When an insurance agent is obtaining coverage for a new account, the issue of binding authority becomes particularly important. Insurers regularly grant at least some binding authority to their agents. The questions of when and under what circumstances one or more agents have that authority are not always easy to resolve.
A California fabric store had allowed its property and liability insurance to lapse. The owners needed coverage on their warehouse, so they contacted a local retail insurance agent. The retail agent submitted applications to an excess and surplus lines broker who had placed coverage for the insured before. The broker’s contract with the nonadmitted insurer that insured the risk authorized it to place limits up to $1.5 million. The fabric store needed limits exceeding $3 million.
The E&S broker forwarded the submission to the insurer the same day. The insurer provided multiple quotes in the following days in response to the insured’s requests for additional coverage. The quotes set conditions that needed to be met before they would bind coverage:
● “Favorable financials prior to binding.”
● “Payment of 2010 premium audit prior to binding.”
● “Details of 2008 water damage claim and verification that all plumbing has been updated prior to binding.”
This insurer had paid a water damage claim in 2008 and had been left with an unpaid audit in 2010 when it insured the risk before.
The E&S broker sent the retailer the quote, They copied and pasted it onto their own proposal template. This proposal, however, omitted all of the preconditions for binding. The producer called the E&S broker, who gave instructions for handling the paperwork and reminded him that financials were needed before binding.
Shortly after 5:00 that day (a Friday,) the retailer asked the E&S broker to bind coverage. He sent a copy of a check for the down payment on the premium and audit, along with details about the plumbing update. Unable to reach the insured for copies of the financials, he called the E&S broker again to say that he needed to bind coverage that day without them. The broker told him there should be no problem with binding that day if he got acceptable financials by Monday. The retailer emailed the signed applications. The E&S broker then asked the insurer to bind coverage effective that day.
The following day, $650,000 worth of fabric was stolen from the warehouse. On Monday, the insurer declined to bind coverage after reviewing the financials and a credit report. Uninsured for the theft loss, the insured sued the agent, E&S broker and the insurer.
The insured argued that the E&S broker had misrepresented its binding authority. The court, however, found the opposite – that the broker had multiple times stated the limits of its authority. The insured also claimed that the retailer was the E&S broker’s agent, and therefore the broker was responsible for the retailer’s actions. The court found no evidence backing that claim.
If the E&S broker made a mistake here, it was in bowing to the retailer’s pressure to bind coverage late on a Friday without the required documents. The retailer never should have sent the quote to the insured without including the preconditions. The insured was led to believe all it needed to do was provide a check. The retailer omitted important information, and that omission led to a lawsuit.
All agencies involved in a transaction must be aware of the limits on their binding authority and comply with any conditions the insurer creates. To do otherwise is to ask for trouble.