Binders are contracts. Binders are not certificates of insurance or evidences of insurance. They are contracts that may have their own terms, exclusions and conditions. In contrast, a properly written certificate of insurance does not have its own terms, exclusions and conditions. On the contrary, it has a standard disclaimer specifically stating that the certificate does not alter the terms, exclusions or conditions of coverage.
Binders are binders. Binders, certificates of insurance and evidences of insurance are not interchangeable and should not be treated as if they were. If a client needs proof of insurance for an existing policy, he or she does not need a binder. Binders should be used when a policy does not already exist. A binder is a bridge spanning the time between the client's agreeing to coverage and the issuance of the actual policy.
When producers or CSRs are waiting for issued policies to arrive, they feel the need to give clients documentation that they're receiving something for their premium, but a binder is not that something. Depending on the situation, evidences of insurance or certificates of insurance are more appropriate.
If, however, the client needs insurance immediately and a policy cannot be issued, a binder is necessary. Never issue binders for policies that already exist. Doing so can create multiple problems, since the agency is essentially issuing a second policy–not to mention being inefficient by doing a task that's already been done.
Use only the proper form. Issuing a binder on the wrong form is especially risky. Many agencies inadvertently make this mistake by writing cover letters advising clients that they've been bound when the agency has not issued a formal binder. Without a formal binder, the coverages, terms and conditions are not adequately defined, leaving the door wide open for problems down the road.
Never bind E&S policies. Things can get especially dicey when an agency sends a cover letter advising a client it has "bound the risk" on an E&S policy. The agency has not only issued a poorly defined binder but it has no binding authority in the first place. Agencies cannot bind E&S policies, so do not attempt it! An agency should also never rewrite an E&S broker's binder on the agency's own ACORD or other form. Make a copy of the broker's binder and use that instead.
You must have authority. When an agency violates its binding authority by issuing an unauthorized binder, it invites the carrier or broker to pull the contract and sue the agency to recover any claims paid under it. Many agencies believe that regardless of whether they issued the binder correctly, the carrier will pay the claim and let the agency slide. Wrong! If the claim is large enough, suing is a fairly simple way to recover a few hundred thousand dollars or even $1 million from the agent's E&O insurer. This is a black-and-white issue. Either you're authorized, or you're not.
Agencies should research their binding authorities. Agencies commonly issue 30-day binders for every carrier, but some companies have reduced binding authority to only a few days. To avoid mistakes, agencies should create a "Summary of Binding Authority" to distribute to all employees.
Clarify communications. Some agents misinterpret conversations concerning new accounts. An underwriter may say he or she will write a risk, but that's not binding a risk. Agreeing to write a risk inherently implies an application will be submitted and that the data on the application will materially match the conditions previously described by the agency–but that's a long way from binding.
Even worse is telling an insured the company has bound a risk simply because it's agreed to quote it. Every agency I've visited has had a company quote a risk and then decline to write it. Agreeing to quote a risk does not imply an automatic binder.
Semantics are important. If an agency needs a company to bind a risk, it should get the company to issue the binder or, at the least, obtain some kind of written confirmation that the company has agreed to bind the risk. Semantics are important. The only time agencies should assume a company has agreed to bind a risk is when it explicitly states as much. Without some version of the term "bind" in the carrier's written communications, agencies cannot and should not assume something has been bound.
Get educated. If an agency's employees do not fully understand the correct terminology or procedures for binders, the owner should put together a brief educational seminar or information packet. Binder mistakes are easy to commit, but they're also easy to avoid by taking a few simple precautions.
Standard binders are generic tools for a specific and straightforward job. Like all tools, using them properly will yield good results, while using them improperly can be dangerous–especially today, when not all companies are necessarily "partners" with their agents. Carriers seem to be more willing to sue agents over binder missteps. Issuing binders when they're unnecessary also wastes time. So follow the aforementioned steps to keep your agency out of a bind.
(Burand & Associates recently launched The Agency School, a six-session intensive training program for brokers and managers. The curriculum is based on a 15-year study revealing 55 factors critical to agency profitability. The students selected for the first school receive market exclusivity. The first session will be held Nov. 13 and 14 in Dallas. For more information, contact Chris Burand at (719) 485-3868 or visit www.theagencyschool.com).
Chris Burand is president of Burand & Associates LLC, an agency consulting firm. Readers may contact Chris at (719) 485-3868 or by e-mail at Chris@burand-associates.com.

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For The Manager: Avoiding blunders when issuing binders

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