I was asked by a client not too long ago why our insurance binders only show a limited effective period instead of the full year. I thought others might have a similar question. The key to a binder is to remember the steps in purchasing insurance. You go to a broker and he/she reviews your information. They get a quote from a carrier based on your information and then (hopefully) you ask for coverage to be put in place.
But when you are purchasing insurance, you are really purchasing a “contract”. The carrier sells you a contract to transfer risk in exchange for your premium (offer, acceptance, consideration…basic contract law). There are generally two problems here:
1) The carrier doesn’t have the actual contract ready when you make your purchase…. and
2) Carriers want to review the sell of the contract that a broker did (inspections, etc.).
The fix to these two challenge is a *binder* which provides “temporary coverage” until such time that the carrier can a) review the risk and b) execute and distribute the 1000-page contract. It’s important to understand the binder only provides an “outline” of the coverage, and doesn’t have all the details….so in most states, binders are limited in how long they can be in effect for.
Moreover, carriers usually limit us (brokers) as to how long we can contractually ‘bind’ the carrier to the coverage because I am acting on their behalf in this capacity. That is, I actually bind their responsibility to the contract (hence the origin of binder). Most “legal” binders are only good for 30 or 60 days. Now a broker can put any dates he wants to on a binder….some skirt the lines a bit more…but at the end of the day, the only thing that *really* matters is the policy contract, itself, REGARDLESS of anything a binder says.
This is an important point, so I will repeat it. It actually DOESN’T matter what a binder says. It only matters what the underlying policy says.
This case reflects a situation where there was a loss after a binder was issued, but before the actual policy was issued. The underlying policy had a special exclusion that wasn’t shown on the binder. The plaintiff argued that since the exclusion wasn’t on the binder (and the policy wasn’t yet issued), it shouldn’t apply. In the end, the Court held that the “policy” always controls coverage, even if the contract hadn’t yet been issued.
That is why you’ll always see limitations on “proper” binders and why you should treat them with a significant grain of salt. At the end of the day, the binder should be treated as nothing more than an indication that insurance was purchased.