Essentials: Be Careful What You Say When Issuing a Binder

Insurance binders are contracts of temporary insurance pending the issuance of a formal policy or proper rejection of the application by the insurer. The binder serves only as a temporary or interim policy until a formal policy is issued. Once the formal policy is issued, the binder merges into the policy and is extinguished. The binder constitutes evidence that insurance coverage has attached at a specific time and continues in effect until either the policy is issued or the risk is declined.

Not all of the terms of the insurance contract are set forth in the binder. This is especially true in situations where oral binders are issued. Nevertheless, a binder is a fully enforceable contract of insurance. Once the binder is in effect, it is deemed to include all of the terms of the policy to which the binder was given, and has the same effect as the policy.

Typically, the customer and the insurance agent do not specifically agree upon all of the essential terms when the binder is issued. However, they are presumed to have contemplated the terms, conditions, and limitations in the the policy issued by the insurance company at that time, at least for other similar risks or standard policies.

Although a binder typically incorporates the terms of a prospective formal insurance contract, there must be a “meeting of the minds” between the parties for the binder to be in effect.

A recent court decision casts a cautionary light on how vague discussions between clients and agents concerning verbal or written binders can raise significant problems.
A “meeting of the minds” legally occurs when there is agreement on the subject matter being insured, the risk, the duration and amount of coverage, the premium amount, and the identity of the parties.

Binding Authority

Insurance companies do not grant their agents binding authority easily.

In many instances agency contracts specifically state that the agent has no binding authority. In those situations the insurer wants to control all significant communications which could create an insurance contract. Such control ensures the that whatever contract is created through communications remains compliant with the policy to be issued.

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