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 “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.
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.
Some agents do have binding authority. Binding authority can be a substantial asset to an agent addressing the emergent insurance needs of a client. Binding authority might even make the difference between making a sale or not.
Binding authority does come with risk. If the insurance agent exceeds his binding authority he faces possibly losing that authority from the insurer and may even lose the insurer as an agency market if the insurer cancels the agency contract due to binder improprieties.
A recent decision from the Oregon Supreme Court casts a cautionary light on how vague discussions between clients and agents concerning verbal or written binders can raise significant problems between the agency and an insurer.
In Stuart v. Pittman, P.3d, 2011 WL 2162919 (Ore., June 3, 2011), the Supreme Court of Oregon substantially liberalized Oregon’s insurance binder statute to commit indirect modifications to the policy that is later issued. Oregon’s binder statute provides in relevant part:
The italicized language is an exclamation point upon the language of the statute that any binder will necessarily include all of the usual terms of the policy, which includes policy restrictions and exclusions. In order to displace this default principal, whereby the binder incorporates the contemplated policy terms, conditions, restrictions and exclusions, there must occur an act during the policy purchase/binder process that specifically and clearly displaces the policy terms. Absent that clarity in the transaction, the “default” continues, which means that the binder is coextensive with the actual terms and conditions of the policy being purchased.
Stuart v. Pittman
In Stuart, the insured decided to build a new house. To protect that interest he wanted to purchase a course-of-construction insurance policy to cover the house while it was being built. The insured contacted an insurance agent who was experienced with course-of-construction policies. During their meeting the insured and the agent discussed at length the scope of coverage that the policy would provide, i.e., that the policy would provide coverage from the start of construction to its finish and that the coverage would be beyond what was normally available in a homeowners policy. The insured told the agent that he wanted coverage that would provide a “safety net” or “catch basin” coverage “in all instances that something goes wrong during construction.”
The agent agreed to provide the coverage and did not communicate to the insured any coverage limitations.
Then, an ice storm struck and substantially damaged the home. The insurer raised several policy exclusions applicable to the loss. The insured sued the insurance company for breach of the oral binder claiming unrestricted coverage. The case was tried to an Oregon jury and a verdict was rendered in favor of coverage and against the insurer.
On appeal, the appellate court construed Oregon’s binder statute and concluded that the terms “clear and express” meant that the oral binder terms must “definitely, explicitly, and unambiguously supersede the terms [in the written policy].” See Stuart v. Pittman, 235 Or.App. 196, 204, 230 P.3d 958, 963 (Ct. App. 2010). The appellate court concluded that the phrases “safety net” and coverage “in all instances that something goes wrong” were too vague and obscure to satisfy the “clear and express” requirements of the binder statute. Because of this, the appellate court overturned the jury verdict.
On petition to the Oregon Supreme Court, the Supreme Court reinstated the jury verdict. The Oregon Supreme Court held that the words “clear” and “express” as used in the binder statute were words of common usage and should be given their plain and ordinary meaning. As such, the Court found that the term “clear” meant “easily understood” and the term “express” meant “directly and distinctly stated, rather than implied or left to inference.” Using those definitions led the Court to the conclusion that the “clear and express” requirement of Oregon’s binder statute, ORS § 742.043(1), meant that those binder terms that were easily understood and expressed, as opposed to implied, will ordinarily be sufficient to supersede the usual or contrary terms in a policy. (Stuart, 2011 WL 2162919).
The Oregon Supreme Court found that the insured’s request that the insurance policy provide “catch basin” or “safety net” coverage “in all instances that something goes wrong during construction,” was, in essence, a request for “all risk” coverage. Thus, the course-of-construction policy, based upon the purchase transaction was converted to an “all risk” policy. The Court reached this conclusion because the words quoted were expressed by the insured to the agent and were not implied. Moreover, the request was easily understood. This was sufficient to modify the actual contract that was eventually issued so that the issued contract’s exclusions were unenforceable because they were contrary to the binder.
Warning for Agents
The Stuart case represents a stop sign to agents with binding authority.
The agent should always tell the insured that the binder includes and incorporates all of the terms, conditions, restrictions and exclusions of the policy that will be issued.
The agent should tell the customer an exemplar policy can be provided if the customer would like to review it before purchase. In most instances, the insured will decline the opportunity to review the policy.
The agent should commit all oral binders to writing and confirm the fact that no representations have been made inconsistent with the terms, conditions, restrictions and exclusions of the policy that will be issued.
Finally, the agent should confirm with the insured that the insured has been given an opportunity to review an exemplar of the basic terms and conditions of the policy.
Sometimes it is difficult to get an exemplar of the policy and the policy that is actually issued will contain additional endorsements. Discretion should be used by the agent to account for the fact that the exemplar policy being provided for informational purposes is only for informational purposes and that there will be additional terms, conditions, restrictions and exclusions contained in policy endorsements.
The exposure to the agent and the insurance company exists between the issuance of the binder and the actual issuance of the formal policy. If a loss occurs in that no man’s land, the concern regarding the language of the policy can become significant to whether the loss will be covered, notwithstanding that the loss would otherwise be excluded by the formal policy that is ultimately issued. This is so because when the formal policy is issued, the binder merges into the formal policy and is extinguished on its own terms.
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