I visit many agencies and interview hundreds of customer service representatives, account managers, account executives and processors every year. Unfortunately, I’ve found that 50% of these “insurance professionals” lack a basic knowledge of certificates of insurance, binders and evidences of insurance. This problem is more obvious at the staff level because these are the people who process these forms. However, a huge percentage of producers also don’t know the difference, which contributes greatly to the problem. These producers tell clients certain things can be done because they don’t know enough, and they then tell the CSR to do it anyway when she or he tells them it can’t be done. This greatly increases errors and omissions (E&O) exposure – not to mention detracting significantly from the agency’s professionalism.
Binders
I often ask agency personnel, “What’s the basic difference between a binder and a certificate of insurance?” Far less than half of them seem to know the key difference is that a binder is a contract of insurance and a certificate of insurance is a form of proof of insurance. They don’t understand that when they “bind” coverage, they’re creating an insurance contract, while when they issue a certificate of insurance, they’re simply warranting certain coverages exist at a given moment.
This is why many agency personnel use binders, certificates, and evidences of insurance almost interchangeably, which is a huge mistake. Because binders are contracts, the people writing the contracts absolutely must know whether they have the authority to do so. This is why carriers provide binding guidelines to every agency that has binding authority with them. Although some carriers have made it more difficult to find these guidelines in recent years, the guidelines still exist.
I often find that less than 25% of an agency’s staff has a copy of the agency’s binding authority. In some cases, agency management doesn’t want the staff to know and simply allows them to write binders anyway. This is stupid. If staff and producers have authority from agency management to write binders, and assuming management wants the job done correctly, they must know the agency’s binding authority! (“Guidelines” is a misnomer, because it’s really a list of the agency’s contractual binding authority by line.).
Some agency managers don’t want staff to write binders, but fail to communicate this. At the same time, so few staff really understand binders that half the time they’re binding risks and don’t even know that they’re doing so. None of these situations is in the best interest of the agency – not to mention the client and the carrier.
Here are a few key points:
- If the agency says it will issue or is binding coverage, it has issued a binder. Whether the agency has authority, whether an actual binder is created (which is an entirely different issue), and whether a binder is even necessary doesn’t matter once an agency has stated that coverage is bound.
- Just because a carrier states it will write a risk does not automatically mean the company is binding the risk. Writing and binding are not necessarily the same thing.
- An agency never has binding authority with excess and surplus (E&S) markets. Thus, when an E&S broker states that it will bind a risk, the agency should never tell the client that the agency is binding the risk because it is not – the broker is binding the risk. The semantics are important. Furthermore, an agency should not tell the client the broker is binding the risk based on a conversation. It’s essential to get what the E&S broker promised in writing.
Also, just because a client demands a binder does not mean the agency has to give the client a binder unless the client really does need a temporary contract of insurance. If the client really only needs proof of insurance, then the agency should issue the proper proof — not a binder. Because very few clients possess insurance licenses, they rarely know what form they need. The agency is the entity with the license and should do what is right.
Agencies often issue binders because the insurance policy hasn’t been delivered. I’m amazed at how Detroit can manufacture an automobile faster than some insurance companies can print a boilerplate insurance policy. However, be that as it might, agencies should almost never write a temporary contract on top of a policy that already exists. Just because the paper policy hasn’t arrived, doesn’t necessarily mean that coverage doesn’t exist.
Evidences of Insurance
In Personal Lines, most insureds, banks, and real estate agents need evidences of insurance, not binders. The policy is in effect, but has not arrived. So why not provide evidence of insurance rather than a binder?
Certificates of Insurance
First, let’s call this area what it is - a mess. We have such a mishmash of laws or lack of laws and regulations among the states that what works in one state isn’t necessarily relevant in another jurisdiction. This has become glaringly obvious with the new ACORD certificate form.
Second, when an agency is trying to go the extra mile for its insureds by providing certificates that fit their needs, they should not overstep their authority. Agents do not have authority to change language without explicit written authority from a carrier. If an agency changes the language, the agency might be violating copyright law and changing the insurance company’s filing with the insurance department. Everyone knows what happens when there’s a claim that involves an agency changing its insurance company’s filing – the agency loses the E&O claim!
Third, a certificate is proof of certain coverage at a certain time. It is not an insurance contract or a binder, and it should not be used to increase coverage. If any agents reading this have not had everyone in their agency take the Virtual University (VU) Certificate of Insurance class from the Independent Insurance Agents and Brokers of America (IIABA), they’re making a serious mistake. Bill Wilson did a great job building this program, which should be a mandatory class for every agency.
Good Practices
Because binders are contracts, there’s more E&O exposure involved with them than with certificates of insurance, assuming the certificates are processed correctly. Given the rising number of E&O claims related to certificates, it’s clear that many certificates aren’t processed correctly. However, assuming that an agency takes the VU certificate class and begins processing certificate’s correctly, certificates should be safer than binders. The need for binders is far more limited today than it was 20 years ago, and many agencies are doing their best not to issue binders. Moreover, when certificates are processed correctly, with binders only issued in rare situations, agencies will spend less time and money servicing accounts – which frees up more time for them to sell.
Most important though, knowledge of the differences among these forms, on which I’ve only touched lightly, is critical. Everyone in every agency needs to have a strong, basic knowledge of these differences!
NOTE: None of the materials in this article should be construed as offering legal advice, and the specific advice of legal counsel is recommended before acting on any matter discussed in this article. Regulated individuals/entities should also ensure that they comply with all applicable laws, rules, and regulations.