It is not uncommon for individuals or businesses to need insurance protection on an expedited basis, before an insurer can fully evaluate an application and prepare, execute, and deliver its insurance policy. Reasons behind this need could include: a newly acquired building or business that is difficult to insure; expiration of a previous policy covering a complex risk; sudden insolvency of a prior carrier; or an insured's allowing a previous policy to lapse.
To meet this need, many insurers authorize their agents to issue “binders.” These documents evidence the existence of insurance during the application process and before an insurance policy is actually issued and delivered to the insured. Binders serve an important need, and can be valuable tools for agents and insureds alike. However, they also present many areas of E&O exposure for insurance agents, brokers, and producers.
A binder is a contract made in contemplation of the issuance of a formal policy of insurance. See “Insurance Agency Risk Management: A Comprehensive Guide To Avoiding E&O Claims” (AgentsofAmerica.org, 2013 ed., Ch. 10). It provides the same coverage as will be contained in the written policy to be issued. In most situations, the binder is effective until it expires by its own terms, even if the insurer subsequently decides not to issue a policy to the insured.
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