Author: VU Faculty
We all know that binders have historically been issued for 30-day terms. Why is that and can a binder be issued for longer terms, perhaps even as long as the 12-month policy period? In this article, our faculty will discuss the historical significance of this "rule" (as best as we know it), along with some caveats to consider.
Recently, one of our faculty members was contacted by an agency management consultant who posed the following question raised by one of his clients:
"Why should binders only be written for 30 days? What is the E&O exposure of doing 60 day binders (or even 12 month binders)? I thought I knew the answer but I had a very smart client throw me a curve yesterday so I need to consult an expert like you now."
We ran this by the VU faculty and got the comments below. When they were provided to the agent, he came back with a series of counterpoint questions (see below) to which we responded. Enjoy the debate!
I don't know that there is any "magic" in the 30-day term, but it does seem to be the industry standard. In fact, some states that have binder laws often use the 30-day term.
My guess from an E&O standpoint is that it's more pragmatic than anything else. That is, it is "safer" to only put something on the back burner for just 30 day before having to go back into the file to check on coverage status. If something is left "on hold" for 60-90 days, that's probably asking for trouble.
There is no reason at all, unless a state-specific statute states otherwise, that a binder cannot be issued "until policy issued." In fact, that is safer in case the policy is issued with different provisions.
30 days was used as its term because binders were originally used when a policy was not necessary for a short term coverage need and the carrier didn't want to go to the expense of a policy issued for less than a thirty day period. We have "polluted" that original usage because some carriers are so slow issuing some policies.
If a carrier elects to cancel the policy in the 60 day "look see" period, it would also be cancelling the binder.
Seems like years ago the 30 day rule was from the old "fire rating" bureaus, in that it might take a maximum of 30 days to inspect a new property for rating purposes. I got out my old Inspection Bureau "Rule Book" and the Binder Rule says "Binders shall be issued for a definite term not exceeding 30 days, but may be renewed for an additional term not to exceed 30 days." I also have an "Advisory Rule Book" dated 1944, but there was no mention of "binders" that I could find. But, that was just after the SEUA case, and the insurance industry was in a state of confusion. Since Public Law 15 went into effect March 9, 1945 I'll assume a lot of rules were implemented and/or changed about that time.
The reason why binders are issued for 30 days is quite simple...some of us old timers remember when policies were actually issued within 30 days! Of course, with the efficiencies of today's technology, it often takes 3-6 months to get a policy...isn't automation great?!
But, seriously, there's no reason why you couldn't do a 60-day binder or something close to it. Anything beyond that could present a problem in that, under most policies, the insurer has 60 days to cancel the policy for any reason. To preserve that underwriting window, insurers might want to cancel the existing binder and issue a new one to start the 60-day tolling again.
I recently received the following similar question: "What are the potential negative ramifications, if any, to an agency that issues a 12-month binder for a property closing? Assuming the insured has paid the first year's premium and the dwelling falls within acceptable risks for the carrier's underwriting guidelines."
I cited two potential problems that came immediately to mind:
State Statutes and Regulations. Some states limit the term of binders, most often 60 days max. I don't know about NY, but you could check with the DOI or if a member agency or affiliate member company in NY, you could check with IIAANY.
Agency/Company Agreement. In many cases, this document or attachments will place limitations on the agency's binding authority, sometimes to 30-60 days.
The consultant passed our comments along to his client, who then responded with the counterpoints below. For each issue addressed by the agent, we've included our responses.
"I don't get it. The 60-day underwriting window has nothing to do with binders or policies. We have carriers that actually issue policies prior to the renewal. To my knowledge, they can still cancel the polices in the first 60 days. There is nothing in the rules that I have seen that say once a policy is issued, the carrier loses its right to cancel in the first 60 days. If that were true, no carrier would issue a policy before 60 days. And while some might argue none do, I know that is not the case."
It has everything to do with binders and policies. Many policies give the company 60 days to cancel for any reason if it's a new (not renewal) policy. In most states I'm familiar with, the insurer does NOT have 60 days to cancel immediately following a renewal...this provision, by statute and contract language, is usually limited to new business. The binder IS the policy, so when coverage is bound, a policy and the cancellation provision are in place. If a 60-day binder is issued, coverage will lapse in 60 days.
So, if the company can't make an underwriting decision in that time, they don't have to worry about the policy now being "uncancellable"...the binder lapses, a NEW binder (i.e., policy) is issued for another 60 days and the 60-day cancellation-for-any-reason condition is reinstated because we have a new binder/policy in place. If the company issued a 90-day binder and decided they didn't want the account after 61 days, it's too late...the policy is in force until expiration unless they can find a valid reason to cancel. The limited binding period is a backstop or safety valve. I'm not saying I agree with it, but that's one of the reasons for having a limited binder period.
A "until policy issued" binder is very dangerous. If a policy is never issued and the insurer fails to cancel the binder, it continues in force until the end of time. So, it's important to have a binder expiration date. Whether that date is 30, 60 or 180 days is debatable.
A continous binder may violate state law regarding binder terms. In most states, a binder can not be issued for a term greater than 60 days. If the policy is not issued within that time, another binder must be issued.
You may also want to read your agency contracts. Many agency contracts limit the authority of issuing binders to terms of 30 to 60 days. Failure to comply with contracts can cause E&O claims or contract terminations.
The 60 day rule on cancellations generally applies to new business only. I have not seen one that applies to renewals unless the risk has material change in exposure not contemplated at the prior term. Once a policy passes the new business 60 day window, state laws generally prescribe the permitted reasons for cancellation and non-renewal. Often non-renewal is very liberal in commercial lines.
"When you issue COI's, after binding coverage but not having polices, why do you issue them for a full year but a binder for only 60 days? If I bought into your logic, we would issue binders and COI's with the same number of days."
A COI typically reflects the policy term, not the expiration of the binder. A COI has no "term" itself...it is analogous to a balance sheet (as opposed to an income statement) in that it is a snapshot of coverages as of the date of issuance. In any case, the ACORD COI isn't a contract and it doesn't grant the holder any rights under the policy. Even if a policy is issued immediately, the COI really doesn't entirely represent the terms of the policy...the insurer can still cancel within 60 days, though the COI gives the actual policy expiration date.
A COI provides no privity of contract nor any contractual terms. It merely states that something exists. A binder is an actual contract. In fact, the reverse side includes the termination language. Often agent's fail to print that page...a dangerous error.
"If the insurance company wants to cancel coverage under a binder, don't they still have to send out notice? What difference is there between canceling the policy in the first 30 days under a binder and after 40 days, assuming policies have been issued at, say, day 35?"
Yes, the insurer must still give notice. As long as the policy is issued within 60 days, there's no problem. Of course, there's no reason why the binder shouldn't be 60 days if that's SOP. As mentioned above, if only a policy is issued or the binder is issued with the policy expiration date of a year later, then the insurer is stuck on the account if an underwriting decision isn't made in 60 days. A 60-day binder ensures that the coverage will lapse if not expressly reinstated, which is advantageous to the company. I use 60 days because that's a pretty standard cancellation feature (for other than nonpayment) in many commercial policies...it could be something else in other policies. And, again, I'm not justifying this practice, just providing some rationale.
State statutes usually state a binder must be cancelled in the same method as cancelling a formally issued policy.
"To my way of thinking, the binder is a temporary proof of insurance that is used until policies are issued. The only argument that would make any sense is the belief that a binder issued for 12 months is still good if the insurance carrier issues policies and then later decides to cancel them. Is there any documented case where a carrier was held to still be on the risk after canceling issued policies because a binder was still in effect?"
A binder is more than proof of insurance, it IS the policy and includes all the terms and conditions of a policy. A COI is evidence of insurance but confers no rights under the policy like a binder does. The ACORD binder says that it is cancelled when a policy is issued, so once that happens, the policy itself would govern. BUT, if the policy is not issued in 60 days, again, the insurer is stuck on the account because the binder is the policy.
The binder does not actually "cancel" upon policy issuance. In a technical sense it is superseded by the policy. I know it's a technicality, but if you use the term "cancel," it leads toward the belief that proof of notice of cancellation may be required.
"Here are some scenarios to illustrate the point I'm making:
"Scenario #1: I issue a 30-day binder and 15 days later the carrier issues the policy. On day 17 the carrier gives 10 day notice of cancellation and the policy cancels on day 27. Is the 30-day binder still good?"
Nope. Once the policy is issued, the binder lapses.
"Scenario #2: I issue a 60-day binder and 35 days later the carrier issues the policy. On day 40 the carrier gives 10 day notice of cancellation and the policy cancels on day 50. Is the 60-day binder still good?"
Nope. Once the policy is issued, the binder lapses.
"If the answer is yes to either scenario then I can see why you should not issue a binder longer than 30 days. In fact, if the answer is yes to either scenario, perhaps we should issue daily binders. If the answer is no, then to me it makes no difference how long you issue a binder because once the polices are issued the binder is no longer the prevailing document, it has been replaced by the policies. If the polices are subsequently cancelled, the binder, would seem to me to have been canceled at the same time."
Here's another scenario:
I issue a 60-day binder and 60 days later, the policy still hasn't been issued. Coverage then lapses and a new binder must be issued. Two days later, the insurer says ISO finally completed their inspection of the property and there are serious hazards, so the company declines the account. Since a new binder (i.e., policy) has been issued, the insurer can cancel. If a 12-month binder had been issued at the outset, 60 days have lapsed, so the insurer cannot cancel without a valid reason and they're stuck on the account.
This brings the question of not just term but when. Is the binder being issued on a risk the insurer has no basic knowledge of? If the risk was submitted and conditionally quoted, it would take a lot of misrepresentation or undisclosed exposures to warrant the 60 day termination action. Most insurers would stay on a "difficult" risk for the current term and non-renew. This is done as an agency accomodation and PR matter. If the risk is that questionable, binders can get agents in a lot of hot water.
"And finally, here is a question for your pundits. If a binder is so significant, what happens in this case: I issue a binder for 30 days. I forget to issue a replacement binder. A claim comes in on day 45 but the carrier has not issued policies yet. Is my customer uninsured? I think not! If I am wrong, wouldn't the smart thing be for me to issue a full term binder?"
Easy answer (at least in my mind):
No coverage. Coverage was bound conditionally for 30 days (the ACORD form says "This Binder is a TEMPORARY Contract"...i.e., it is not a full-term policy), but the coverage lapsed without a policy being issued.
This is precisely why agencies use diary systems and buy E&O coverage.
If the insurer has not indicated it's willingness to issue a 12 month policy and the binder is the only evidence of coverage or intent to cover, the coverage lapses with the binder. If the insurer has offered a 12 month quotation and acknowledged the application and binder, the courts would most likely rule the coverage was accepted. This issue is really one dependent upon the knowledge of the binder by the insurer. I have read claim files where the agent bound the risk and somewhere between issuing the binder and the carrier the binder was misplaced and the carrier never had knowledge of the binding. In most cases that carrier was relieved of responsibility and the E&O came to the plate. The length of time between the issuance of the binder, the lapse and the claim really dictates where the liability lies. The more time that elapses, the more liability of the agency.
"I am afraid I require more proof than offered to date."
Insurers determine how long they're willing to permit a binder to be issued and there's not a whole lot we can do about it. If most insurers issue policies most of the time within 30 or 60 days, then a corresponding time limit on a binder shouldn't be a problem. If an insurer frequently takes longer than this to make an underwriting decision, then the problem runs deeper than the issue we're discussing.
There's no reason why an insurer can't issue a binder longer than 30-60 days (unless there's a statute or regulation governing this), but I don't think you'll find many carriers willing to permit 12 months.
Statues and promulgated regulations do exist in most states. Check Oden.
Postscript:
"We reviewed our binding authority with all of the standard markets and we could not find any limitation on how long we could issue a binder. That is the first thing we did before establishing our policy. I really think the 30/60 day issue today is just a carry forward of old rules that no longer apply."
Are those companies appointing agents? If so, count me in!
Last Updated: August 14, 2009