“I've been researching the issue of binders. It seems that the going theme is to avoid the use of binders in any situation. However, it seems to me that an authorized and properly executed written binder is necessary in the case when the policy is not yet available for renewal or new business. The State of MN requires a written binder to follow an oral agreement to bind coverage. Can you provide other reasons to support the use of a properly written and executed binder? Is it better to rely on a proposal and your client’s memory of the coverage in the event of a loss prior to issuance of a policy?”
This is excerpted from an article by Chris Burand, one of the top agency management consultants in the country.
“Simply because a client demands a binder does not mean the agency has to give the client a binder unless the client really does need a temporary contract of insurance. If the client really just needs proof of insurance, then the agency should issue the proper proof — not a binder. Very few clients possess insurance licenses, so rarely do they really know what form they need. The agency is the entity with the license and should do what is right.
“Many times binders are issued because the insurance policy has not been delivered. I am amazed at how Detroit can manufacture an automobile faster than some insurance companies can print a boilerplate insurance policy. But be that as it is, agencies should rarely write a temporary contract on top of an insurance policy that already exists. Just because the paper policy has not arrived, does not necessarily mean coverage does not exist.”
A written binder can be essential in an E&O claim to prove what you communicated to a customer about coverage. On the other hand, it could potentially document an agency error or omission. Issuing one is a business decision. If proof of insurance is requested but not necessarily a binder, you can issue an ACORD certificate or evidence of insurance, a document loaded with disclaimers.
The agent responds:
“I have read the article you mentioned. Let me pose the question a different way. In the case of a new sale, the producer does not have a policy in hand. The client asks the question, ‘Is coverage bound so I do not have a lapse in coverage if I go with your company?’ The author misses the point on the issue of an oral binder. If an agent merely provides a certificate, he/she must also be certain not to provide an oral binder. This is not a rare occurrence. This situation occurs frequently in new sales.
“In the case of renewals, often in competition, policies are not available until after the renewal date. In this case the agency could ask for a binder from the underwriter which may not be possible when decisions are made at the final hour prior to a renewal. Again, this is not as rare an occurrence as we'd like to believe. In some states, it is required that a written binder follow an oral binder. In absence of a policy on either a renewal or new business, what do you recommend? The Insurance Journal, in an article they published, cited two cases on the subject of oral binders: Parlier Food Co. v. Fireman's Fund Ins. Co., (1957) 151 Cal. App. 2nd 6 and Eames v. Home Ins. Co., 94 U.S. 621.
“The article you mentioned urges the producer to avoid the use of binders, but it does not clearly articulate when a binder is necessary and the best procedure to avoid an E&O. I also think a properly executed binder is good customer service and perhaps something independent agents should provide and strive to execute in better ways. When in your view should a producer provide a binder to an insured?”
If we understand your point, we'd agree that a certificate or evidence of insurance is provided where a policy has been issued. If a policy has not yet been issued but coverage has been bound, then a binder is the proper form if the customer desires documentation or there is a law that compels the issuance of a binder. As you point out, state laws may govern whether a written binder is required. If not, then it's debatable whether issuing a binder is appropriate or not if the insured does not request one. To broaden the feedback on this issue, we submitted this to the VU faculty and got the following responses:
A binder should always be issued in writing if the policy isn't available.
The better a contract is understood, the better for all parties, and a properly completed binder can be most useful in that context. Not only can it facilitate identification of any part of the agreement that may require change sooner rather than later, it may also highlight differences in memories of discussions. This could be particularly crucial when a loss occurs before policy issuance, and memory sometimes becomes self-serving. What’s the downside? I don’t see any.
I think there are really two questions here. The first is whether a written binder is better than an oral binder. In my opinion, an oral binder has the greatest risk because the “authorized issuer” of the binder might actually forget about the issuance and fail to provide the carrier (principal) notice of the existence of the binder with a resulting exceeding of binding authority and lack of coverage.
As for the second question, “Is a written binder as good as the policy?" A binder almost always lacks the reference to the specific policy forms and edition dates found in an actual policy and so even a written binder has a potential exposure for an errors and omissions allegation.
So, if I was having the argument about binders, I would point out that the fastest way to get the actual policy issued should be explored to reduce the amount of time coverage is being provided under the terms of ANY binder as quickly as possible. Binders have their place but also have their own set of associated risk.
The fact that a policy is not available, i.e., has not yet arrived, does not necessitate the issuance of a binder. In fact, issuing a binder in this scenario is wrong. The policy has been issued. It just has not arrived. A binder is supposed to ONLY be used in situations where a policy has not been issued. The definition of issued is whether a policy number has been assigned. Being issued has nothing to do with whether the policy has arrived.
No binders should be verbal. In today’s world, rarely will a binder issued by the agency itself be required. They just are not necessary. The only common example I can think of is if a person who does not already have an auto policy buys a car on Saturday, requests coverage, and whoever answers the phone at the agency cannot issue a policy so they have to write a binder until Monday when someone can get a policy issued.
When coverage is bound for a new policy, the insured should sign the application and provide a down payment. That binds coverage on the effective date indicated on the application. E&O carriers recommend that the agency provide a copy of the signed app to the client as proof of coverage until a policy is issued. E&O carriers also recommend that a binder not be provided unless the client has specific need for an ACORD binder (e.g. a mortgage closing).
A more modern "twist" on this is the prevalence of e-signatures to bind coverage but we recommend that a copy of the app with e-signature noted is sent to the new insured at that point too.
Many renewals are now issued by carriers very early before the effective date. They want to get their bills out and paid, of course, but that does mean that clients get those renewal policies early. If the agency is moving the renewal as new business to another carrier, the new business rules above should govern. If the agency is keeping the coverage with the incumbent carrier and that carrier is late in issuing a renewal policy (e.g. after the effective date), a letter delineating the coverage is renewed is a better option to a binder. So again, if the insured needs a binder (or EPI) for a specific reason, it should be provided; but unless needed, it is not necessary.
I am not familiar with any state that requires a binder be issued and I am willing to bet that the signed app would suffice in such states.
I think erring on the side of caution by providing Evidence of Insurance or a binder serves as a reminder to the agency that follow up is required with the carrier in question. The documents if anything put the client at ease when the agency performs such action. The strange side is the “companies” do not want you to copy them, but require you to maintain the records during a company audit.
They are seeking to hang your E&O responsibility directly in your hands in the event of an error through improper documentation of the aforementioned documents. Various thoughts abound on this issue. Just type “ONLY” what represents the coverage at that “SPECIFIC“ moment in time. The policy will respond to the coverages provided.
If you find yourself a week prior to your new policy inception date and you still haven’t nailed down your coverage, a binder may be needed. I prefer to make the coverage decisions at least two weeks prior to inception, and have certificates issued to all holders at least a couple of days prior to inception. Cab cards (where needed) need to be in the autos several days prior to policy inception similarly. I want a receipt for the deposit premium (the condition precedent to formation of a binding contract), and I want all governmental folks (DOT, etc.) bathed in the paper they love prior to the date that they say they need it.
Last Updated: December 15, 2015