18 Jun The Difference a Binder Makes
Without a doubt, you all know the drill. The client (or prospect) advises you they want the coverage, and now it is up to you / your agency team to advise the appropriate parties (carriers, wholesalers). It should also be part of the process to provide your client with some evidence to ensure clarity of what coverage is being put into place.
It is appropriate to point out that the evidence should be in writing; oral binders are unacceptable. Just telling the client “you’re bound” with nothing in writing is a formula for disaster. If the client suffers a loss (before the policy is issued) that is not covered, there is a serious possibility the client could have a different understanding of what was bound.
When providing a document detailing the client’s purchase decision, it is common to add clarity by advising them (in writing) of the coverages quoted but declined. These documents should become part of the client’s file. In the event of a problem involving an uncovered loss, this level of documentation may prove to be critical in the agency’s defense.
Binders are typically issued as temporary documentation of coverage bound until the policy is issued. At that point, the policy will govern the extent of coverage, including exclusions and limitations. For this reason, binders need to be accurate. This may sound like common sense (and it is), but if the binder is not issued correctly, there is a distinct possibility that the binder will prevail in the settlement of a loss. This has been an integral element in a substantial number of E&O claims. In addition, the agency normally does not prevail in these matters. So, if the intent is for the property coverage to be subject to a $10,000 deductible, but the binder states a $5,000 deductible will apply, the agency could be liable for the difference since the carrier is going to settle by applying a $10,000 deductible. A number of the E&O claims where the binder was not issued correctly have resulted in sizable payments by the E&O carrier. So, mistakes can be costly.
Instead of issuing a binder, many agencies have provided clients with the final proposal detailing the coverage the client agreed to purchase. This probably applies more to commercial accounts. The bottom line is that the manner and process for providing confirmation to a client may vary based on the size and type of account. Agencies should have detailed procedures for what form and process applies for each type of account they write. The process should be in accordance with the applicable state laws, including the timeframe for the binder.
In some situations, the agency may not have authority (or limited authority) to issue a binder. When placing coverage through an E&S wholesaler, agencies cannot issue binders (unless the authority has been granted in writing) as the wholesaler is technically the agent of record. Thus, binders should be requested from the wholesaler when placing coverage through a wholesaler.
Carrier contracts will typically include this topic, addressing whether the agency is authorized to issue a binder and, if so, what binder timeframes are allowed. Carriers may require a copy of the binder. Even if they don’t require it, it is strongly suggested that they receive this important document.
Binders or some other form of confirmation of coverage (such as an agreed-upon final proposal) are key issues that can have dire consequences if not handled correctly.