Peter Polstein discusses insurance binders and why the placing agent or broker must make absolutely certain that all parties fully understand the coverage ramifications.
When all the negotiating and shouting is done from a marketing standpoint, one of the last and perhaps most important actions of an agent or broker is to issue to underwriters binders covering the risk, and confirmation to the insured as to coverage, premiums, and any changes in the terms and conditions of the placement, irrespective of whether it is a renewal of an existing account or new business.
How many times have we heard, "I wasn't aware of that," "I didn't realize that was the case," or worst case scenario, when a loss occurs, coverage was not as expected causing loss to the client, and the high probability of an errors and omissions (E&O) claim, not to mention placing the entire account in jeopardy. All too often, we fail to remember that the assets we are bound to protect by our own professional conduct are not ours.
When issuing a binder and confirmation to an insured, let's not take the easy road, which is a dangerous one at best, by simply having underwriters sign:
renewal, dated ________, as expiring Policy # _______, all terms and conditions
and then, proceed to advise the client, in a likewise manner.
One of the most interesting E&O claims that I can remember from Alexander & Alexander was a broker who, in writing, advised the client that the renewal was basically follow form, all terms and conditions of the expiring program. When the loss occurred, the first question asked was, "Would you tell us what you meant by 'basically follow form?'"
What Should the Binder Include?
All binders to underwriters, and confirmations to your client, should contain the exact information, save perhaps questions relating to income, unless the client has demanded that information. There is no disgrace in forwarding to the client a full copy of the signed binder, which many clients will expect as part of the renewal package.
In this litigious world in which we survive, I would suggest that any binder and confirmation to client include the following (which in this example was obviously a property cover, with United Kingdom underwriters).
Binder and Confirmation Information
Type: All Risks of direct physical loss or damage insurance including Flood, Earthquake, Boiler Explosion and Machine Breakdown.
Form: J (a) Form including Manuscript Form, all terms and conditions as expiring.
Interest: Real and Personal Property of the Assured including improvements and Betterments, Property of Others in the care, custody and control of the Assured or for which the Assured is responsible, Gross Business Interruption (excluding ordinary payroll) including Extra Expense, Off Premises Power Failure, Property in Transit, Accounts Receivable, Electronic Data Processing equipment and Media, Fine Arts, Valuable Papers, Newly Acquired Real Property subject to report to Underwriters within 90 days of acquisition.
Sum Insured: Primary US$ _____________ any one Loss and in the aggregate with Flood and Earthquake perils separately.
The following coverages are sub-limited to:
- US$ (List them all; in this illustration, there were 19.)
Deductibles: US$ _______ (Be overly careful, relative to this wording e.g., to each and every loss; with an aggregate or without, etc.)
Locations Insured: (Be sure they are all properly identified. Unless, the agent or broker has negotiated wording which provides blanket coverage for all locations for which the insured has an insurable interest or obligation to provide coverage.)
Conditions: (List them all; in the case of this binder, there were 25 separate inclusions and exclusions.)
Information: (If there is pertinent data, relative to the risk, or warranties by either the Assured or Underwriter, list all of them. In this case, there were 8 separate items which affected the placement, including 3 warranties by the Assured.)
There are many instances where the primary underwriter is limited to acceptance of risk, due to either size of risk or underwriting constraints, and the placing agent or broker finds themselves negotiating excess or layers of coverage. The same criteria applies to the binder to underwriter(s) and confirmation to client. In a way, these segments of the placement can be more dangerous from an E&O standpoint, as too often, the underwriter(s) may not disclose all of the terms and conditions that they are subject to, especially from a reinsurance standpoint. It is imperative, that their binders contain exact terms and conditions as they apply to the primary coverage.
A classic example of this has been the ongoing litigation relative to the World Trade Center terrorist attack. Not only is there a question relating to the number of occurrences, but the many layers of that placement apparently contained wording which was inconsistent with the so called primary or first layer.
The cost to defend or litigate this matter has already been substantial, and irrespective of the outcome, it does stand as a relatively interesting example of who said what to whom, and how did they understand it.
The more complex the insurance program, the more it is incumbent on the placing agent or broker to make absolutely certain, that all parties to the negotiations fully understand all of the ramifications of the placement.