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.

Many states have statutes recognizing temporary insurance binders. Several states 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 the details and formality of a policy. In some cases, the essential contractual terms of an insurance binder may be inferred from the prior course of dealing between the parties or from established insurance business standards. A temporary insurance binder is often adequate if it indicates at least the subject matter, coverage period, rate, and amount of insurance.

In many states, and in many insurance situations, it is becoming increasingly difficult to make the clear distinction between insurance “agents,” “brokers,” and “producers.” Suffice it to say the law remains in a state of flux as to the roles associated with these various titles. However, in the world of insurance binders, the distinction remains an important one, as it is relevant to determine whether the insurance salesperson's promises and representations regarding coverage bind the insurer.

A definitive traditional characteristic of an insurance agent is the authority to bind the insurer. An insurance broker ordinarily has no such authority. Insurance agents generally act on behalf of the insurer. An agent's primary duty is to represent the insurer in transactions with insurance applicants and policyholders. Some agents may sell insurance for one or more insurers. An insurance agent may be authorized to do any act which his or her principal, the insurer, might do. Thus, 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.

The term “general agent” usually refers to a person or business entity that has a contract with an insurer to provide various services for the insurer, including underwriting certain risks. Thus, a general agent would typically be authorized to consider an application and bind coverage in accordance within the scope of the general agency agreement.

In contrast, insurance brokers generally act on behalf of the applicant for insurance or, after insurance is purchased, the policyholder. A broker may transact business with more than one insurance company. A broker's primary duty is to represent the applicant/insured, and his or her actions are not generally binding on the insurer.

The source of an agent's authority to bind the insurance company may be either “actual” or “ostensible.” People who are “really employed” by the insurance company to transact business on its behalf 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. An agent authorized to execute a written binder of insurance sometimes has apparent authority to make an oral binder of insurance absent any notice of restriction against such power communicated to the applicant.

When faced with an “urgent” request of a client to bind insurance, it is natural to want to help that client as quickly as possible. However, E&O and other claims related to binders can present themselves in a number of ways, including:

Ambiguity regarding the authority granted by the carrier to issue a binder. This can lead to subsequent coverage and E&O disputes, including a claim by the insurer against the agent.
An insured's concealment of a prior loss, for which the insured is essentially trying to back-date coverage through a binder. This can lead to rescission of the binder, and a subsequent E&O claim by the insured against the agent—even if it is meritless.
An insured's subsequent expectation of greater coverage than the basics outlined in a binder. This can lead to disputes between insured and agent regarding the terms of coverage.
Providing the insured with an “oral” binder, without confirming the basic elements of coverage in writing. This can lead to a misrepresentation claim by the insured against the agent.
Failure to confirm the term of the binder.
Failure to replace the binder with an actual policy, once the binder has expired.

Circumstances surrounding binders can often include a difficult risk, a difficult client, uncertainty regarding exclusions the carrier may ultimately include in the actual policy, and a sense of urgency to get coverage bound. These factors create a perfect breeding ground for E&O claims, and insurance agents, brokers, and producers must take extra precaution to ensure binders are handled in the appropriate manner.

Special Reports /

Caught in a Bind: The E&O Risk of Using Binders

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