Burand’s Agency E&O Blog: Tip #50

Binders Redux. A binder is a temporary insurance contract. This is a fact. The Acord 75 field Description states, “A Binder is a temporary insurance contract which provides coverage in advance of the issuance of an insurance policy.” The Acord Insurance Binder form states, “This binder is a temporary insurance contract, subject to the conditions shown on the reverse side of this form.”

It is often used as an evidence of insurance. However, if a policy – which is a contract of insurance – has already been issued, why issue another contract (a binder) just to prove insurance exists? In other words, why would anyone in their right mind write two contracts of insurance on the same risk? Yet this is what happens when one issues a binder on top of an existing policy. Remember, a binder is written in advance of the issuance of an insurance policy, not after the issuance of an insurance policy.

Part of the problem lies in agencies not understanding what it means that a policy has been issued. A policy issued does not mean the policy papers have arrived. It means a policy number has been issued by the company. Why a company cannot get the paper policy printed and mailed within a couple days is baffling but beside the point. Once a policy number has been issued by the company, the company has issued coverage and therefore the client has coverage. Therefore a binder is redundant. A good plaintiff attorney will ask, “Why did you issue a second contract unless you wanted the insured to have other coverage?” If you answer that you just did it so they had evidence of insurance, they might ask, “Why did you not issue a certificate of insurance? Or do you not know what you are doing?”

Even if you argue that a binder is harmless, the binder says it is a contract. After all, why does a binder state that it can be cancelled? Evidences and certificates cannot be cancelled because they are not contracts. Only contracts can be cancelled.

Furthermore, the policy terms are not usually shown on the binder. So if you have issued a contract of insurance (a binder) and the company has issued a contract of insurance (the policy), which has the broader coverage? The one with terms and definitions or the one that lacks terms and conditions? Before concluding the binder follows the policy, remember that is likely true if the binder is issued in advance. If issued after, and is redundant, then why would it automatically follow?