Coverage Concerns


Binding coverage requires that agents follow established procedures

By Roy C. McCormick

Violation of express binding authority, whether done unknowingly or intentionally, will strain an agency/company relationship.

The binding of insurance is authorized under the contract between an insurer and its agent. It is unrelated to the provisions in the policy, form or endorsement that is the subject of the binder. Binding coverage is an extremely important procedure that must be performed properly.

Guidelines that an agent should follow in binding property and liability insurance protection include: knowing, without question, the agency’s authority to bind the various coverages written by a company or companies represented; discussion with the client of the nature of the risk and the scope of coverage bound; immediate follow-up of the oral binding of coverage with a written binder, a copy of which is sent promptly to the insurer as well as to the insured.

Binding authority

The extent of binding authority usually is spelled out in the contract between an insurer and its agent. In other agency/company relationships, this is stated in supplemental rules or guidelines.

Violation of express binding authority, whether done unknowingly or intentionally, will strain an agency/company relationship. It also can cause legal problems and possibly a lawsuit. When there is uncertainty over authority to bind a company in a particular situation, it is advisable to check with the underwriter beforehand.

Recently, various insurers have restricted risk acceptability as a consequence of a series of major fires and weather-related occurrences, unfavorable investment results, the 9/11 experience, the potential for never-before-known occurrences, and sharp tightening of risk acceptability by reinsurers.

Agents should review their agency contracts and provi-sions for binding coverage with their insurers. Restriction of risk acceptability affects agents’ binding authority.

Accuracy of information

It is essential that the information for binding be accurate. This includes the name of the purchaser, description and address of the property, the date coverage is to be effective, and the name and address of a mortgagee (lender). It is extremely important to discuss the exposures involved and, to the extent possible, the scope of coverage to be made effective by the binder. Make clear to the insured that the policy identified in the binder contains coverage particulars, including limitations. Also emphasize that the binder is issued pending the obtaining of needed underwriting data and policy issue.

Written vs. oral binding

This part of our guidelines for binding had its origin in a 1969 case decided by the Florida Supreme Court and identified as Standard Fire Insurance Company v. United States, 407 F.2d 1295 (5th Cir. 1969). This case underscored the necessity of written binding as distinguished from oral binding, the former being a necessary prompt follow-up of the latter. The court said:

“Binding insurance must always be done in writing. It is essential that a written binder be issued without delay unless the policy itself is prepared immediately. It must never be assumed that nothing will happen in a few days’ time that could bring about a claim, or that a particular insurance company could be expected to assume a loss when a number of companies are represented by an agency. There is no incontestable protection without a written binder or a written policy.”

Agency agreements and supplemental rules employed by various companies specifically provide that, whenever an agency issues a written binder, it must send a copy to the insurer within a specified period, frequently within three business days. A leading case in point is General Accident Insurance Company v. David C. Smith & Associates, New York Supreme Court, Appellate Division, Second Judicial Department, Nos. 90-04059, 90-04663. June 15, 1992.

The insurer involved knew nothing of a binder that its agency’s employee had issued on commercial property because a copy had not been sent to the company. The insurer would have rejected the risk had it known about it. However, it paid a claim for fire damage at the premises solely on the strength of the binder that the property owner held.

The insurer then sued the agency for indemnification, citing the agency agreement to which the insurer and the agency subscribed, which provided that, whenever the agency issued a written binder, it was required to send a copy to the insurer within three business days. This had not been done. On appeal, trial court judgment was affirmed in favor of the insurer and against the agency.

“The improper use of binders has become a major cause of producer errors and omissions claims. It is imperative, therefore, that only authorized people prepare them. Preparation must be complete and accurate.” This observation was made by ACORD, whose forms are used throughout the insurance industry, including those for binding commercial and personal property and liability insurance. ACORD further advises that at regular intervals a designated person should follow up each binder until its disposition.

We cannot expect an insurer to assume liability for the oral binding of coverage by an agent. This is especially true when an agency represents several companies. The necessity for binding coverage in writing seems to be widely recognized, and the practice is being followed. Evidence of this is a decline in litigation over loss attributed to faulty binding, extending through the appeal system and decided by higher courts.

On the other hand, our society has become extremely litigious. Newspaper and television reports, ads and commercials suggest that damaged, injured and offended persons are often uncertain whether to call a lawyer or 911 first! In any event, agencies must keep their guard up by following tested binding procedures to the letter and periodically checking adherence to them. *