Lesson Learned: Don't Exceed Binding Authority
All independent insurance agents have worked without binding authority. Even some agency contracts specifically note that there is no binding authority on the part of the agent. On the other hand, binding authority is given to many agents and if you are one of them, you need to realize that there is some risk to using that authority. It is particularly important that you do not exceed that authority and act within its limitation at all times.
Your risk of exposure under your E&O insurance for insurance agents continues from the time you issue the binder until the written policy has been issued. Once the formal policy has been issued, the binder is extinguished and merges with the actual policy.
Here is an example of an insurance agent exceeding his binding authority which led to an E&O insurance claim being filed against him. Review the facts and the E&O insurance prevention tips that follow. Learn all you can about reducing your exposure to any E&O insurance claim.
Claim Description: An insurance agent met with a homeowner whose house was under construction. The agent bound the homeowners policy for $1.5 million when the agent had binding authority only for a maximum of $750,000. Any amount over $750,000 required authority from the underwriting department of the carrier. Other violations of the underwriting guidelines compounded the problem. First, the construction of the home had not been completed at the time the policy was bound. Second, the homeowners had no intention of occupying the residence within 30 days of the inception of the policy. The carrier paid the homeowners claim and sued the insurance agent under his E&O insurance policy for reimbursement alleging that the agent had exceeded his binding authority. The E&O insurance claim cost was in excess of $1 million.
E&O Insurance Prevention tip: Know if you have binding authority and, if you do, do not exceed it. If you have any questions at all, contact the underwriting department. Reduce all oral binders to writing and make it very clear that any promise made is consistent with the terms of the policy that will ultimately be issued. Give the insured the opportunity to review an exemplar policy including the terms and conditions of the policy. Make a note that the insured either reviewed the exemplar or chose not to do so.