Individuals or businesses sometimes require insurance before an insurer can fully evaluate an application and prepare, execute and deliver the policy. To meet this need, many insurers authorize their agents to issue binders, which are documents that evidence the existence of insurance during the application process and before a policy is issued and delivered. Binders can be valuable tools, but they also present areas of E&O exposure for agents, brokers and producers.
A binder is a contract made in contemplation of the issuance of a formal policy of insurance. It provides the same coverage to be contained in the soon-to-be written policy. Usually the binder is effective until it expires by its own terms, even if the insurer does not issue a policy to the insured.
Agent vs. Broker Distinction
With binders, the distinction between agents, brokers and producers is critical. Agents have the authority to bind the insurer and represent the insurer in transactions with applicants/insureds. Some may sell insurance for multiple insurers and may be authorized to act on the insurer's behalf. Absent actual or constructive notice to the applicant or insured of limits on the agent's authority, an agent may bind the insurer by “acts, agreements, or representations within the ordinary scope and limits of the insurance business entrusted to him,” even if the agent's actions violate private restrictions on his or her authority.
Brokers act on behalf of the applicant or insured and may transact business with multiple insurers. Their actions generally are not binding on the insurer.
General agents are contracted to provide services for the insurer, including underwriting risks. They are authorized to consider an application and bind coverage within the scope of the general agency agreement.
Authority to bind the insurer may be “actual” or “ostensible.” People who are “really employed” by the insurer to transact business have actual authority. Ostensible authority exists where the insurer intentionally (or carelessly) causes a third person to believe someone who is “not really employed” by the insurer is its agent. Agents authorized to execute written binders sometimes have authority to make an oral binder.
Areas of E&O Exposure
E&O claims related to binders can involve:
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Ambiguity regarding the authority granted by the carrier to issue a binder leading to coverage and E&O disputes, including a claim by the insurer against the agent.
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An insured's concealment of a prior loss, for which the insured tries to back-date coverage through a binder. This can lead to rescission of the binder, and an E&O claim by the insured against the agent—even if without merit.
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An insured's expectation of greater coverage than outlined in a binder, leading to disputes between insured and agent regarding terms of coverage.
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Providing the insured with an “oral” binder, without confirming the basic elements of coverage in writing.
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Failure to confirm the term of the binder.
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Failure to replace the binder with an actual policy, once the binder has expired.
States' Binding Laws
Many states have statutes recognizing temporary insurance binders. Several recognize the validity of insurance binders through their case law. As with insurance policies, formation of a binder is generally governed by the law of contracts. A binder is not required to have all of the details and formality of a policy. In some cases, the essential contractual terms of an insurance binder may be inferred from established insurance business standards or relationships. A temporary insurance binder suffices if it indicates at least the subject matter, coverage period, rate and amount of insurance.
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