Recently, I’ve come across many instances of agencies binding coverage without realizing they do not have the authority or they do not even realize they are binding coverage.
First things first. What is a binder? I find that only a small minority of people whom I ask, know the correct answer. As the formal issuance of binders has dwindled to almost zero, people have lost the knowledge of what a binder is.
A binder, simplistically, is a short-term insurance policy. IT IS AN INSURANCE POLICY. If you do not believe me, read the ACORD binder form.
A binder IS NOT EVIDENCE OF INSURANCE! When you issue a binder, you are issuing an insurance policy. When you issue an evidence, you are issuing evidence that insurance exists, but you are not issuing an insurance policy. The difference is huge.
When a binder is issued as an evidence, an insurance policy already exists. Therefore, issuing a binder in this situation, which is extremely common, means issuing a second insurance policy. A binder should only be issued if no other policy exists. To issue an evidence, a policy must already exist. Therefore, to substitute a binder for an evidence means issuing a second policy and no good can come from issuing a second policy. Issuing a binder to prove a policy already exists is incorrect.
The argument that a binder in this instance is not a second policy does not hold water because a binder form states it is a policy. The argument that a binder is required because the actual physical policy has not arrived does not hold water either. If a policy number has been issued, a policy exists. Whether it is lost in the mail or the carrier is a month behind with their printers (one would think carriers could afford more printers, but that does not seem to be the case), is a moot point.
Issue an evidence if you have a policy number. In fact, this is a perfect scenario for an evidence because you are providing evidence coverage exists even though the policy itself has not arrived.
Additionally, read the terms and conditions on the binder. If I am a plaintiff attorney and an agent has issued a binder when a policy exists, but the binder’s terms and conditions are silent, how will that attorney interpret coverages?
Furthermore, I find that almost no agent has researched the agency’s binding authority in the last five years. Carriers just make changes on their websites today and no one pays attention. Binding authority has been severely curtailed. Some admitted carriers have eliminated binding authority completely, but I see agencies still issuing binders for these carriers. Some carriers have minimized binding authority to a week or even 48 hours, but I see agencies still issuing 30-day binders. If you are going to bind coverage, you can only bind coverage within your authority. Failure on this point is an E&O slam dunk for carriers.
Additionally, I am now seeing staff and producers, who do not adequately know the differences between admitted and non-admitted carriers, binding coverage in surplus lines. Retail agencies almost never have binding authority of any kind in surplus lines.
Sometimes they bind completely innocently, not thinking about their words and likely trying to sound like they have more authority than they do. A producer will tell a client, “Thank you. I’ll get your coverage bound today.” Unless the agency possesses binding authority, the agent cannot tell a client they’ll get coverage bound or that they will bind coverage. Saying this arguably means the agency has issued an even worse binder, a verbal binder. The better response is to tell the client you’ll request coverage be bound and you will let them know the result.
Sometimes the agent feels like they are under pressure because of carriers and surplus lines markets’ poor service. The policy does not arrive for a month or six months. The insured needs the policy, and the agent feels compelled to give them a policy. The market’s incompetence does not change the agency’s contractual limitations.
Another example is when the client needs a certificate before the policy is issued, prior to even receiving a policy number, and the agency issues a certificate. Arguably the agency has bound coverage here, which is not correct. Instead, this might be one of those situations where, if binding authority exists, the agency should actually issue a binder.
In today’s world when policy issuance by standard carriers is measured by the immediacy of having a policy number, binders have almost no use. The need simply does not exist.
With surplus lines carriers, never issue a binder. Instead, obtain a binder from the broker and pass it on to the insured without changing anything whatsoever. A retail agent does not have the authority to change anything whatsoever. Do not rewrite the binder either onto a new form to suggest it is your binder.
Do not verbally bind any coverage, ever, even if you have binding authority. Do not issue certificates on policies that do not exist. Do not try to make clients think you have more authority and power than you actually possess. And never, ever guess or assume you have authority or power that is not in a contract. Any authority you have should be expressly stated in your carrier contracts. Know your limits and do not exceed those limits.
Binders done incorrectly are fairly straightforward E&O claims the agency is almost certain to lose. Whether the insured sues or the carrier pays the claim and subrogates against the agency for violating their binding authority, the agency is likely to lose. Stay simple and do not issue binders unless you must absolutely do so in a situation where the insured does not have coverage, needs coverage, and you have the authority to offer coverage. An example might be someone that does not have auto coverage on Saturday morning and needs it immediately and you cannot issue a policy on a carrier’s system that morning, so you issue a binder within your authority.
And here’s the other benefit! It’s less work for your staff to not issue binders!
NOTE: The information provided herein is intended for educational and informational purposes only and it represents only the views of the authors. It is not a recommendation that a particular course of action be followed. Burand & Associates, LLC and Chris Burand assume, and will have, no responsibility for liability or damage which may result from the use of any of this information.
None of the materials in this article should be construed as offering legal advice, and the specific advice of legal counsel is recommended before acting on any matter discussed in this article. Regulated individuals/entities should also ensure that they comply with all applicable laws, rules, and regulations.