt and accurate communications. These honorable arrangements should (a) reflect industry customers and understanding, (b) be concerned with the perceived intentions of the parties and (c) treat the jot and little of contract provisions as secondary and not primary.
The genesis of the clause is m_______ to the pro rata treaties these were the Lloyds contracts where the underwriters could divide up the risk by initializing the assumption percentage of the lateral risk. Errors in getting the pot right were common and were called bordereaux2 errors. The clerical error was needed to achieve fairness and at the same time to see that a ship at sea could not lose coverage en route.
A definition of clerical error which have withstood the test of centuries is as follows:
Clerical error is any error which:
- Relates to information transmittal and/or communications
- Is perfunctory or ministerial in nature
- Involves claims processing, recordkeeping or underwriting functions
- Is made by the Plan Sponsor, Plan Administrator, Plan Supervisor or any Party in interest to the Plan.
- Does not involve errors of judgment or errors involving the knowledge of such error and its implication as an advantage to any party thereto
- Does not, except for the error, expand or contract coverage.
- Does not involve misconduct, misrepresentation, gross negligence, gross incompetence or poor administration as measured by industry standards
- Is promptly reported and corrected.
But is must be made clear that introducing these basic concepts will never be used as an excuse to thwart the true purposes of the stop-loss agreement. These basic concepts are used to keep the parties (ceder and assumer, i.e.) out of litigation; this desire is reinforced by the near universality of an alternate dispute provision.
The Stop-loss Clerical Errors Provision
Most, but not all stop-loss agreement have a clerical errors provisions. When such provision is found, it is typically far too brief to be as helpful to both the ceder and assumer as it should. The clerical errors provision if often called the errors and omissions clause.
Drafting of the Clerical Errors Provision
It is the view of the writer that the purpose of the clerical error is stop-loss agreements (when it is found at all) should be fair and honorable to both ceder and assumer; also, that the commonly-found provision is woefully skimpy and largely ineffectual. A revision to such is being suggested by this writer in an Article entitled Suggested Changes to Stop-loss found at www.self-fundhealth.com.
The writer does not make light of the fact that the drafting of a good clerical error provision is very complex with many shades and variations:
- The entire clause can be imploded of the error is prejudicial.
- Certain risks may be excluded or permitted to be covered for only a limited period of time or even limited to a dollar amount.
- With great constancy the condition precedent to the error is that it be reported and corrected with as great haste as practicable.
- Certain functions may be declared to be hands-off as regards to such errors.
- A great significance is that such errors may not expand or contract the risk; i.e., the clerical error must not retroactively impact on the risks original actuarial assumptions.
- The basic terms, purposes, provisions, etc. of the stop-loss must not be disturbed.
- The drafter usually believes the clerical provision will, for the most part, apply to communications and transmittal of information.
A scrivener’s error is merely an archaic way of saying clerical error except that a scrivener’s error is more narrow than clerical being limited to the document working and not considering actions of parties not related to the wording. The IRS has, historically, taken a hardline on the wording, or scrivener’s errors.
Traditional IRS Position
IRS relies on a tax court decision3 which held a written plan, once communicated, is etched in stone. Regulations and procedures in support of this position have been issued.4 The problem arises when clerical errors (called scrivener’s errors) are found which are prevented from being corrected by this position of the IRS. Since this position was set for pension plans and pre-ERISA, should it be allowed to stand post-ERISA?
ERISA and Scrivener’s Errors
Several difficulties arise with regard to the response to this questions:
- No clear guideline exist with federal common law as is the case with state common law.5
- Regardless, IRS will claim that their free-standing definite written program requirement is outside of ERISA rules.
Some observers believe the position of IRS will, at some future date, be successfully challenged.
A clerical error may be one made in writing or copying.6 which often will be evident on the face of document;7 such error may be in matters of records or recordkeeping8; such errors are generally those made by ministerial or staff persons, clerks or printers and not the result of judgment or discretion. 9
Instances of a clerical error include the following
- Failure of a court clerk to enter an order.10
- Omission in a plan document of a statutory provision. 11
- Setting of a limitation before a legal limit. 12
- Inclusion of needless or extraneous material in the document. 13
- Misstatement of statutory, judicial or regulatory intent. 14
The Federal rules provide that a court may, on its own initiative, or by a motion of any party to a dispute correct a clerical error. 15
Reinsurance or Excess Loss Court Cases
A brief review of a few of the court cases which involve clerical errors with either reinsurance or excess loss follows.
Agent’s Erroneous Action
The agent made a clerical error but such was committed while acting outside his authority. This was held to not be a clerical error. 16
Error in Application
Insurer’s attempt to avoid liability decrease a certain box on the application was erroneously not checked was blocked by the court. The omission of an “X” was patently a clerical oversight with no impact on the assumed risk. 17
Recoupment of a Claim
Claims paid by virtue of a mistake of fact which was not induced by fraud or clerical error may not be recouped. 18
Broadened Definition of Clerical Error
The court held that clerical error was not limited to clerical or ministerial errors but extended to administrative-type errors (beyond those of records and communications). 19
Reinsurance must have an insurance company in both ceder and assumer; excess insurance is not written on a reimbursement basis; stop-loss fails by rigorous tests on being either reinsurance or excess but it is extremely close to both.
The bordereaux stems from the fact that the initials were made on the edges (or borders) of the agreement.
Rev. Proc. 98-33 and Rev. Proc. 99-13.
Engineered Timber Sales Inc. v. Commissioner, 74 T.C. 808 (1980).
In re Estate of Duncan, 232 A.2d 717 (Pa. 1967); Jonas v. Meyers, 101 N.E. 2d 599 (Ill, 1951); Maland v. Houston Fire & Casualty Insurance Company, 274 F.2d 756 (8th Cir. 1926); Snipes Mountain Company v. Benz Brothers & Co., 298 P. 74 (Wash. 1931); Wilson v. Moog Automotive, Inc. 193 F.3d 1004 (8th Cir. 1999); Jensen v. SIPCO, 38 F.3d 945 (8th Cir. 1994), cert. Denied, 415 U.S. 1050 (1995); International Union of Electronic Workers v. Murata Erie North America, 980 F.2d 889 (Cir. 1992); Matthews v. Sears Pension Plan, 144 F.3d 461 (7th Cir.), cert. Denied, 525 U.S. 1054 (1998); Audio Fidelity Corporation v. PBGC, 624 F.2d 513 (4th Cir. 1980); Cinelli v. Security pacific Corporation, 611 F.3d 437 (9th Cir. 1994); Aramony v. United Way Replacement Benefit Benefit Plan, 191 F.2d 140 (2nd Cir. 1999); Airline Pilots Association v. Shuttle, Inc., 555 F.Supp. 2d 47 (D.D.C 1999); Landro v. Glenndenning Motorways, Inc., 625 F.2d 1344 (8th Cir. 1980).