COVERAGE CONCERNS
Observe insurers' newly made modifications or restrictions
By Roy C. McCormick
Familiarity with the scope of policy coverage, notably exclusions and limitations, is fundamental.
The dawning of the year 2002 brought with it a probability that insurers would reassess their capabilities for accepting risks and also would make substantial premium adjustments. That process is now well under way. This is a consequence of a long period that involved major fires and weather-related occurrences, unfavorable investment results, the 9/11 experience and the resulting potential for other terrorist activities, plus a sharp tightening of risk acceptability by reinsurers.
Restriction of risk acceptability certainly impacts agents' binding authority. Agents should review with all their insurers agency contracts and provisions for binding coverage.
Individual insurers will inform their agents of significant changes in risk acceptability and limitations; but until guidelines for future acceptability of risks appear, it is important to strictly observe that existing authority for binding. Coverage implementation is relaxed during favorable underwriting experience, but current hard-market conditions require care on the part of those who arrange coverage for insureds and those who underwrite it.
Now is a good time for agents to review their scope of authority to bind coverages. Which classes of insurance or coverage may or may not be bound? What dollar limit is placed on the authority to bind certain coverages?
Agency contracts or agreements between some insurance companies and their agents include specifics for binding. They are stated in supplemental rules or guidelines in other company/
agency relationships. Whether carried out intentionally or unknowingly, violation of express binding authority can strain a relationship. It could cause legal problems or possibly a lawsuit. Check
with the underwriter before binding when there is uncertainty about authority to bind a company in a particular situation.
Judicial evidence reveals the dangers of binding by word of mouth. There is no incontestable protection without a written binder or policy. An insurer cannot be expected to assume liability for the consequences of oral binding by an agent, most certainly when several companies are represented by the agency. Written binding minimizes a prime source of errors and omissions claims against agencies.
A copy of a written binder must be sent to the designated insurer promptly. This should be done within a time frame spelled out in a governing agency agreement or supplemental rules. Otherwise, it should be sent to the insurer at the time the original is delivered to the insured or mortgagee.
Pay attention to special exposures prior to binding--regardless of pressure to act quickly. In a specific loss situation, a homeowners insured suffered a silverware loss of $8,000 while insurance was under binder pending policy issue. The insured was offered $1,000, the special limit for silverware theft loss in the policy form.
The resulting lawsuit ended with a judgment in favor of the insurance company because the binder stated that insurance was "subject to the terms, conditions and limitations of the policy(ies) in current use by the Company." The agent could have avoided the problem by inquiring about special possessions and including scheduled property coverage in a binder.
We learn from the adverse experiences of fellow insurance practitioners. Agents can avoid these types of problems by inquiring if there is property for which there is limited coverage or no coverage at all in the insurance form specified in a binder (either commercial or personal). Needed additional coverage may be bound. Familiarity with the scope of policy coverage, notably exclusions and limitations, is fundamental.
Whether or not a written binder contains such a statement, it is in the interest of all parties to inform the insured that coverage bound is subject to the provisions of the pertinent insurance form. Another mark of professionalism is making sure to inquire at the same time about special exposures.
These considerations are important within the framework of the fundamental guidelines for binding, which are:
* It is essential that a written binder be issued without delay, with a copy sent promptly to the insurer, unless the policy itself is prepared immediately.
* Binding must be practiced only within the scope of the authority granted to the agent or agency by the insurance company.
In light of current conditions, it is essential that special care be taken that binding be done within the current grant of authority. At the very least, it would be embarrassing for an agent to have to inform an insured that the insurer named in a binder had rejected coverage. At worst, the agent could be held financially liable for a loss under a binder when it was issued outside the grant of authority.
In conclusion, agents would be well-advised to review existing binding authority and make certain that insurers' newly made modifications or restrictions are observed. *
The author
Roy C. McCormick is consulting editor of the Policy, Form & Manual Analysis Service (PF&M) published by Rough Notes.